DECIL Insights — Issue #4, blockchain regulation, central bank digital currencies, crypto 2023 outlook, blockchain education, and more (Jan. 2023)
The cascading failures of crypto companies in 2022, including FTX, Alameda Research, Terra, Celsius, Voyager Digital, and Three Arrows Capital, serve as another reminder that this space still faces significant challenges.
Genesis which was caught up in the 3AC debacle last May filed for bankruptcy in January which comes in conjunction with both Genesis and Gemini Earn getting charged by the SEC for offering unregistered crypto asset securities since Genesis had $900 million of assets from 340,000 investors.
John Ray III, the interim CEO of FTX is considering a restart of the exchange citing that may be the best path to make creditors and depositors whole. It appears most creditors are supporting the plan whose claims are currently fetching about $.15 on a dollar in the market.
Even though crypto awareness is pervasive among most parts of the world, we believe that mainstream adoption is unlikely to occur until better guardrails in the form of established laws and guidelines are in place. The lack of clear regulation and guidance remains one of the crypto industry’s greatest concerns and limiting factors.
Governmental regulatory bodies, particularly those in the US, are generally reactive rather than proactive when it comes to financial regulation. While many regulators have attempted to incorporate the crypto markets into existing financial regulations, the inherent pseudonymous and decentralized nature of the market has made it challenging to control under current regulatory frameworks. This market will require specific, crypto-native rules and regulations.
One of the most comprehensive crypto regulatory legislations right now is the Markets in Crypto-Assets (MiCA) proposal in the EU. Its primary objectives are to replace existing crypto regulations of individual EU countries and it includes specific rules around the issuance and trading of crypto assets, stablecoins, and non-fungible tokens (NFTs), as well as market manipulation and environmental disclosures. However, the proposal has faced numerous vote delays and is not expected to take effect any earlier than mid-2024. In the US, there have been multiple proposals for crypto regulation, including the Digital Commodities Consumer Protection Act (DCCPA), which aims to place crypto brokers, dealers, custodians, and exchanges under the purview of the Commodity Futures Trading Commission (CFTC).
Joint Statement on Crypto-Asset Risks to Banking Organizations
The Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the agencies) published Joint Statement on Crypto-Asset Risks to Banking Organizations on January 3 and highlighted several key risks associated with crypto-assets and crypto-asset sector participants:
Risk of fraud and scams among crypto-asset sector participants.
Legal uncertainties related to custody practices, redemptions, and ownership rights, some of which are currently the subject of legal processes and proceedings.
Inaccurate or misleading representations and disclosures by crypto-asset companies, including misrepresentations regarding federal deposit insurance, and other practices that may be unfair, deceptive, or abusive, contributing to significant harm to retail and institutional investors, customers, and counterparties.
Significant volatility in crypto-asset markets, the effects of which include potential impacts on deposit flows associated with crypto-asset companies.
Susceptibility of stablecoins to run the risk, creating potential deposit outflows for banking organizations that hold stablecoin reserves.
Contagion risk within the crypto-asset sector results from interconnections among certain crypto-asset participants, including through opaque lending, investing, funding, service, and operational arrangements. These interconnections may also present concentration risks for banking organizations with exposures to the crypto-asset sector.
Risk management and governance practices in the crypto-asset sector exhibit a lack of maturity and robustness.
Heightened risks associated with open, public, and/or decentralized networks, or similar systems, including, but not limited to, the lack of governance mechanisms establishing oversight of the system; the absence of contracts or standards to establish roles, responsibilities, and liabilities; and vulnerabilities related to cyber-attacks, outages, lost or trapped assets, and illicit finance.
These agencies are continuing to assess whether or how current and proposed crypto-asset-related activities by banking organizations can be conducted in a manner that adequately addresses safety and soundness, consumer protection, legal permissibility, and compliance with applicable laws and regulations, including anti-money laundering and illicit finance statutes and rules. Banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation. However, they should ensure that crypto-asset-related activities can be performed safely and soundly, are legally permissible, and comply with applicable laws and regulations, including those designed to protect consumers (such as fair lending laws and prohibitions against unfair, deceptive, or abusive acts or practices).
