The below articles and industry developments have been
identified by Kelley Drye and Warren’s Blockchain and
Cryptocurrency practice group as relevant during the week of
September 7 – September 13. We hope you find this useful.
Access may require subscription.
Regulatory Update
Near Protocol Forms Working Group to Promote DeFi
Governance
CoinDesk, September 12, 2022
The Near Protocol, a blockchain network on which developers can
build decentralized applications (dapps), is forming a working
group to set standards for self-governance. The initiative, called
the Near Digital Collective (NDC), is aimed at further
decentralizing the ecosystem’s decision-making by moving it
onto its native blockchain, according to an announcement on Monday.
The move will make the Near community more transparent and fairer,
according to the press release shared with CoinDesk.
Self-governance initiatives in the decentralized finance (DeFi)
sector, where developers from around the world are building
financial applications that cut out traditional intermediaries, are
having a moment. Usually, these initiatives are run by
decentralized autonomous organizations (DAOs), which are
blockchain-based organizations or companies where members who hold
a native digital token can vote on key business and management
decisions.
Although the NDC will move decision-making on-chain, and Near
tokens have been set aside to function as the governance token for
the collective, the protocol’s co-founder Illia Polosukhin
avoided calling it a DAO during an interview with CoinDesk.
“I’m usually thinking in blockchain terms, so it’s
more of a protocol of how people interact and make decisions. And
then we codify some of it in smart contracts, part of it will be
codified in the constitution, part of it will be codified in the
processes built around it,” Polosukhin said. Smart contracts
are computer programs that automatically execute transactions when
preset conditions are met.
Read more here.
How Will Meta Stop Crypto Scams? 6 Senators Would Like to
Know
Barron’s, September 10, 2022
Six U.S. senators sent a letter to Meta Platforms CEO Mark
Zuckerberg to request information about the company’s efforts
to combat cryptocurrency scams. In the letter, the senators state
their concerns over the amount of crypto scams that take place on
Meta’s (ticker: META) platforms, including Facebook, Instagram,
and WhatsApp, calling Meta’s sites “hunting grounds for
scammers.” It was signed by Sens. Robert Menendez (D., N.J.),
Sherrod Brown (D., Ohio), Elizabeth Warren (D., Mass.), Dianne
Feinstein (D., Calif.), Bernie Sanders (I, Vt.), and Cory Booker
(D, N.J.).
“Based on recent reports of scams on other social media
platforms and apps, we are concerned that Meta provides a breeding
ground for cryptocurrency fraud that causes significant harm to
consumers,” the letter, dated Thursday, said. It also cited
data from the Federal Trade Commission that from Jan. 1, 2021,
through March 31, 2022, 49% of fraud reports to the FTC involving
cryptocurrency said that the scam originated on social media.
The letter added that “among consumers who reported being
scammed out ofcryptocurrency on a social media website, 32%
identified the scam as having originated on Instagram, 26% on
Facebook, and 9% on WhatsApp.” The scams come in multiple
forms, including “investment” and “romance”
scams, and have cost victims in total about $417 million, the
letter said.
The senators asked for Zuckerberg to respond by Oct. 24 to a
list of questions regarding how the company fights crypto scams on
its platforms.
Read more here.
White House Report Calls for Cleaner Crypto Mining
WSJ, September 9, 2022
Crypto mining uses as much energy as all conventional data
centers in the world, a U.S. government report released Thursday said, and about a
third of that comes from the U.S. If the nation is going to reach
its clean-energy goals, the report says, crypto needs to get
greener.
The report is one of a series of government studies on
cryptocurrencies ordered by President Biden in the spring. The
report makes a number of recommendations, everything including from
pushing miners to increase the use of renewables to releasing more
detailed information about their energy usage.
Bitcoin miners are already working on the same problem. An
example: In Cavalier County, N.D., near the Canadian border, a
company called Bitzero Blockchain plans to transform an abandoned
200-acre missile complex into a data center and greenhouse.
Read more here.
Crypto Investor Paradigm Argues Infrastructure Providers Should
Not Be Subject to US Treasury Sanctions
CoinDesk, September 9, 2022
Crypto investment firm Paradigm published a nuanced legal
argument amid concerns of potential sanctions by the U.S. Treasury
Department’s Office of Foreign Assets Control (OFAC) that would
target blockchain base layer participants such as miners and
validators.
The post was published on Thursday and comes on the heels of a
lawsuit filed by users who believe OFAC exceeded its authority when
it sanctioned Tornado Cash smart contract addresses last month.
