The below articles and industry developments have been identified by Kelley Drye and Warren's Blockchain and Cryptocurrency practice group as relevant during the week of September 7 – September 13. We hope you find this useful. Access may require subscription.
Regulatory Update
Near Protocol Forms Working Group to Promote DeFi Governance
CoinDesk, September 12, 2022
The Near Protocol, a blockchain network on which developers can build decentralized applications (dapps), is forming a working group to set standards for self-governance. The initiative, called the Near Digital Collective (NDC), is aimed at further decentralizing the ecosystem's decision-making by moving it onto its native blockchain, according to an announcement on Monday. The move will make the Near community more transparent and fairer, according to the press release shared with CoinDesk.
Self-governance initiatives in the decentralized finance (DeFi) sector, where developers from around the world are building financial applications that cut out traditional intermediaries, are having a moment. Usually, these initiatives are run by decentralized autonomous organizations (DAOs), which are blockchain-based organizations or companies where members who hold a native digital token can vote on key business and management decisions.
Although the NDC will move decision-making on-chain, and Near tokens have been set aside to function as the governance token for the collective, the protocol's co-founder Illia Polosukhin avoided calling it a DAO during an interview with CoinDesk. "I'm usually thinking in blockchain terms, so it's more of a protocol of how people interact and make decisions. And then we codify some of it in smart contracts, part of it will be codified in the constitution, part of it will be codified in the processes built around it," Polosukhin said. Smart contracts are computer programs that automatically execute transactions when preset conditions are met.
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How Will Meta Stop Crypto Scams? 6 Senators Would Like to Know
Barron's, September 10, 2022
Six U.S. senators sent a letter to Meta Platforms CEO Mark Zuckerberg to request information about the company's efforts to combat cryptocurrency scams. In the letter, the senators state their concerns over the amount of crypto scams that take place on Meta's (ticker: META) platforms, including Facebook, Instagram, and WhatsApp, calling Meta's sites "hunting grounds for scammers." It was signed by Sens. Robert Menendez (D., N.J.), Sherrod Brown (D., Ohio), Elizabeth Warren (D., Mass.), Dianne Feinstein (D., Calif.), Bernie Sanders (I, Vt.), and Cory Booker (D, N.J.).
"Based on recent reports of scams on other social media platforms and apps, we are concerned that Meta provides a breeding ground for cryptocurrency fraud that causes significant harm to consumers," the letter, dated Thursday, said. It also cited data from the Federal Trade Commission that from Jan. 1, 2021, through March 31, 2022, 49% of fraud reports to the FTC involving cryptocurrency said that the scam originated on social media.
The letter added that "among consumers who reported being scammed out ofcryptocurrency on a social media website, 32% identified the scam as having originated on Instagram, 26% on Facebook, and 9% on WhatsApp." The scams come in multiple forms, including "investment" and "romance" scams, and have cost victims in total about $417 million, the letter said.
The senators asked for Zuckerberg to respond by Oct. 24 to a list of questions regarding how the company fights crypto scams on its platforms.
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White House Report Calls for Cleaner Crypto Mining
WSJ, September 9, 2022
Crypto mining uses as much energy as all conventional data centers in the world, a U.S. government report released Thursday said, and about a third of that comes from the U.S. If the nation is going to reach its clean-energy goals, the report says, crypto needs to get greener.
The report is one of a series of government studies on cryptocurrencies ordered by President Biden in the spring. The report makes a number of recommendations, everything including from pushing miners to increase the use of renewables to releasing more detailed information about their energy usage.
Bitcoin miners are already working on the same problem. An example: In Cavalier County, N.D., near the Canadian border, a company called Bitzero Blockchain plans to transform an abandoned 200-acre missile complex into a data center and greenhouse.
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Crypto Investor Paradigm Argues Infrastructure Providers Should Not Be Subject to US Treasury Sanctions
CoinDesk, September 9, 2022
Crypto investment firm Paradigm published a nuanced legal argument amid concerns of potential sanctions by the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) that would target blockchain base layer participants such as miners and validators.
The post was published on Thursday and comes on the heels of a lawsuit filed by users who believe OFAC exceeded its authority when it sanctioned Tornado Cash smart contract addresses last month.
Paradigm acknowledged that sanctions can be an important tool to preserve national security, but said it believes base layer participants merely record and order data (which may include sanctioned addresses), but do not actively control sanctioned assets. Paradigm further suggested that stringent regulation would eventually push blockchain innovation offshore, making it more difficult to track crypto transactions for legitimate national security purposes.
