DECIL Insights- Issue #8, regulatory update, market adoption, Bitcoin new development, web3 & AI
Fed & IMF's view on crypto, SEC vs Binance & Coinbase, Hongkong, EU & UK crypto policy, Fortune 100 enterprises' crypto adoption, Bitcoin upgrade Taproot and protocol Ordinals, Polygon Copilot
Crypto is not just an industry; it is a global asset class and an inherently global technology. The decentralized nature of blockchains makes most crypto projects global, even if they originated in a specific country. Governments around the world have prioritized regulating crypto, especially after the failures and frauds in the market in 2022. The crypto industry continues to evolve, with US regulatory bodies expressing their stance on stablecoins and taking legal action against major exchanges. However, amidst the regulatory uncertainty in the US, other countries are embracing crypto as an opportunity for global competition.
The market adoption of crypto has seen significant interest from Fortune 100 companies, who have made notable advancements in the space. For instance, BlackRock's application for a Bitcoin ETF and JPMorgan's expansion of their blockchain-based payment system demonstrates the growing acceptance and integration of crypto within established financial institutions. Moreover, the emergence of Ordinals has injected new dynamism into the Bitcoin ecosystem, ushering in a flurry of activity in areas such as NFTs, tokens, and Layer 2 solutions. Another exciting development is the intersection of Web3 and AI. An AI-powered interface called Polygon Copilot has been introduced by the Polygon blockchain, enabling developers to build decentralized apps with ease. This integration of AI technology, powered by OpenAI's GPT-4, showcases the potential for innovation and collaboration between these two cutting-edge fields.
Regulatory Update
In the U.S. House Financial Services Committee's semi-annual hearing on monetary policy, the Federal Reserve (Fed) Chairman, Jerome Powell, has revealed the agency's stance on the stablecoins. During his testimony, Powell said the Fed, the U.S. central banking system, sees stablecoins as a form of money. The Fed official stated that the ultimate source of credibility in money is the central bank in all advanced economies, and thus, the Fed should regulate and supervise the stablecoins in the U.S. In July, the U.S. House Financial Services Committee will vote on a comprehensive framework for stablecoins, which would be the first crypto legislation in the U.S. if passed, and a separate crypto bill aimed to move the status of digital assets from security to commodity. The Fed Chairman also pointed out that the digital asset industry appears to be here to stay, though it has seen a sharp decline since last year.
The International Monetary Fund (IMF), a major financial agency of the United Nations (UN), has recently released a paper evaluating crypto adoption worldwide through research reports. In the paper, the agency said banning crypto assets may not be an effective approach in the long term for countries seeking to manage risks. The IMF stated that the countries should focus on addressing the drivers which direct citizens to the crypto assets instead of completely banning them. The institution counted citizens' unmet digital payment needs and the need for improved transparency among these drivers. The agency also advised countries to record crypto asset transactions in national statistics to constantly evaluate demand and traffic. The paper pointed out that the emphasis should be on reducing risks from digital assets while leveraging the benefits of the market.
Coinbase and Binance are both facing lawsuits from the SEC, although the cases differ. The SEC has charged Coinbase with acting as an unregistered exchange, broker, and clearing agency. They also allege that Coinbase sold securities without proper registration and failed to provide material information about its Staking Program to investors. Coinbase argues that they have been requesting rulemaking, maintained transparency with the SEC, and welcome regulations for the crypto industry in the US. SEC Chair Gensler, who previously sought additional regulatory authority from Congress, now asserts having sufficient authority to regulate crypto.
Three weeks later, Coinbase filed a motion asking the court to dismiss SEC charges against it. In the filing, the firm described the SEC's move as an extraordinary abuse of process. Coinbase argued that the SEC approved the exchange going public in 2021 without requiring it to register with the agency or classify any tokens listed on the exchange as securities. The company also underlined that it underwent an extensive review process for several months before going public and involved in-depth discussions with the SEC. Besides, the exchange cited the SEC Chair Gary Gensler's testimony from 2021 when he said only Congress had the power to regulate the crypto industry. Coinbase's legal team has stated that even if all the allegations in the lawsuit are true, they are beyond the SEC's legal authority. The firm added that the shift in the SEC's approach toward the crypto industry confused market participants.
In a separate case, the SEC has also filed a lawsuit against Binance and its CEO, Changpeng Zhao (CZ), alleging U.S. law violations. The complaint, spanning 136 pages, claims that Binance knowingly permitted high-net-worth US clients to use the platform without implementing sufficient controls and disclosures, thereby exposing the platform to potential market manipulation.
