DECIL Insights- Issue #5, regulation update, new blockchain adoption, crypto market prediction, industry events
US SEC vs Kraken, Paxos & Binance USD, Coinbase Statement, California DMV NFT, ARK Big Ideas 2023, Berkeley ZKP, 2023 Hack Summit
The crypto industry is still dealing with the aftermath of ’22. Genesis Global, the largest crypto lender, filed for bankruptcy which entangled Gemini, an exchange and custodian with 765 million dollars of customers' assets tied up at the lender. As a result of their troubles, both are facing an SEC lawsuit.
U.S. regulators have been taking heavy enforcement action against crypto players recently. Kraken, a major player in the crypto industry, has faced regulatory action resulting in the shutdown of its staking service in the U.S. and a $30 million fine. SEC Chairman Gary Gensler has clarified the regulator's decision in interviews with Bloomberg and CNBC. In the case of Kraken, Chm. Gensler noted that there were no disclosures available for the investing public to understand what the company was doing with token deposits. He also expressed the need for exchanges and platforms to be compliant and register their business functions separately.
Chm. Gensler highlighted that there is sufficient guidance, forms, and staff support for companies to register and draft disclosures. When asked if there will be further actions, he responded, “Regardless of whether you call it earn, lend, staking-as-a-service, annual percentage yield, the labels aren’t what’s important it is the economics, and the investing public is putting their hard-earned funds into a platform and getting these yields, the law says they need disclosure, and the companies need to register.”
On the other hand, Coinbase has released an official statement arguing that staking is not a security under the Securities Act of 1933 or the Howey test. The exchange stated that securities law would prevent U.S. consumers from accessing basic crypto services and force them to offshore platforms.
Coinbase CEO Brian Armstrong added that the company will happily defend Coinbase staking in court.
On February 12, the Wall Street Journal reported that the SEC's enforcement staff issued a notice to Paxos Trust Co, indicating plans to sue the company for allegedly violating investor protection laws. The notice claims that Binance USD (BUSD), a stablecoin owned by Paxos and responsible for issuing, is an unregistered security. However, it's important to note that Wells notices are not always a final indication that the SEC will take enforcement action.
Following the SEC's announcement, Paxos terminated its relationship with Binance and announced that it would stop issuing new BUSD tokens as directed by the New York Department of Financial Services (NYDFS) from February 21. The company also reassured BUSD holders that they can redeem their funds in USD or Pax Dollar (USDP), a regulated USD-backed stablecoin, until at least February 2024.
According to Bloomberg, Binance's U.S. customers are serviced by Binance.US, which claims to operate independently and has no plans to leave the U.S. However, Binance announced earlier this month that it was temporarily suspending U.S. dollar bank transfers by its customers. A Binance spokesman explained that they are conducting a cost-benefit analysis and will pivot their business as necessary to protect their global user base.
While the recent regulatory actions against crypto companies may be motivated by the events of '22, it's likely that this would have happened eventually as the asset class matures. The approach of regulation by enforcement may be disruptive in the short term, but it aims to provide clarity for the marketplace while allowing for innovation in the longer term.
While these developments are certainly challenging, it's important to remember that the industry as a whole is still evolving and finding its footing. It's crucial that all participants work together to create a sustainable and secure environment for crypto investments and transactions.
In the current regulatory landscape, we believe established centralized entities with strong legal teams and balance sheets are likely to thrive, while emerging players may struggle to survive. For decentralized projects, interest and investment will likely shift towards regulation-resistant and transparent smart contracts and protocols. Although many projects may not make it, there is potential for multi-billion dollar winners to emerge.
There is also some positive news in the adoption of blockchain technology. California has announced that it is testing a private fork of Tezos for some of its record-keeping, including the issuance of car ownership and simplifying transfers of such ownership. The California Department of Motor Vehicles (DMV) plans to develop consumer-facing applications like digital wallets and car title NFTs later this year, according to Ajay Gupta, the agency's chief digital transformation officer. California had over 30 million registered vehicles as of 2020. Fortune reported that the plans for an on-chain title are expected to materialize in the next three months. This collaboration follows California Governor Gavin Newsom's executive order last year directing state agencies to explore ways to utilize blockchain technology and digital assets.
Ark Invest recently released its latest report on big ideas.
According to their research, the crypto market suffered a loss of approximately $1.5 trillion in market capitalization in 2022 due to the contagion from Terra/LUNA, Three Arrows Capital, Celsius, and FTX/Alameda.
However, despite this severe downturn, public blockchains are still promoting monetary, financial, and internet revolutions and the long-term prospects for Bitcoin, DeFi, and Web3 are getting stronger. Bitcoin's network fundamentals have improved, and its holder base has become more long-term oriented. Furthermore, contagion caused by centralized counterparties has elevated Bitcoin’s value propositions: decentralization, auditability, and transparency. According to ARK's research, the price of one Bitcoin could exceed $1 million in the next decade, with a base case price of $258,000 and a bull case of $1.48 million by 2030.
It is a fact that despite severe drawdowns, Bitcoin has consistently outperformed all major asset classes over extended periods and it is expected to scale into a multi-trillion-dollar market.
ARK Invest also made a bold prediction that crypto assets could reach $25T by 2030. As cryptocurrencies and smart contracts become more widely adopted, all money and contracts are likely to migrate onto public blockchains that offer digital scarcity and proof of ownership verification. The financial ecosystem is expected to evolve to accommodate these changes, resulting in increased transparency, reduced regulatory control, and lower contract execution costs. Digital wallets are expected to become increasingly essential as more assets become money-like and both corporations and consumers adapt to the new financial infrastructure. In the next decade, the market value of cryptocurrencies and smart contracts is predicted to reach $20T and $5T, respectively.
In the aftermath of the catastrophic failures of centralized crypto intermediaries last year, automated self-executing contracts on decentralized public blockchains offer the alternative of transparent and non-custodial financial services. Decentralization is proving more critical to maintaining the original value proposition of public blockchain infrastructure. Based on their research, ARK predicts that as the value of tokenized financial assets increases on the blockchain, decentralized applications and smart contract networks could generate up to $450 billion in annual revenue and reach a market value of $5.3 trillion by 2030.
Events:
March 1st - May 2nd, 2023
This ZKP / Web3 Hackathon, hosted by Berkeley RDI and in partnership with ZKP MOOC (~3500 enrolled worldwide) aims to bring together all students, researchers, and practitioners to build and showcase their innovative work in ZKP. The application is open to the general public and is held both virtually and in person at UC Berkeley.
Prizes (up to $200,000+ in Prizes):
Monetary prizes for the winning teams in each track
Winners will also have a chance to get admission and scholarships to the ZKP Summer Cluster at UC Berkeley Simons Institute, co-hosted by Simons Institute and Berkeley RDI
March 31 - April 1, 2023
Hack VC is hosting Hack Summit, a Virtual Conference for Blockchain Developers. It will feature the pioneers in the crypto industry and support good causes.
Some speakers:
