Feb 13 Briefing

02.07.23 - 02.13.23

GM and welcome to another edition of THE W3EKLY, your go-to source for all things web3.

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EXEC SUMMARY:

The most notable headlines from last week pointed to US Regulation ramping up, specifically as it relates to Stable Coins and Centralized Exchange Staking Services (more on this later):

• Kraken: The crypto exchange will shutter its US crypto staking platform and pay $30M to settle with the SEC over sale of unregistered securities

• Paxos: The stablecoin issuer is being investigated by New York's regulator, but the subject of the investigation is unclear

• SEC Activity: Coinbase CEO, Brian Armstrong, flags rumors of a possible outright US SEC ban on crypto staking 

Three months after the FTX collapse, ripple effects from the acronym-riddled company continue to find there way to the mainstream news cycle: 

• Debtors: FTX's debtors want political donations return by the end of the month

• Genesis: The bankrupt crypto lender (a casualty of the FTX fall-out) reached an initial restructuring deal with competitors, including Winklevoss-owned Gemini

• Robinhood: The Fintech giant’s board approved a plan to buy back SBF’s $578M 7.6% stake in the company

Finally, Hermes, the French luxury retailer, won a significant legal battle against NFT creator Mason Rothschild when a jury declared his digital depictions of Birkin bags constitute trademark infringement. This is important because it could influence pending and future NFT cases that test the often blurry line between art and consumer products.

TOP HEADLINES: 

MACRO: 

• Natural Disaster Donations: A Turkish rock star and a charity organization teamed up to establish a crypto donation wallet for earthquake support, raising over $2 million for disaster relief

• Rate Hikes: More modest pace of rate hikes are in the cards for numerous Fed officials

POLICY/LAW: 

• UK: The Bank of England and the UK finance ministry said on Monday that a central bank digital currency (CBDC) would likely be needed later this decade

• Australia released a plan to regulate crypto with 3 focuses: strengthening enforcement; bolstering consumer protection; and creating a reform  framework

PRODUCT: 

• Blowfish: The web3 security protocol launched a transaction simulator extension to help protect users from signing malicious txns

• Dopex: The decentralized options exchange launched on Polygon 

• Binance: The Crypto Exchange introduced a tool for calculating taxes on transactions

• Revolut: The Fintech company debuted crypto staking

• Vesta & Mover: The DeFi lending platform and the web3 debit card provider partner to create an on chain credit card

CORPORATE ACTIVITY: 

• Superbowl: The superbowl banned crypto-related ad deals for this year

• Affirm: The BNPL giant is shutting down its crypto business

• Visa: The payments giant is testing accepting payments and payouts in stablecoin on the Ethereum network

• Tether: The Ethereum-native stablecoin provider generated $700M of profit in the December quarter

• Paypal: The payments giant paused stablecoin work amid regulatory scrutiny of crypto

NFTs:

• OpenSea: Launches 3 hour Hold Period to mitigate theft-related risk

• Shopify: The E-Commerce giant launched a suite of blockchain commerce tools for merchants

• Chainlink: The decentralized blockchain oracle network is launching ‘dynamic NFTs,’ which are encoded w/smart contracts enabling automatic metadata updates based on external conditions 

• The Sandbox: The virtual worlds project agree to collaborate on metaverse projects with Saudi Arabia. D​etails will be released in the “coming weeks.”

• VerticalCrypto Art: The digital curation team announced their official integration with the Artblocks engine

FUNDING/ INVESTMENTS: 

• Coincover: The  digital asset protection startup raised a $30M round led by Foundation Capital

• C3: The decentralized crypto exchange raised a $6M seed round led by Two Sigma Ventures

• Sesame Labs: The web3 marketing platform raised a $4.5M seed round led by Wing Venture Capital and Patron 

• VAULT: The startup building an open and decentralized network for purchasing, playing, and sharing music raised a $4M Series A led by Placeholder VC 

• Cedro Finance: The omnichain liquidity platform raised a $1.5M pre-seed round led by Shima Capital

• VRRB Labs: The a Proof-of-Claim (PoC) decentralized protocol, raised a $1.4M pre-seed round from Jump Crypto and others

MY 3 CENTS: 

"First, they ignore you, then they laugh at you, then they fight you, then you win." As it relates to policy, I'll let you guess where we are right now. Here's a hint, no one's ignoring us and it doesn't feel like we're winning. I'm off to a hot start, but why say that? Well, two of the most important crypto features are under attack: staking and stablecoin use. There's a lot to unpack, so we'll focus on staking for today. Regardless, if either of these measures are executed, it could be very bad outcome for the space.Let's take a step back. What is staking, and why is it important? Staking is how Proof of Stake (PoS) networks, like Ethereum, validate transactions. It's a beautiful solve to the energy-related critiques of crypto. The approach uses a very small amount of energy and aligns incentives to make sure network validators mutually agree on what events occur, when they occur, and how they occur. If you stake your crypto to confirm transactions, you get paid a percentage of the crypto staked as a reward. It takes 32 ETH and familiarity with the space to become a validator, which is obviously a major barrier to entry. As a result, a lot of the exchanges run this service for people, so they can still stake, but they don't have to validate or hold the full required amount.  Here's a deeper primer, if interested. 

So what is the argument against staking? Some regulators are claiming that staking crypto should be viewed as an investment contract under US Security law. This is honestly sensible if you only have a surface level of how the process works. According to the Howey Test, a security is defined as (1) an investment of money; (2) in a common enterprise; (3) with the reasonable expectation of profits; (4) derived solely from the efforts of others. At first glance, staking seems to meet this definition. However, what the regulators miss is that ETH being deemed an investment contract misinterprets the second and fourth requirements... The tl;dr here is that the network is decentralized, so there is no promoter of the space. Further, when investors rely on their own efforts for their profit, it becomes harder to  characterize the transaction(s) as an investment contract. I'm not a lawyer, so I won't dive in any further. But this write up by Paradigm does an amazing job of laying out the full legal argument.

Already, we're seeing massive fines distributed (ie. Kraken) and widespread rumors from prominent figures in the space (ie. Brian Armstrong of Coinbase) that staking regulation is all but guaranteed. The downstream effects are that banning staking in the US doesn't kill crypto, but it does kill innovation and it does incentivize talent to go elsewhere. And let's face it, the US is only as powerful as it is innovative. What's really scary is the "Crypto Crash" Senate Banking Committee hearing is scheduled to begin tomorrow. The outcome of that meeting could be the biggest development (or lackthereof) in 2023. The irony here is that, although this topic became largely relevant due to the FTX fiasco, none of the policy being discussed or proposed seems to do anything to prevent FTX from happening again. If anything, it incentivizes development to occur off-shore, where the overarching legal framework is looser and fraud is more likely... 

I could go down the slippery slope argument, or talk about the added hindrances to mass adoption, but it's the Monday after the Super Bowl and I'm tired. Instead, I'll leave you with this: at the end of the day, regulation is needed, but cookie cutter regulation is lazy and a stifle to innovation. Proper oversight isn't a crazy ask and it's honestly not as complex as people make it out to be. Create a new, thoughtful legal token designation, make sure airtight disclosure rules are present, and then create oversight rules for custodians. To categorize staking as an investment contract would be an ignorant policy decision that does nothing to protect consumers. 

Until next week.

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.