AI Protocols Merge, VC Crypto Funding Increases, Tether Completes SOC 2 Audit
By Robert A. Musiala Jr.
According to a recent press release, “SingularityNET (SNET), the world’s first decentralized Artificial Intelligence (AI) network, Fetch.ai, a Web3 platform for the new AI economy, and Ocean Protocol, a decentralized data exchange platform to protect data … announced the launch of the Artificial Superintelligence Alliance” (ASA). The press release describes ASA as “the largest open-sourced, decentralized network” and “a major step that accelerates the race to Artificial General Intelligence.” The press release notes that “As part of the formation of the Alliance, the $FET, $OCEAN and $AGIX tokens that fuel the three Alliance member networks will be merged into a single $ASI token that will function across the combined decentralized AI network, providing unprecedented scale and power.” According to the press release, “The deal provides an unparalleled opportunity for these three influential leaders to create a powerful compelling alternative to Big Tech’s control over AI development, use and monetization.”
In other recent reports, venture capital funding in the cryptocurrency sector increased by 52.5 percent in March, with cryptocurrency-based projects raising approximately $1.16 billion. The two largest venture capital investments reportedly went to Ethereum layer-2 blockchain Optimism ($89M) and Cryptography startup Zama ($73M).
In a final notable item, Tether, the issuer of the USDT stablecoin, recently published a press release announcing that “The company underwent the System Organization Control (SOC) 2 Audit Type 1.” According to the press release, “The SOC 2 Type 1 Report is based on Security, Availability, Processing Integrity and Confidentiality, ensuring that Tether had robust IT control measures in place to make sure their systems were safe, could be accessed when needed and kept information private.”
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Report Discusses Rise and Risks of Liquid Restaking Tokens
By Diana C. Milton
A major U.S. cryptocurrency exchange recently published a report on the rise of liquid restaking tokens (LRTs). According to the report, liquid restaking protocols use LRTs to secure actively validated services (AVSs), which in turn “secure new features in Ethereum – like data availability layers, rollups, bridges, oracles, cross chain messages, etc.” The report notes that “Restaking represents a new income stream for validators in the form of ‘security-as-a-service.’”
According to the report, “restaking … rewards are setting the foundation for a new class of DeFi protocols.” The report provides an analysis of EigenLayer’s restaking protocol, which went live on Ethereum Mainnet in June 2023. Among other things, the report finds that Ethereum’s staking infrastructure and excess security budget have enabled EigenLayer to grow into the ecosystem’s second-largest DeFi protocol by total value locked at $12.4B. The report predicts that EigenLayer’s restaking protocol is poised to become the bedrock for a wide range of new services and middleware on Ethereum, to potentially generate a meaningful source of ETH rewards for validators in the future.
The report also addresses risks posed by restaking and LRTs, including those related to how different LRTs will handle AVS selection, potential slashing and ultimately token financialization. According to the report, with restaking, the mapping of many validator responsibilities to singular earnings “adds some nontrivial complexity (and diversity on the part of the LRT issuers) on how to accrue and distribute gains (and losses).” The report notes that “LRTs also carry non-negligible valuation risks.” In one example, “an extended staking withdrawal queue” may cause “a temporary dislocation of LRTs from their underlying value.” The report notes that “If LRTs become a widely accepted form of collateral within DeFi … this could unintentionally exacerbate liquidations, especially in low liquidity markets.” The report proposes various potential approaches to addressing these and other LRT risks.
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Court Denies Custodia Master Account, SEC Opens Comments on Ether ETFs
By Joanna F. Wasick
A Wyoming district court has rejected a motion by Custodia Bank, a Wyoming-chartered, crypto-focused depository institution, in which Custodia argued that the Kansas City branch of the U.S. central bank improperly denied Custodia’s request for a U.S. central bank “master account,” which allows banks to directly access the U.S. central bank rather than going through “intermediary banks.” The court acknowledged that without a master account, “a depository institution is nothing more than a vault” and that Custodia was undisputedly eligible for a master account. The court nevertheless held that the U.S. central bank had discretion to deny Custodia’s application. Wyoming U.S. Senator Cynthia Lummis was reportedly “disappointed” with the ruling, which she said “goes against clear laws enacted by Congress.” She added that “Wyoming’s special purpose depository institutions have the right to have access to master accounts.”
In another recent development, the U.S. Securities and Exchange Commission (SEC) is now soliciting comments from the public on proposed rule changes allowing the listing and trading of three spot ether exchanged-traded funds (ETFs) on exchanges. The ETF applications likened the ether ETF to bitcoin ETFs, which the SEC approved for the first time in January. Notably, however, SEC Chair Gary Gensler has said that the bitcoin ETF approval shouldn’t “signal anything about the commission’s views as to the status of other crypto assets under the federal securities laws.” In addition, the SEC has reportedly been probing whether ETH should be classified as a security, which would put it on a different legal footing than bitcoin. The window for submitting comments on the ether ETFs is open for 21 days from the date the proposed rule change is published in the Federal Register (likely April 8).
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Singapore Expands Token Service Provider Regs, BIS Announces Token Pilot
By Maya E. Rivera
According to a press release by the Monetary Authority of Singapore (MAS), the MAS recently issued amendments to the Payment Services Act to expand its regulatory scope over certain payment services and impose user protection requirements on digital payment token (DPT) service providers. The amendments enable MAS to impose requirements relating to anti-money laundering and countering terrorist financing, as well as bolstering user protection and financial stability on DPT service providers. MAS’s regulatory scope will be expanded to include: (i) provision of custodial services for DPTs; (ii) facilitation of DPT transmissions between accounts and the exchange of DPTs, even where the service provider does not come into possession of moneys or DPTs; and (iii) facilitation of DPT exchanges and cross-border money transfers internationally, even where moneys are not accepted or received in Singapore. These amendments will take effect six months from April 4, 2024. Transitional arrangements will be provided for entities that conduct activities under MAS’s expanded authority.
In a recent press release, the Bank for International Settlements (BIS) announced Project Agorá, a plan to partner seven central international banks with private financial firms that the Institute of International Finance (IIF) has gathered. The project seeks to explore how tokenized commercial bank deposits can integrate with tokenized wholesale central bank money. According to the BIS press release, participants intend to examine and overcome structural inefficiencies in the payments process caused by international legal, regulatory and technical requirements as well as increasingly complex financial integrity controls. BIS intends to issue a call in the near future seeking interest among private financial institutions in joining Project Agorá.
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Oregon DFR Settles With Provider of Interest-Bearing Crypto Deposit Products
By Christopher Lamb
According to a recent press release from the Oregon Division of Financial Regulation (DFR), the DFR has reached a settlement agreement in principle with a group of affiliated cryptocurrency companies, commonly known as Abra, which operated a digital asset platform violating state securities regulations in the offer and sale of “interest-bearing cryptocurrency depository products.” Abra allegedly allowed accredited U.S. investors to deposit digital assets with Abra that were in turn lent to institutional borrowers. The settlement requires Abra to “notify all Oregon consumers with open accounts containing crypto assets with the companies that they are winding down U.S. operations and to encourage consumers to move any remaining crypto assets from the platform.” According to the release, Abra is required to “cease and desist from offering or selling unregistered securities in Oregon” and will be required to pay an administrative penalty if it fails to return all assets to consumers before April 25, 2024.
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