Paradigm acknowledged that sanctions can be an important tool to
preserve national security, but said it believes base layer
participants merely record and order data (which may include
sanctioned addresses), but do not actively control sanctioned
assets. Paradigm further suggested that stringent regulation would
eventually push blockchain innovation offshore, making it more
difficult to track crypto transactions for legitimate national
security purposes.
Paradigm explained that a blockchain “base layer” is
essentially a “communications protocol and technology
infrastructure,” much like the internet. As such, the base
layer must be free from censorship and preserve neutrality in order
to maintain its utility as a public good.
Read more here.
FTX Ventures Takes 30% Stake in Anthony Scaramucci’s
SkyBridge Capital
Pensions & Investments Online, September 9,
2022
FTX Ventures acquired a 30% interest in alternative investment
firm SkyBridge Capital, a SkyBridge spokeswoman said in an email.
The financial terms of the transaction have not been disclosed,
according to a SkyBridge news release Friday. An FTX spokesman
confirmed the deal has closed.
The investment by FTX Ventures, a multistage venture capital
fund, will provide SkyBridge “additional working capital to
fund growth initiatives and new product launches,” the news
release said.
In addition, SkyBridge will use a portion of the proceeds to buy
$40 million in cryptocurrencies to “hold on its corporate
balance sheet as a long-term investment,” the release added.
SkyBridge said in the release that it “remains profitable and
debt-free, notwithstanding market conditions.”
The transaction represents the latest collaboration between
SkyBridge and FTX, following the multiyear partnership to sponsor
global SALT (SkyBridge Alternatives) Conference in North America,
Asia and the Middle East, and co-present Crypto Bahamas, the
institutional digital assets conference that was launched in April
this year.
Read more
here.
SEC Chairman Gensler Wants Disclosures From Crypto Issuers,
Lawyer Says
CoinDesk, Interview, September 9, 2022
U.S. Securities and Exchange Commission Chairman Gary Gensler
wants disclosures from cryptocurrency issuers but recognizes that
could be done differently than what publicly traded companies do
now, Ashley Ebersole, a former SEC lawyer said Thursday on CoinDesk
TV’s “All About Bitcoin.”
Ebersole’s comments were in response to an interview Gensler
did with Nikhilesh De, CoinDesk’s managing editor for global
policy and regulation, earlier on Thursday.
Gensler “recognized that disclosure in the crypto as a
context may not look the same … you’re not going to get a
10-K or 10-Q every period from an issuer,” Ebersole said,
referring to annual and quarterly financial reports that publicly
traded companies must file with the SEC.
“The technology makes it unnecessary. In many cases, a lot
of this is very transparent. So it’s sort of case by case, but
he recognized there may be a difference here, and he’s open to
that,” Ebersole said.
Read more here.
SEC’s Gensler Signals Support for Commodities Regulator
Having Bitcoin Oversight
WSJ, September 8, 2022
Securities and Exchange Commission Chairman Gary Gensler
signaled that he would support Congress handing more authority to
the SEC’s sister markets regulator to oversee certain
cryptocurrencies such as bitcoin.
Mr. Gensler, speaking at an industry conference, said Thursday
he looked forward to working with Congress to give the Commodity
Futures Trading Commission added power, to the extent the agency
needs greater authority to oversee and regulate “nonsecurity
tokens…and the related intermediaries.”
The remarks come amid an intensifying battle among federal
agencies and congressional committees that oversee them over who
will regulate crypto. Cryptocurrencies remain largely unregulated
by the federal government, leaving investors without protections
from fraud and market manipulation that come with many other types
of investments. The competition for jurisdiction heated up in
recent months as a meltdown in crypto markets underscored the need
for guardrails in the eyes of many policy makers.
The competition also reflects the industry’s ramped-up
lobbying presence in Washington and its push to reach more
mainstream investors through Super Bowl ads and other high-profile
marketing initiatives.
Mr. Gensler, who headed the CFTC from 2009 to 2014, qualified
his remarks by saying he welcomed working with lawmakers as long as
it doesn’t take away power from the SEC. “Let’s ensure
that we don’t inadvertently undermine securities laws,” he
said. “We’ve got a $100 trillion capital market. Crypto is
less than $1 trillion worldwide. But we don’t want that to
somehow undermine what we do elsewhere.”
Read more here.
House Republicans Press Fed on Digital Dollar
The Block, September 8, 2022
Republicans on the House Financial Services Committee want more
information from the Federal Reserve System on a potential US
Central Bank Digital Currency, ahead of a deadline set by President
Joe Biden’s executive order on digital assets.
Lawmakers wrote a letter to Board of Governors Vice Chair Lael
Brainard on Wednesday, asking for clarification the Fed’s
thinking around a potential digital dollar, including whether
curtailing the use of digital assets is part of the Fed’s
motivation.