Over the last several months, many other crypto exchanges, including Kraken, Gemini, and Bittrex, came under increased scrutiny by the SEC. Other exchanges such as EDX which is backed by Fidelity and Schwab are not registered with the SEC and are offering only four cryptocurrencies and none of which were mentioned in the complaints against Coinbase and Binance. Prometheum, under a lot of controversy among industry insiders, was granted a first-of-its-kind Special Purpose Broker-Dealer by the SEC for digital securities which we believe will only be offering registered crypto products. Undoubtedly others will be aiming to fill any gaps in the marketplace while this plays out.
The SEC actions recently are suggesting that crypto regulation can be handled by the existing rules and that many of these offerings are securities. This is the question at the heart of the Ripple lawsuit with the SEC which began in 2020. There's likely going to be some precedent being made here soon on what crypto is or is not a security and importantly what constitutes a project as sufficiently decentralized in the eyes of the law.
Pessimism comes easily in a bear market, especially when the cloud of regulatory uncertainty seems to be getting darker. However, the regulatory uncertainty and aggression in the US are paralleled by improving clarity and progressivism virtually everywhere else. Besides, regardless of what transpires in the US, other countries see the encouragement of crypto as an opportunity to compete on the global stage.
Hong Kong officially kicked off a new regime offering crypto to retail investors on June 1, 2023. The city's ambition is to become a global hub for web3. It is willing to take the risks associated with embracing something new while other jurisdictions have growing apprehension and feel threatened.
Both the European Union and the United Kingdom have demonstrated sophistication in their treatment of the sector, and the EU’s Markets in Crypto Assets (MiCA) regulation is likely to become law this summer. In total, according to Coinbase, 30+ countries are developing comprehensive crypto regulations.
Market Adoption
Recent research jointly conducted by The Block Research and the crypto exchange Coinbase has shown that 52% of Fortune 100 companies had crypto initiatives at various stages since the beginning of 2020. The study pointed out that 70% of these companies moved their crypto initiatives to the publicly launched stage as of Q2 2023, hitting the highest level in three years.
It also revealed that financial services and enterprise have become the top two categories most invested by Fortune 100 firms. As for the crypto industry, NFTs saw the most investment from the giant companies with an 11% rate, while Web3 and decentralized finance (DeFi) made up 9% and 1% of the investments, respectively.
Blackrock has formally made its application for a spot Bitcoin ETF. There’s been a lot of excitement around this given their track record of 575 approved ETFs out of 576 applications. A number of other major fund managers followed suit, such as Invesco, Wisdom Tree, Valkyrie, and Bitwise.
JPMorgan Chase & Co., the world’s largest bank by market cap, has expanded its blockchain-based JPM Coin system to payments in euros for institutional clients. JPM Coin is a blockchain-based application launched in 2019 to offer an alternative payment system on blockchain. Since its launch, the platform has processed around $300B of transactions. The system previously allowed only dollar-denominated payments. The system now allows corporate clients to move dollars or euros to and from their JPMorgan accounts worldwide. The first euro payment on JPM Coin was conducted by German tech giant Siemens AG. Besides, the system processes payments instantly, differently from transactions on traditional payment rails that typically process payments only during business hours.
Over the last few years, the payment processing giant Mastercard has launched many initiatives targeting the crypto industry, demonstrating its commitment to the digital asset market. Recently, it announced its plans to launch a blockchain-based platform dubbed Multi Token Network (MTN) over the next few months. The firm's head of crypto and blockchain, Raj Dhamodharan, defined the platform as a blockchain-powered app store for building regulated financial apps. Developers will be able to build applications on the new app store using the Ethereum programming language, Solidity. During the beta testing phase, Mastercard will give developers access to tools it has been developing this year. These tools include a private version of the Ethereum network on which developers can build new applications. Plus, the platform will allow developers to experiment with tokenized commercial bank deposits and blockchain data showing the amount of cash in a bank account.
New Development on Bitcoin
Bitcoin is the soundest form of money ever created and nothing more. Over the years, the Bitcoin community has become a blockchain ecosystem that has consciously prioritized stability at the expense of dynamism. Many of the concepts proliferating in alternative ecosystems like Ethereum were all intellectually conceived as Bitcoin ideas in the early 2010s, e.g. smart contracts, sidechains, layer 2’s, NFTs, tokens, and DAOs. However, those ideas lost steam in the mid-2010s as the Bitcoin community developed an increasingly conservative approach to core protocol development.
