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 August 31 – September 6. We hope you find this useful. Access may require subscription.
Regulatory Update
US Congressman and Crypto Skeptic Explains Why a Crypto Ban Won’t Work
Cointelegraph, September 5, 2022
In a recent interview, United States congressman and a known crypto skeptic Brad Sherman claimed that banning cryptocurrencies is not an option at this point.
In a statement to LA Times, the Northridge-area Democrat said that the crypto industry has become quite powerful over the years. He added that the high capital donations to the politicians and strong crypto lobbying make it impossible for them to impose a blanket ban.
The democratic representative is a well-known skeptic who has been demanding a crypto ban since 2019. Nearly three years later, Sherman has changed his tune about a ban and now advocates for regulating the crypto market.
The U.S. congressman is especially worried about small and retail investors who often fall prey to gullible scams but admitted that any amount of effort by the judiciary to protect investors won’t work until they keep investing in cryptocurrencies such as memecoins.
Read more here.
Economists Split on US Recession, so What Now Bitcoin?
Beincrypto.com, September 5, 2022
U.S. economists are now unable to agree on whether a U.S. recession is likely or not, has started or has not, or even how to define a recession.
The Federal Reserve (Fed) continues to pursue a policy of aggressive fiscal tightening to combat high inflation, currently at 8.5%, suggesting that a sustained economic contraction is ever more likely.
If such a scenario should pass, or has passed, what does it mean for crypto and Bitcoin?
Bitcoin was born out of the last recessionary cycle in 2009 following the banking crisis of the previous year. If the U.S. economy can ever be officially described as in recession or in a recession-like environment again, then it would be the first U.S. recession of Bitcoin’s lifetime. How Bitcoin reacts to this kind of economic environment is understandably a major point of interest for crypto heads, and so far, the signs seem to indicate not well.
No matter how economists or politicians might choose to define the r-word, Bitcoin prices are either high or low. BTC is currently down 71% from an all-time high of $69,044 in Nov. The cryptocurrency is also down 57% from the start of the year, and 14.8% in the previous 30 days.
It appears that Bitcoin is by no means immune to economic troubles in the economy or traditional markets. Debate on the matter rages on. Bullish BTC advocates such as Eric Wall argue that the currency is at or around “fire sale” levels, a position that others in the industry have echoed. Earlier last month, Senior Bloomberg Analyst Mike McGlone declared that Bitcoin is trading at a massive discount.
Read more here.
Regulation Debate Misses the Point of Crypto
WSJ (Opinion), September 2, 2022
In “Why Warren and Sanders Object to Crypto Rules” (op-ed, Aug. 24), Brian Brooks and Charles Calomiris correctly acknowledge that crypto developers are trying to build a financial system in which users have more control. But then they advocate a government-controlled financial system, much as Sens. Elizabeth Warren and Bernie Sanders have done. The difference is that this time it would be run by the Office of the Comptroller of the Currency instead of the Postal Service or Federal Reserve.
Regulators must remember that our bank regulatory framework isn’t a universal solution. Not all crypto companies should be classified as banks. Not all crypto users need banks to send money. And not all crypto users want to do business with banks. People want more financial options because they don’t like the current ones. That’s why crypto was invented.
How might we reinforce a user-controlled financial system? Start with a few market-based solutions, such as private market insurance, bankruptcy-remote entities for stablecoin reserves, privacy layers for blockchain payments and accreditation bodies that regularly audit code for security flaws.
Opinion of Agnes Gambill West, Mercatus Center, George Mason U.
Read more here.
BlackRock to Use Kraken’s CF Benchmarks for Crypto
The Block, September 2, 2022
BlackRock will use Kraken's CF Benchmarks bitcoin index pricing product for its first crypto offering.
The world’s largest asset manager's bitcoin product will be benchmarked by CF Benchmark's indexes, the latter company's CEO Sui Chung told The Block. Last month, BlackRock announced a deal with Coinbase to offer institutional investors access to crypto, and subsequently said it launched a private trust offering exposure to spot bitcoin to U.S.-based institutional clients.
