Crypto Regulations Are Coming
Dear Bankless nation,
Here’s a recap of the biggest crypto news in the fourth week of September.
Crypto regulations galore
The White House released last Friday its first crypto and digital assets regulatory framework.
Those with the stomach to sieve through the jargon will find the reiteration of many familiar regulatory themes, like the continuation of efforts against crypto-related crime, continuing research on CBDCs (ugh) and protecting retail against crypto scams.
In line with the latter, the report encourages the SEC, CFTC and an alphabet soup of regulatory agencies to “aggressively pursue investigations and enforcement actions against unlawful practices in the digital assets space” and “redouble their efforts to monitor consumer complaints and to enforce against unfair, deceptive, or abusive practices.”
And boy, these agencies were ready to pounce.
This Thursday, the CFTC charged Ooki DAO (wait, who?) and its founders for “illegally offering leveraged and margined retail commodity transactions in digital assets; engaging in activities only registered futures commission merchants can perform; and failing to adopt a customer identification program as part of a Bank Secrecy Act compliance program.”
It doesn’t stop there: any Ooki DAO member that participated in a governance vote would similarly be charged:
“Simultaneously, the CFTC filed a federal civil enforcement action in the U.S. District Court for the Northern District of California charging the Ooki DAO… with violating the same laws as the respondents. The CFTC seeks restitution, disgorgement, civil monetary penalties, trading and registration bans, and injunctions against further violations of the CEA and CFTC regulations, as charged.”
A common grievance by crypto folks is that existing financial regulations are unequipped for a wholesale application to crypto products. If you take that view, then all of this makes for another prime example of “regulation by enforcement” (as opposed to regulation by a clear set of crypto-dedicated rules) following the SEC’s sanctions on privacy mixer Tornado Cash last month.
That sucks. Which developer wants to build in crypto, or investor invest in crypto, or DAO member vote in a DAO, with a proverbial Sword of Damocles hovering over their heads?
But back to the White House report. The one silver lining is its rhetorical support for “responsible innovation” in digital assets – a sign that American policymakers are at least willing to acknowledge crypto’s role in maintaining economic competitiveness. Coinbase CEO Brian Armstrong claims that the best argument for crypto-friendly regulations which also appeals to a policymaker’s self-interest is the reminder that look, crypto is just code, and code can go offshore, and do you want to sacrifice American hegemony?
Yet, the regulatory hammer is already starting to swing, and in the absence of clear rules, crypto builders are left to guess when, where and how hard it lands.
When Terra plummeted in May, the regulatory spotlight on crypto intensified. U.S. Treasury Secretary Janet Yellen called out Terra specifically, and The White House report cites Terra’s crash as a warning for how crypto can create “disruptive runs if not paired with appropriate regulation.” As Jake Chervinsky said: “Terra gave them (un)just cause to push forward.”
Regulators never needed the excuse anyway, but the optics around pushing regulation forward now is certainly much easier.
Case in point: A draft legislation to regulate stablecoins is reportedly circulating Congress this week. According to Bloomberg, the draft is positioning to “place a two-year ban on coins similar to TerraUSD, the algorithmic stablecoin” and make it “illegal to issue or create new endogenously collateralized stablecoins” that aren’t backed by outside assets.
What defines algorithmic? Would DAI, FRAX or RAI fall into scope? How will this stifle innovation?
That’s a lot of regulatory developments to take in this week. In sum, regulatory agencies are being told to “do the right thing” and the crypto sector is implicitly told to “watch out” — despite the lack of strict clarity around the big regulatory questions like, are tokens a security? If yes, which ones? The SEC previously said that Bitcoin and Ether aren’t like stocks or bonds, yet it filed a lawsuit against Ripple last year for selling XRP as an “unregistered security”, and Gary Gensler came out two weeks ago in a speech to say that the vast majority of tokens in the crypto are in fact securities. Whose word counts? There’s too many cooks in the kitchen and every chef has his own recipe.
Senator Pat Toomey, one of the vocal pro-crypto voices in Congress is coming on the Bankless podcast next week. I leave you with this exchange between Tommey and Gensler.
Web3 News Roundup
Wintermute gets hacked for $160M
The last time crypto market maker Wintermute made headlines was when it bungled the Layer-2 chain Optimism’s airdrop in June by providing an incorrect wallet address that $15M worth of tokens were wrongly sent to.
This week, Wintermute is in the headlines again after suffering an exploit for a $160M hack. According to Polygon's CISO Mudit Gupta:
The vault only allows admins to do these transfers and Wintermute’s hot wallet is an admin, as expected. Therefore, the contracts worked as expected but the admin address itself was likely compromised. The admin address is a vanity address (starts with a bunch of zeroes) which might have been generated using the famous but buggy vanity address generating tool called Profanity. Profanity has a critical bug that was disclosed by 1inch a few days ago.
CEO Evgeny Gaevoy immediately came out with assurances that the firm was still solvent, and offered his own post-mortem.
Helium launches cellular plans with T-Mobile
In a space where so much of what is being built has questionable use, Helium is one of those rare crypto projects that has been touted for delivering tangible, real-world utility, prompting a New York Times’ editorial last month “Maybe There’s a Use for Crypto After All”.
Helium is a decentralized wireless network that pays users in crypto ($HNT) to create “Helium hot spots” by refunneling internet bandwidth from their ISPs with IoT devices. The company was founded in 2013 but struggled to amass enough users to upkeep the Helium network until it pivoted to crypto in 2017 and experimented with crypto economic incentives.
Despite Helium’s success in onboarding miners onto its supply side, demand for bandwidth on the Helium network has been sparse. To solve the problem on the demand side, the company announced Tuesday that it was rolling out its own cellular plans in partnership with T-Mobile. See the full blog post here.
Rari Capital votes to pay hack victims
This week saw a governance proposal passed 99% in favor of fully reimbursing hack victims in the totality of ~12.68M FEI and ~26.61M DAI.
Rari Capital’s Fuse pools suffered a $80M hack back in April, affecting many major DeFi projects that managed liquidity pools on Fuse like Babylon, Olympus and Frax. Its parent company Tribe originally passed an off-chain Snapshot vote that voted 75% in favor of repayment to victims, only to backtrack before its final, on-chain vote.
Three months later, Tribe announced that the protocol was shutting down, leaving hack victims hanging in the wind. The whole episode demonstrated a major blind spot in decentralized "autonomous" organizations. In the absence of automated wind-down procedures that should've been dictated by smart contracts, the community was forced to engage in internal political governance to resolve the issue.
For full context, see Ben’s write-up here.
- Arbitrum is live on Opensea
- Nasdaq is launching an institutional crypto custody service
- Robinhood Lists USDC as First Stablecoin on Trading Platform
- A white hat hacker earns a 400 ETH bounty by avoiding a hack on Arbitrum
- Binance and FTX is in a bidding war for Voyager
- Universal Studios are launching a NFT scavenger hunt
- A U.S. judge in New York orders Tether to reveal USDT backings
Here’s what we have lined up next week.
- Vitalik Buterin is joining us on the podcast to talk big brain post-Merge stuff
- William dives into the NFTFi ecosystem with a tactic on how to borrow/lend your NFTs
- Ben is analyzing the best DeFi business models
See you next week.