Welcome back. Don’t you just love regulatory banter? We had a lot of it this past week, from the SEC’s love letter to Bittrex to Republicans’ inquisition of Gary Gensler. Also this week: an update on Ethereum staking post-Shapella.
The usual disclaimer: This newsletter collates the main themes and headlines of the week in DeFi/crypto/metaverse/Web3/NFT land and tries to provide unbiased context. It's aimed at anyone who wants to keep an eye on the space. It's put together by a team at YAP and doesn't contain any promotion of our clients (if one is mentioned, we'll flag that).
[tl;dr]
The SEC sues crypto exchange Bittrex
House Republicans sharply question Gary Gensler
Ethereum staking withdrawals not affecting network security
[Bittrex in Check]
On Monday, the U.S. Securities and Exchange Commission charged Bittrex with operating as an unregistered cryptocurrency exchange, broker, and clearing agency. (Bittrex Global and co-founder Bill Shihara are co-defendants.) The exchange had announced in March that it would cease US operations by April 30 “due to continued regulatory uncertainty.”
What the SEC Said 💬: The agency asserts that Bittrex let US users buy and trade “crypto asset securities,” which would necessitate its registering with the SEC. It provided six examples, including DASH, OMG, and ALGO. The complaint also takes issue with Bittrex’s structure, which unifies functions ”carried out by brokers, exchanges, and clearing agencies” that regulators keep separate “in part to better protect investors and their assets from conflicts of interest.”
What Bittrex Said: How about some clarity? “For over five years, and despite multiple, specific requests to do so, the SEC would not provide notice of the specific conduct that it thought violated the federal securities laws,” Bittrex tweeted in a statement Monday.
What the Financial Journalists Said: That’s par for the course, Dave Michaels and Mengqi Sun wrote in The Wall Street Journal: “The SEC typically won’t tell crypto exchanges outright which digital assets are securities, counseling the industry to apply a legal test created by a 1946 Supreme Court case that addressed an investment in orange groves.”
What the Columnists Said: The problem is that crypto has apples, not oranges, said Bloomberg’s Matt Levine: “If you run a crypto exchange and you come into the SEC and say ‘we want to register as a securities exchange so we can let our customers trade securities tokens on our website,’ the SEC will stop you right there and say ‘Wait: customers? Website? No no no no no, if you are an exchange, you can’t have customers, or a website; that’s for brokers. You can’t come in here and register a securities exchange with customers.’ And then you go away, confused and sad and probably sued.”
Don’t expect things to change any time soon, said TechCrunch’s Alex Wilhelm. “In a comment that should serve as a clear portent of future activity, the agency said that its Bittrex-related action ‘makes plain that the crypto markets suffer from a lack of regulatory compliance, not a lack of regulatory clarity.’”
Why It Matters: While Bittrex is already leaving town, Coinbase is, for now, based stateside (and courtside). In March, the public company received a Wells Notice, which indicates the agency is considering a lawsuit. Coinbase, which has been operating since 2012, also lists ALGO and DASH and is not registered as an exchange with the SEC.
[Gary, Gary, Quite Contrary]
SEC Chair Gary Gensler appeared before the House Financial Services Committee Tuesday for an oversight hearing regarding “regulatory developments, rulemakings, and activities that the SEC has undertaken” in the last 18 months. Several committee members questioned the SEC’s approach toward cryptocurrency, including the types of enforcement actions taken against Bittrex and others.
What Gensler Said 💬: In prepared testimony, Gensler reiterated his existing position: “Given that most crypto tokens are securities, it follows that many crypto intermediaries are transacting in securities and have to register with the SEC.”
What Crypto Media Said 🔎: Blockworks’ Casey Wagner kept a running log of the proceedings, while CoinDesk policy editor Nikhilesh De live-tweeted the hearing. But the writing was on the wall before Gensler stepped into the room, suggested Decrypt’s André Beganski. A letter signed by every Republican on the committee blames the SEC for the regulatory mess: “Without clear rules of the road, your push for firms to ‘come in and register’ is a willful misrepresentation of the SEC’s non-existent registration process.” .
What Republicans Said: The majority party wasn’t done. During one exchange, Committee Chair Patrick McHenry (R-NC) unsuccessfully tried to get Gensler to state whether Ether, the second-biggest cryptocurrency by market cap, was a security despite earlier indications from the agency that it is not. When Gensler said he couldn’t prejudge, McHenry responded: “But you have prejudged. You’ve taken 50 enforcement actions. We’re finding out as we go, as you file suit, as people get Wells Notices, on what is a security in your view, in your agency’s view.”