Central Bank Digital Currencies (CBDCs)
One hundred and fourteen countries are exploring digital currencies or CBDCs, and their collective economies represent more than 95% of the world’s GDP, according to the Atlantic Council’s Central Bank Digital Currency tracker. Some countries, including China, India, Nigeria, and the Bahamas, have already rolled out digital currencies. Others, like Sweden and Japan, are preparing for possible rollouts. The U.S. is studying the issue and has run trials of various technologies to enable a digital currency. Biden White House outlined the possibilities of a digital U.S. dollar in a September 2022 report.
Generally, CBDCs can be roughly divided into two types: those designed for use by financial institutions and those designed for use by the general public.
The first type is just a new way for central banks to transfer money to commercial banks. More specifically, some central banks are testing whether money transfers between financial institutions — which in some cases can take days to settle — might be made safer and more efficient under a system in which central-bank money is represented by digital tokens and transactions are settled on a shared distributed ledger, concepts borrowed from cryptocurrency and blockchains. One such system is being tested by the New York Fed and a range of big U.S. banks and financial institutions.
The second type of CBDC is a digital version of fiat money made available to the general public through accounts held by a central bank or a commercial bank. This type of CBDC represents a departure from the way money is created and distributed today, in that everyday people would now have accounts, or “wallets” that contain money created by their country’s central bank itself, instead of by their commercial bank. It represents a profound shift for central banks, from their traditional role as providers of money to a country’s banking and financial system to connecting directly with everyday people. China’s digital yuan is one such currency, and it can be used by everyday Chinese people through existing, and very popular, digital payment services like Alipay and WeChat Pay.
The impact of CBDCs can be profound. First, it is about control. The rise of cryptocurrencies — which are another form of digital money, but one that isn’t controlled by a government or other central authority — and the potential of one nation’s digital currency to eat away at the dominance of others’ has driven interest in official digital currencies. What central bankers and other interested parties fear is the potential of cryptocurrencies to wrest control of the creation and transfer of money from central banks, leaving them without the tools they currently have for preventing their respective economies from running too hot or too cold.
Another notable reason is financial inclusion. If everyone had access to an account with their country’s central bank and could use it to transact instantaneously with others using a digital currency, for a minimal or no fee, the idea is that it would bring many more people into the regional and even global financial system, with all the benefits that attend.
On the other hand, there are many potential downsides of a digital currency. The most important one is the privacy issue. A digital currency could allow governments to track every transaction a person makes, no matter how minute. This level of transparency would be a powerful disincentive to using these currencies for crime or fraud, but it could also open the door to new kinds of social control, especially in countries with already-scant protections for human rights.
Optimistic outlook for 2023
We believe some of the largest futures market caps and biggest wins in the venture will be found in the crypto asset class but like anything of value, it will take us some time to build those. The old style ‘find print money buttons and mash them until they don’t work anymore’ will be increasingly difficult to find and we’ll be left with the perennial challenge of creating real value that customers will pay for.
While there could be another 9 to 18 months of crypto winter, we have an incredibly optimistic outlook for 2023. Hereʼs why:
New adoption in the crypto industry
In new support and adoption, the 87th Texas legislature commissioned a work group to ensure a statewide strategic approach to enabling blockchain in the state. They recently published a report recommending full support of crypto which includes a recommendation for the state to buy Bitcoin, pass self-custody protection, provide tax breaks for mining, and include Bitcoin education in schools.
Institutional DeFi has also picked up over this past year with payments, custody, Real World Assets (RWA), and AML solutions receiving particularly high interest from large banks and institutions. On-chain banking enables instantaneous finality and reconciliation of transactions that institutions believe will give rise to new business models and financial products. MakerDAO recently partnered with banks to provide $100M decentralized finance loans with RWAs on-chain. Accessing real-world assets requires DeFi to be grounded in established institutional and regulatory frameworks that leverage trust and privacy. With this approach, DeFi has a much easier path to product-market fit for the masses.
A healthy and growing developer ecosystem
A healthy stream of developers continues to enter the market. Value creation in emerging technologies originates from developer engagement. More developers translate to more applications and more users. More users mean more net positive inflow of capital into the market and the cycle repeats with more developers attracted to the inflow. In Electric Capitalʼs most recent report, there are now 23,343 monthly active developers in crypto and building blockchain applications. Starting with the settlement and network layers, every major ecosystem has notable development improvements to address gaps in their stack. With the highest number of developers of any ecosystem, Ethereum completed the Merge where Ethereum transitioned to proof-of-stake consensus, officially deprecating proof-of-work, and reducing energy consumption by ~99.95%.