CF Benchmarks is trying to be the MSCI index of the crypto world as interest and demand continue to grow despite the plunge in crypto asset prices. Several other players are creating crypto indexes, including the industry leader, S&P Dow Jones Indices, which created new cryptocurrency indexes last year.
CF Benchmarks is a member of the Crypto Facilities group of companies, a member of the Payward group of companies. Payward is the owner and operator of crypto exchange Kraken Exchange, one of the oldest such platforms.
Read more here.
Sudoswap Is Getting a New Governance Token
Blockworks, September 2, 2022
Decentralized NFT marketplace Sudoswap is laying the groundwork for a massive airdrop of 60 million SUDO tokens, an up-and-coming governance token built on the protocol.
At its core, Sudoswap allows users to use liquidity pools to buy and sell NFTs (non-fungible tokens) — similar to how Uniswap participants provide liquidity to pools and earn money from trading fees. The SUDO governance token will allow holders to participate in protocol governance and ensure the organization moves in the right direction.
The Ethereum-based token will initially be non-transferable, a blog post by Sudoswap said. This is to ensure that SUDO will not be circulated unless there is sufficient governance participation from SUDO holders.
“A governance proposal to initiate transferability may be put forward through the standard governance process for the sudoAMM protocol, which will be addressed at a later time,” the blog said.
Read more here.
House’s Stablecoin Bill May Face Fatal Delays for 2022 Progress
CoinDesk, September 2, 2022
A legislative push toward the crypto industry’s first significant set of U.S. regulations remains bogged down over negotiations between the panel’s Democratic chairwoman and its ranking Republican, despite initial plans that aimed to release a draft of the bill as early as this week, according to three people familiar with the talks. There have been a number of points to iron out, including such thorny topics as the role of state regulators, the possibility of a future digital dollar in the U.S. and the treatment of customer money held by crypto platforms.
While the negotiations are still going between Chairwoman Maxine Waters (D-Calif.) and Rep. Patrick McHenry (R-N.C.), the timeline is tightening for getting a bill through Congress. At this stage – as lawmakers devote more and more attention to the November midterms and as the legislative session winds to a close – the effort is unlikely to make it through this year, the people said. Though there had been some discussion of a bill being marked up – or revised in preparation for a committee vote – by mid-September, it may slip until much later in this session, or not at all.
The industry, however, has been calling for Congress to start establishing federal oversight over crypto. The absence of rules in stablecoins – digital tokens meant to maintain steady value by being tied to assets such as the U.S. dollar – was on wide display in May with the fatal plunge of terra-luna, which gave critical lawmakers something to focus on.
Read more here.
Binance Under Investigation Over Bank Secrecy Act
Blockworks, September 1, 2022
US authorities have an ongoing investigation into whether Binance violated the Bank Secrecy Act, Reuters reported Thursday, after federal prosecutors began probing the company and its CEO in December 2020.
The Justice Department’s money laundering unit asked the world’s largest crypto exchange nearly two years ago to hand over messages from CEO Changpeng Zhao and other executives on matters including its detection of illegal transactions and US customer recruitment, according to the report.
The 2020 letter reportedly made nearly 30 requests for documents that included details of Binance’s policies to combat illegal finance, or reports of suspicious financial activity it had filed to authorities, among other matters.
Read more here.
California Assembly Passes Crypto Regulation Bill That Requires Bank-Issued Stablecoins
CoinDesk, August 31, 2022
California Gov. Gavin Newsom is set to sign a recently passed bill that would require digital asset exchanges and other crypto companies to obtain a license to operate in the state.
The Digital Financial Assets Law, dubbed California’s "BitLicense," takes after New York’s BitLicense regulation, which came into effect in 2015. California’s law, if signed by Newsom, a Democrat, would go into effect in January 2025.
“While the newness of cryptocurrency is part of what makes investing exciting, it also makes it riskier for consumers because cryptocurrency businesses are not adequately regulated and do not have to follow many of the same rules that apply to everyone else,” Assembly Member Timothy Grayson (D-Concord), the bill’s sponsor, said in a prior statement.