Brainard testified in May on the potential impacts of a
Fed-issued digital currency. She told a banking industry conference
on Wednesday that the central bank still needs to answer key
questions around the possible creation of a digital dollar and
suggested that a decision was not imminent.
The lawmakers, led by the committee’s top Republican Rep.
Patrick McHenry (R-N.C.), want more information on whether Fed
leadership believes it needs Congressional approval to move forward
with a digital dollar, and whether the Fed would create accounts
for individual Americans a move that could significantly disrupt
the banking industry.
During her May testimony, Brainard said that the Fed would need
support from Congress and the executive branch to issue a digital
currency. Republicans signing the letter pressed for an explicit
answer as to whether that meant the Fed thought a digital dollar
would require a new law from Congress.
Read more here.
Gensler: Securities Laws Cover ‘Vast Majority’ of
Crypto Tokens
CFOdive.com, September 8, 2022
Securities and Exchange Commission (SEC) Chair Gary Gensler
signaled Thursday that he would cooperate with the Commodity
Futures Trading Commission (CFTC) saying that, to the extent that
“it needs greater authorities with which to oversee and
regulate crypto non-security tokens and related intermediaries, I
look forward to working with Congress to achieve this goal,”
according to a copy of his prepared remarks.
Addressing an industry conference, Gensler also forcefully made
the case for the SEC’s broad authority over crypto, saying that
the “vast majority” of the nearly 10,000 tokens in the
crypto market meet the definition of a security and are therefore
covered under the securities laws.
A former head of the CFTC, Gensler also outlined limits to his
assistance, saying he was looking forward to working with Congress
on various legislative initiatives but didn’t want to
“inadvertently undermine existing securities laws underlying
$100 trillion capital markets.”
Read more here.
Franklin Templeton Preps First Institutional Crypto
Accounts
Blockworks, September 8, 2022
Franklin Templeton is set to offer cryptocurrency-focused
separately managed accounts (SMAs) to investment professionals for
the first time. The move is the latest example of a traditional
finance giant diving into digital assets — despite the
ongoing bear market. Separately managed accounts are sometimes
favored by institutional investors over commingled funds, because
they come with customized strategy and risk profiles, as well as
instant liquidity.
The launches follow Franklin Templeton’s strategic
investment in SMA platform Eaglebrook Advisors in April. The $1.4
trillion asset manager’s first crypto strategies will be
available to financial advisers and wealth managers working with US
investors via Eaglebrook’s turnkey platform by mid-October.
Eaglebrook Advisors CEO Christopher King said Franklin
Templeton’s new offerings represent “an inflection
point” for crypto, as the US wealth management market is
demanding professionally managed digital asset SMA strategies from
trusted asset managers. He called the segment the
“lowest-hanging fruit” for the crypto market in an
interview with Blockworks last year, adding at the time that about
95% of the adviser market had not yet invested in cryptoassets.
Franklin Templeton’s Digital Assets Core SMA is a market
cap-weighted strategy that invests in 10 to 15 of the largest
digital assets, excluding stablecoins and meme coins.
Though competing asset managers, such as BlackRock and Fidelity,
launched ETFs focused on blockchain technologies in April, Bayston
said then that Franklin Templeton was still mulling the right time
for an entrance. Fidelity in April moved to allow certain US
workers to allocate a portion of their retirement savings to
bitcoin through the company’s 401(k) plan investment lineup.
BlackRock, the world’s largest asset manager with roughly $8.5
trillion, partnered with Coinbase last month and days later
launched a bitcoin private trust.
Read more here.
News Articles
The news articles cover relevant content from September 7
through September 13. Access may require subscription.
Citadel Securities, Fidelity, Schwab Back New Crypto
Exchange
WSJ, September 13, 2022
A consortium of financial heavyweights including electronic
trading giant Citadel Securities and brokerages Fidelity
Investments and Charles Schwab Corp. on Tuesday announced plans to
launch a new cryptocurrency exchange.
The launch of the exchange, to be called EDX Markets, is a sign
that Wall Street continues to see opportunity in digital assets
despite this year’s slump.
Other backers of the new exchange include high-speed trading
firm Virtu Financial Inc. and venture-capital firms Sequoia Capital
and Paradigm.
Read more here.
Crypto Lending Now Pays Less Than Safest US Government
Debt
Bloomberg Tax, September 13, 2022
Cryptocurrencies are facing a new threat: the lure of Treasuries
offering a similar payout for a whole lot less risk.
In a rare reversal, crypto yields that institutions typically
seek out have fallen below what the US government pays to borrow
for three months, giving the hedge funds and family offices that
have flocked to the digital space one less reason to keep
investing.