This is until one recent upgrade, named Taproot, had unexpected consequences. Taproot, initially proposed in 2018 by long-time Bitcoin core developer Greg Maxwell, was activated in late 2021. Its primary goal is to enhance Bitcoin scalability by improving how digital signatures are aggregated within blocks. As a result, the previous size limit on transactions was relaxed. Combine the newfound ability to store more data on Bitcoin with permissionless developer creativity and you get Ordinals - a protocol for inscribing arbitrary digital data on the Bitcoin blockchain. Suddenly, Bitcoin became dynamic. There is a flurry of developer activity on Bitcoin, such as NFTs, tokens, and Layer 2’s. It has over 11M cumulative inscriptions in the 4 months since its establishment.
The most prominent Ordinals inscriptions are images - i.e. native Bitcoin NFTs - such as Taproot Wizards. Bitcoin NFTs have inspired a slew of new wallets, NFT marketplaces, creator tools, and NFT collections themselves. The initial excitement around NFTs has inspired Ordinals innovation in other places too. For example, new fungible tokens and DeFi protocols on Bitcoin are being experimented with such as BRC-20. There are also a number of early attempts to build Bitcoin Layer2’s (e.g. ZK-Rollups) to cater to Ordinals-specific activity. There’s a vibrant ecosystem forming around Ordinals and it is breathing new life into Bitcoin innovation.
On the other side, Ordinals introduce potential technical and regulatory risks that Bitcoin has previously been immune from. The beauty of a permissionless, open protocol is that it becomes what developers and users ultimately do with it. There is no top-down preordainment of purpose. While Bitcoin has succeeded on several dimensions over the past decade, it has fallen behind in terms of innovation. The Taproot upgrade to Bitcoin and its emergent Ordinals protocol has reignited developer activity. While the community needs to reconcile this flurry of activity with Bitcoin’s ultimate purpose, we think Ordinals have the potential to usher in a new chapter for Bitcoin arising from a level of bottom-up developer activity not seen in nearly a decade.
Web3 & AI
The team behind the Polygon blockchain has introduced an AI-powered interface dubbed Polygon Copilot to help developers build decentralized apps (dApps) on the network. The interface will allow developers at any level to create their projects on Polygon by simply asking. Polygon Copilot is powered by OpenAI's renowned AI-powered chatbot, ChatGPT, and its latest large language model, GPT-4. The interface was trained on documentation about the Polygon blockchain. The platform will look at wallets and transactions to provide analytics and insights for the developers building dApps or NFTs on Polygon. The AI-powered interface will offer three different levels while onboarding users based on their comfort with using the interface.
Coming Events
● Boundless Hackathon
Stanford Blockchain Accelerator, Zebec, Nautilus, and Rootz Labs organized a hackathon with 150+ projects with over $300k in prizes and esteemed judges from renowned brands like Stanford, zkSync, Layer0, Animoca Brand, Binance, OKX, Huobi, and Galxe, They will host a closing ceremony on 7/1. Welcome to join if you happen to be in the bay area.
❖ Date: July 1st
❖ Time: 10:00 AM - 6:00 PM
❖ Location: Stanford University, Stanford Faculty Club
❖ Register Closing Ceremony: Here
● The Ethereum Community Conference 6 (EthCC6)
EthCC6 is the largest annual European Ethereum event focused on technology and community. Four intense days of conferences, networking, and learning. It will have 280+ speakers and 120+ side events on different subjects and address different levels of comprehension of blockchain technology.
❖ https://www.ethcc.io/
❖ Date: JULY 17-20, 2023
❖ Location:
Maison de la Mutualité, Paris, France.
Collège des Bernardins, Paris, France.
● ETHCC Infra Breakfast - Powered by Shima x Zee Prime
During EthCC6, Zee Prime Capital and Shima Capital will host three panels discussing the latest innovation in Layer 1, Infrastructure, and Applications. The panelists include Orb Labs, Hyperlane, Exocore, Artela, Monad, peanut.to, Holyheld.
❖ Date: July 18
❖ Time: 9:30 AM - 2:30 PM
Thank you for your support!
DECIL is a nonprofit organization on blockchain research. We have constantly received generous donations from our donors via the Benevity Giving Platform. We are deeply grateful for their support in our mission to advance blockchain technology and build a sustainable ecosystem. With these donations, we will accelerate the generation of collaboration and consensus needed for technology adoption, and bridge the gap between crypto communities and the mainstream.