Among the requirements is a prohibition, which would be phased out in 2028, on California-licensed entities dealing with stablecoins, unless that stablecoin is issued by a bank or is licensed by the California Department of Financial Protection and Innovation. This is similar to a proposed (and never passed) bill in the U.S. Congress that would require stablecoin issuers to have a bank charter.
Read more here.
Why “THE MERGE” Matters for Ethereum and Cryptocurrency
SOFI Daily, August 31, 2022
Big changes could be coming as soon as next month to the Ethereum blockchain, which fuels the world’s second-largest cryptocurrency, Ether (ETH). An event known as “the Merge” is planned, and its backers argue it could result in higher crypto prices going forward.
This upgrade will transition Ethereum to a proof-of-stake model, as opposed to the current proof-of-work model. Proof-of-stake utilizes an algorithm and is said to be more energy-efficient and better for the environment. The “stake” refers to the algorithm’s preference for computers within a network that hold more of a given currency. The “work” model rewards computers that are more powerful and better at solving complicated math problems.
Ultimately, computers or nodes within a network that are chosen are then able to create new coins.
Impact on Coins
For people who have already invested in crypto, the Merge may not have much of an impact on your current holdings, although some suggest prices could rise over time. That said, for people considering buying crypto, the end result could be a more eco-friendly option.
The Ethereum Foundation wrote a recent blog post warning to watch out for scams, as no action will be required after the Merge. Ether’s price is down significantly since the start of the year, as is Bitcoin’s. Crypto bulls believe the coming upgrade could help boost both coin’s prices, given a successful Merge could boost confidence in crypto overall. Digitally and environmentally conscious investors are sure to pay close attention.
Read more here.
News Articles
The news articles cover relevant content from August 31 through September 6. Access may require subscription.
Binance Will Convert Users’ USDC Into Its Own Stablecoin (3)
Bloomberg Tax, September 6, 2022
Binance, the largest crypto exchange by volume, will start converting any existing user balances and new deposits of USD Coin (USDC), Pax Dollar (USDP) and True USD (TUSD) into the company’s own stablecoin, according to a statement published on Monday. The conversion is scheduled to begin Sept. 29.
USDC, issued by Circle Internet Financial , is the second-ranked stablecoin after Tether’s USDT, with a market value of nearly $52 billion, according to data from CoinGecko. Binance’s stablecoin, BUSD, is a distant third at around $19.3 billion.
The exchange said the move is intended “to enhance liquidity and capital-efficiency for users.” Binance will also remove and stop any trading on spot pairs that involve USDC, USDP or TUSD, the exchange said in the statement.
Read more here.
Parent of crypto ETF provider 21Shares secures $25 million in funding, valuing it at $2 billion
MarketWatch, September 6, 2022
Hedge fund firm Marshall Wace has led a $25 million investment in crypto company 21.co, the parent of exchange-traded-product issuer 21Shares and token provider Amun, valuing the Swiss business at $2 billion.
21.co., founded in 2018 by Ophelia Snyder and Hany Rashwan, said in a statement that other investors in the funding round include Collab+Currency, Quiet Ventures, ETFS Capital and Valor Equity Partners. The company is Switzerland’s biggest “crypto unicorn” with a $2 billion valuation, according to its statement.
While the company is known for its 21Shares brand and line of exchange-traded products, “the way we see what fundamentally we do is build bridges into the crypto world,” Rashwan said. He said 21.co is “a tech company” that owns its entire infrastructure.
Read more here.
Crypto Investment Slowdown Will Continue Rest of 2022, KPMG Predicts
CoinDesk, September 6, 2022
Global investments in cryptocurrency companies pulled back to $14.2 billion in the first half of 2022 from a record $32.1 billion last year, a slowdown that’s expected to continue, according to a new report from global audit and consulting firm KPMG.