Here is the detailed developer report. Some highlights:
• Monthly developers grew 5% year-over-year while prices dropped by more than 70%. As a reference point, in the last bear market (2018–2019) when assets dropped at a similar clip, the number of developers stayed flat.
• Full-time developers grew by 8%+ year-over-year; full-time developers contribute to more than 75% of code commits
• 471K+ monthly code commits
• All-time high of 61K+ developers contributed code to a public blockchain or crypto project repository
Notable technology advancements
We continue to see notable advancements in specific subsets of cryptography such as zero-knowledge, homomorphic encryption, and secure multi-party computation that elevate core requirements for end-user adoption such as security and scalability. Looking forward, infrastructure maturity leads to consumer maturity. This ebb and flow relationship will unlock a plethora of asymmetric bets across the web3 technology stack. Infrastructure and middleware “picks and shovels” are key enablers for delivering the best user experience of applications that consumers can derive value from. Despite the focus on infrastructure and middleware projects in these market conditions, arguably, the bigger opportunity lies with what consumers can be enabled to do.
Blockchain education and clubs in top universities:
Berkeley:
Berkeley RDI is a multi-disciplinary, campus-wide center, focusing on advancing the science and technology of decentralization and web3, and empowering a responsible digital economy, with 3 core pillars: research, education, and community/entrepreneurship.
Starting on January 17th, Berkeley RDI offered a new MOOC on Zero Knowledge Proof, to explore more on ZKP with Shafi Goldwasser (Turing Award winner, co-inventor of ZKP, professor at UC Berkeley), Dan Boneh (professor at Stanford), Dawn Song (professor at UC Berkeley) and more.
B@B is a student organization at UC Berkeley focused on blockchain innovation via education, research, and consulting.
Website:
https://blockchain.berkeley.edu
Contact: external@blockchain.berkeley.edu
Stanford:
The Stanford Blockchain Club is Stanford University’s official student group for everything blockchain, crypto economics, and cryptocurrency.
Website: blockchain.stanford.edu
Contact: prinu@stanford.edu
Purdue:
Boiler Blockchain is on a mission to build a blockchain community at Purdue University. The club provides students with opportunities to gain hands-on experience with blockchain technology.
Website:
https://boilerblockchain.io
Contact: boilerblockchain@gmail.com
USC
Blockchain@USC is a student-run organization that has been building a space for members to engage with blockchain-related topics, develop blockchain applications, and connect with industry professionals since 2018.
Website:
https://www.blockchainusc.com/
Cornell
Cornell Blockchain was founded in 2017 to democratize Web3 awareness and help catalyze real-world use cases of Blockchain technology.
Website:
https://www.cornellblockchain.org/
Dartmouth
Dartmouth Blockchain is an ecosystem for committed, talented individuals to build their blockchain competency and connect with other students interested in blockchain technology.
Website:
https://dartmouthblockchain.com/
Contact: dartmouthblockchain@protonmail.com
Northeastern
NEU Blockchain Organization is a student-led organization whose mission is to foster an open community of thought leaders, developers, and researchers to support the development of blockchain and digital currency technologies.
Website: https://www.linkedin.com/company/neu-blockchain-org/
Our Podcast:
SustainaDAO Non-Fungible Talk:
https://sustainadao-non-fungible-talk.castos.com/
Partner Update:
Euterpe 2022 Highlight:
At the beginning of 2022, Euterpe was merely a concept. During 2022, Euterpe expanded its influence, built an active community, and raised more capital. By the end of the year, Euterpe had successfully launched its IP-powered NFT platform and sold its first batch of IP-NFTs.
Product Update:
In November 2022, Euterpe, the world’s first IP-powered NFT and SocialFi platform, formally launched online. Euterpe Genesis SBT first opened up for selected allowlist members, then to the general public through a raffle. Over 5000 Euterpe Genesis SBT tokens were claimed.
In December, Euterpe dropped 1180 IP-NFT Mystery Boxes and the first batch of music work was made available for auction on the platform.
On December 30, Euterpe completed its first music copyright NFT auction in its own marketplace with three copyrighted works. The highest purchase price of a single NFT hit 0.03 ETH, which is three times the auction reserve price.
Read Full Euterpe 2022 Anual Report: https://www.eut.io/Updated.pdf