What the Columnists Said 🗞️: Blockworks editor-in-chief Jon Rice transcribed most of the exchange between McHenry and Gensler and let it speak for itself in an op-ed titled “Regulatory Clarity? Gensler Can’t Give a Simple Yes or No on Ethereum.”
What We Say: The Securities and Exchange Commission should at least be able to provide straight answers on which assets constitute securities.
[Stake Lively]
Last week’s Shapella/Shanghai upgrade on Ethereum allowed users to withdraw funds they had locked into the network. In the run-up to the upgrade, there was speculation it would lead to a mass exodus of stakers. Thus far, that hasn’t been the case.
What Reporters Said 💬: Most Ether is staying on the network, said CoinDesk’s Shaurya Malwa, who noted that selling “has remained tepid so far, with users restaking the ether withdrawn or sending the same to exchanges to capture other market opportunities instead of liquidating the same for U.S. dollars or stablecoins.”
Since the Ethereum network restricts how much ETH can be unstaked per day, there’s not much of an issue, wrote David Canellis for Blockworks. “There are still more than 563,000 active Ethereum validators, so the outflows won’t make a dent in the network’s overall security.”
And Cointelegraph’s Prashant Jha pulled data from analytics company Nansen that “suggests that more ETH is currently being staked than withdrawn.”
Why It Matters: Ethereum requires ETH to be staked in order to keep the network secure. Stakers act as validators, verifying and processing network transactions. If too much ETH is withdrawn, the network could become less secure.
[Tidbits]
Solana Mobile released the Sage smartphone last week. The hardware, which comes with a web3 app store, is a “powerful phone with native, secure wallet functionality that feels tight and intuitive, but with few available apps plus some hitches along the way,” said Decrypt’s Andrew Hayward. TechCrunch’s Jacquelyn Melinek agreed, saying that, while she had fun, “using the phone was not the smoothest experience.”
[Tweet of the week]
[Events]
Sol.Ladies Build Hacker House | April 20th - 24th 2023 | Austin, TX, USA
TechCrunch Early Stage | April 20th 2023 | Boston, MA, USA
MIT Bitcoin Hackathon | April 21st - 23rd 2023 | Cambridge, MA, USA
ETHTaipei (Hackathon + Conference) | April 21st - 25th 2023 | Taipei, Taiwan
Consensus | April 26th - 28th 2023 | Austin, TX, USA - Look out for our YAP Team members on the ground!
Privacy Hackathon | April 27th - 30th, 2023 | Istanbul, Turkey
Polkadot Mini Conference | April 29th 2023 | Bled, Slovenia
Avalanche Summit II | May 3rd - 5th 2023 | Barcelona, Spain
[DeFi Definitions]
A new occasional segment exploring one particular aspect of DeFi
This week “Account Abstraction” by Tiffany Mac Sherry.
Account abstraction is a proposed change to the Ethereum blockchain that would allow users to interact with smart contracts in a more secure and user-friendly way. Currently, when users interact with smart contracts, they need to use an externally-owned account (EOA) to sign transactions. This means that users need to keep their private keys safe, and if they lose their keys, they lose access to their funds.
Account abstraction would change this by allowing users to interact with smart contracts through a smart contract wallet. A smart contract wallet is a smart contract that stores user funds and executes transactions on their behalf. This would make it much more difficult for users to lose their funds, as they would no longer need to keep their private keys safe. To use an analogy, when you open a bank account, you give the bank your money and they give you a debit card. You can use your debit card to withdraw money from ATMs, make purchases, and so on. The bank is responsible for keeping your money safe, and you don't need to worry about losing your money if you lose your debit card.
Account abstraction is still under development, but it has the potential to revolutionize the way we interact with smart contracts. It could make Ethereum more secure, user-friendly, and accessible to a wider range of users.
The team: founder Samantha Yap and consulting editor Jeff Benson, Sam O'Donohoe, Ewan Brewster, Tiffany Mac Sherry, Becky Corbel and Delon Chan. Your feedback is, as always, welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
This newsletter is prepared by YAP Global, an international P.R. Consultancy focusing on helping cryptocurrency, Decentralised Finance (DeFi) and Web3 brands through impactful storytelling. Find out more about us here.