“Despite the crypto space collapsing significantly since midway through Q1 22 due to the unexpected Russia-Ukraine conflict, rising inflation and the challenges experienced by the Terra crypto ecosystem, investment at midyear remained well above all years prior to 2021,” KPMG noted in its report. “This highlights the growing maturity of the space and the breadth of technologies and solutions attracting investment.”
The top deals in the first half of the year were venture capital investors putting $550 million in crypto custody firm Fireblocks, $450 million in Ethereum infrastructure builder ConsenSy and $400 million into crypto exchange FTX.
In the second half of the year, KPMG expects investors to move away from companies offering coins and non-fungible tokens (NFTs) and toward blockchain infrastructure projects, particularly those that involve the use of blockchain in updating financial technology. The firm sees a growing focus on compliance and transaction traceability-related products and increased corporate interest in stablecoins as a lower-risk path to investing in crypto.
KPMG predicts that well-managed crypto companies with healthy risk and cost-management strategies will survive the downturn, while the resilience of other crypto companies will be “tested very hard as some look to recapitalize at lower valuations.”
Read more here.
Solana NFT Startup Dust Labs Raises $7M as y00ts Tops NFT Charts
Decrypt, September 6, 2022
Solana NFT project y00ts is off to a hot start since launching last night, topping secondary markets as the NFTs sell for a significant premium over the mint price. And amid the hype over the rollout, the Web3 tech company tied to the project has raised a seed round from some notable investors.
Dust Labs, a tech startup linked to both y00ts and the popular DeGods NFT project, has raised $7 million in funding from an array of venture capital firms. Participants in the round include FTX Ventures and Solana Ventures, as well as top Solana NFT marketplace Magic Eden, Solana NFT protocol maker Metaplex, and firms Foundation Capital and Jump.
The startup spawned out of the success of DeGods, currently the most valuable NFT profile picture (PFP) project on the Solana blockchain. It was founded by the creator of DeGods, who goes simply by Frank, but has its own CEO (who goes by Kevin) and is focused on “building software that helps NFT communities bring more value to their holders,” per the website.
Read more here.
7 Trends That Could Reignite Crypto Growth
CoinDesk, September 6, 2022
1. The Ethereum Merge is successful
2. Rollups to bring the next wave of crypto user demand
3. Ether flips bitcoin as the top cryptocurrency
4. DeFi on rollups brings back the DeFi summer
5. NFTs pivot to gaming and play-to-earn becomes play-to-own
6. Token economic designs start to focus on value accumulation
7. Fat protocol thesis becomes the fat application thesis
Read more here.
Bored Ape NFT Trademark Suit Judge Threatens Attorney Sanctions
Bloomberg Tax, September 2, 2022
Attorneys for an artist alleged to have sold fake Bored Ape Yatch Club nonfungible tokens could face a $1,500 sanction for “repeated violations” of a Los Angeles federal court’s standing order, US District Judge John F. Walter said Thursday.
Citing those transgressions, Walter also struck conceptual artist Ryder Ripp’s Anti-Strategic Lawsuit Against Public Participation motion and motion to dismiss Yuga Labs Inc.'s trademark infringement lawsuit.
The judge’s order said the defendants will have until Sept. 6 to explain in writing why “lead counsel should not be sanctioned.” Louis W. Tompros of Wilmer Cutler Pickering Hale & Dorr LLP, who represents Ripps, said in a statement to Bloomberg Law that he will respond to the order by the court’s deadline.
Read more here.
Bankrupt Crypto Lender Celsius Wants To Return $225 Mil To Users
Investor’s Business Daily, September 2, 2022
Struggling cryptocurrency lender Celsius Network wants court permission to return digital assets to some users, according to the latest bankruptcy court proceedings.
Hoboken, N.J.-based Celsius requested permission to release cryptocurrencies in its custody program and withholding accounts, which are for storage rather than generating returns. Roughly $210 million in assets are currently in its custody program accounts and $15 million in withholding accounts, according to reports. Celsius says customers own those cryptocurrencies, not the company. The court scheduled a hearing on the request for Oct. 6.
Read more here.
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