The Federal Reserve’s hawkish stance is driving up interest
rates almost everywhere — except in the speculative world of
crypto, where yields have collapsed alongside volumes, wiping out
some of the main avenues for generating double-digit returns, while
the implosion of the Terra stablecoin project and the failures of
crypto lenders like Celsius Network shook confidence.
“Two years ago, interest rates in crypto were at least 10%
and in the real world rates were either negative or
near-zero,” said Jaime Baeza, chief executive officer of ANB
Investments, a hedge fund focused on digital assets. “Now
it’s almost the reverse, because yields in crypto have
collapsed and central banks are raising rates.”
Read more here.
Ethereum Merge Explained: Experts Break Down the Risks of the
Long-awaited Crypto Update
Market Insider, September 12, 2022
The long-awaited Ethereum merge event is set to happen around
Thursday, according to the Ethereum Foundation, and experts say it
will reduce the blockchain’s energy consumption by 99%.
The update, which is six years in the making, will transform
Ethereum from a proof-of-work to a proof-of-stake consensus
mechanism. That means so-called gas fees, or transaction costs,
will come down, and the network will be able to process
transactions faster.
Some have called the merge the most important crypto event after
the creation of ether and bitcoin, noting the blockchain contains
hundreds of billions of dollars of value. Ethereum underpins some
of the top crypto-related applications like NFTs and smart
contracts.
Read more here.
NY State Bar Launches Task Force To Study Cryptocurrencies
Law360, September 12, 2022
The New York State Bar Association announced Monday the
launching of a task force to make recommendations on how virtual
currencies and digital assets should be regulated within New York,
while also studying how the technologies can help the state’s
legal community.
The group, dubbed the Task Force on Emerging Digital Finance and
Currency, will be led by Jacqueline J. Drohan, a partner at Drohan
Lee LLP, and Dana V. Syracuse, the co-chair of Perkins Coie
LLP’s fintech industry group.
“We are already seeing the effects of this trillion-dollar
industry in many areas of practice including entertainment,
business, intellectual property, tax, criminal and environmental
law and trusts and estates,” Sherry Levin Wallach, president
of the NYSBA, said in a statement on Monday. “The Task Force
on Emerging Digital Finance and Currency will ensure that the New
York State Bar Association has a voice in this innovative and
emerging field.”
Read more here.
SEC Wrong To Reject Bitcoin ETF Bids, Advocacy Group Says
Law360, September 12, 2022
Cryptocurrency advocacy group Chamber of Digital Commerce
released a report Monday arguing the U.S. Securities and Exchange
Commission hasn’t offered a good reason in repeatedly rejecting
bids for exchange-traded funds that hold bitcoin, saying the U.S.
is falling behind the rest of the world.
Monday’s report — titled “The Crypto
Conundrum” — notes the SEC received its first filing
seeking to register shares of an exchange-traded fund that would
hold bitcoin back in 2013, and has rejected every effort to list a
bitcoin ETF on a national securities exchange since then. But while
the regulator has cited concerns about investor protection and
fraud, the Chamber of Digital Commerce said those issues have been
“fully addressed by asset managers seeking to offer
responsible, transparent and regulated bitcoin exposure to retail
and institutional investors.”
“Unfortunately, it is becoming increasingly probable that
it will take litigation or focused efforts by Congress to break
through the SEC’s increasingly arbitrary and unwarranted
treatment of this important investment product,” the report
reads. “Moreover, if the SEC’s ability to transform itself
into a merit-based regulator goes unchecked, the future of
innovation and capital raising in the United States will be dark
indeed.”
Read more here.
New Defiance ETF Aims to Capitalize on the Crypto Downturn
Bloomberg Tax, September 8, 2022
A new exchange-traded fund is aiming to capitalize on the
lackluster performance of digital assets as the Federal Reserve
moves aggressively to tamp down inflation.
The Defiance Daily Short Digitizing the Economy ETF (ticker
IBIT), which debuts on Thursday, tracks the inverse performance of
the roughly $540 million Amplify Transformational Data Sharing ETF
(BLOK), a blockchain-focused product that has MicroStrategy Inc.,
Silvergate Capital Corp., Coinbase Global Inc. and CME Group Inc.
among its top holdings. BLOK is down about 50% this year.
“BLOK is the granddaddy of the blockchain ETF space, which
will help IBIT from a branding perspective,” said Nate Geraci,
president of The ETF Store, an advisory firm.
BIT will not invest in digital assets directly and instead will
use derivatives to short BLOK, according to the prospectus. The new
ETF, which has a management fee of 0.95%, joins Defiance’s
roughly $1.3 billion ETF lineup.
Read more here.
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