Paradigm explained that a blockchain "base layer" is essentially a "communications protocol and technology infrastructure," much like the internet. As such, the base layer must be free from censorship and preserve neutrality in order to maintain its utility as a public good.
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FTX Ventures Takes 30% Stake in Anthony Scaramucci's SkyBridge Capital
Pensions & Investments Online, September 9, 2022
FTX Ventures acquired a 30% interest in alternative investment firm SkyBridge Capital, a SkyBridge spokeswoman said in an email. The financial terms of the transaction have not been disclosed, according to a SkyBridge news release Friday. An FTX spokesman confirmed the deal has closed.
The investment by FTX Ventures, a multistage venture capital fund, will provide SkyBridge "additional working capital to fund growth initiatives and new product launches," the news release said.
In addition, SkyBridge will use a portion of the proceeds to buy $40 million in cryptocurrencies to "hold on its corporate balance sheet as a long-term investment," the release added. SkyBridge said in the release that it "remains profitable and debt-free, notwithstanding market conditions."
The transaction represents the latest collaboration between SkyBridge and FTX, following the multiyear partnership to sponsor global SALT (SkyBridge Alternatives) Conference in North America, Asia and the Middle East, and co-present Crypto Bahamas, the institutional digital assets conference that was launched in April this year.
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SEC Chairman Gensler Wants Disclosures From Crypto Issuers, Lawyer Says
CoinDesk, Interview, September 9, 2022
U.S. Securities and Exchange Commission Chairman Gary Gensler wants disclosures from cryptocurrency issuers but recognizes that could be done differently than what publicly traded companies do now, Ashley Ebersole, a former SEC lawyer said Thursday on CoinDesk TV's "All About Bitcoin."
Ebersole's comments were in response to an interview Gensler did with Nikhilesh De, CoinDesk's managing editor for global policy and regulation, earlier on Thursday.
Gensler "recognized that disclosure in the crypto as a context may not look the same ... you're not going to get a 10-K or 10-Q every period from an issuer," Ebersole said, referring to annual and quarterly financial reports that publicly traded companies must file with the SEC.
"The technology makes it unnecessary. In many cases, a lot of this is very transparent. So it's sort of case by case, but he recognized there may be a difference here, and he's open to that," Ebersole said.
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SEC's Gensler Signals Support for Commodities Regulator Having Bitcoin Oversight
WSJ, September 8, 2022
Securities and Exchange Commission Chairman Gary Gensler signaled that he would support Congress handing more authority to the SEC's sister markets regulator to oversee certain cryptocurrencies such as bitcoin.
Mr. Gensler, speaking at an industry conference, said Thursday he looked forward to working with Congress to give the Commodity Futures Trading Commission added power, to the extent the agency needs greater authority to oversee and regulate "nonsecurity tokens...and the related intermediaries."
The remarks come amid an intensifying battle among federal agencies and congressional committees that oversee them over who will regulate crypto. Cryptocurrencies remain largely unregulated by the federal government, leaving investors without protections from fraud and market manipulation that come with many other types of investments. The competition for jurisdiction heated up in recent months as a meltdown in crypto markets underscored the need for guardrails in the eyes of many policy makers.
The competition also reflects the industry's ramped-up lobbying presence in Washington and its push to reach more mainstream investors through Super Bowl ads and other high-profile marketing initiatives.
Mr. Gensler, who headed the CFTC from 2009 to 2014, qualified his remarks by saying he welcomed working with lawmakers as long as it doesn't take away power from the SEC. "Let's ensure that we don't inadvertently undermine securities laws," he said. "We've got a $100 trillion capital market. Crypto is less than $1 trillion worldwide. But we don't want that to somehow undermine what we do elsewhere."
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House Republicans Press Fed on Digital Dollar
The Block, September 8, 2022
Republicans on the House Financial Services Committee want more information from the Federal Reserve System on a potential US Central Bank Digital Currency, ahead of a deadline set by President Joe Biden's executive order on digital assets.
Lawmakers wrote a letter to Board of Governors Vice Chair Lael Brainard on Wednesday, asking for clarification the Fed's thinking around a potential digital dollar, including whether curtailing the use of digital assets is part of the Fed's motivation.
Brainard testified in May on the potential impacts of a Fed-issued digital currency. She told a banking industry conference on Wednesday that the central bank still needs to answer key questions around the possible creation of a digital dollar and suggested that a decision was not imminent.
The lawmakers, led by the committee's top Republican Rep. Patrick McHenry (R-N.C.), want more information on whether Fed leadership believes it needs Congressional approval to move forward with a digital dollar, and whether the Fed would create accounts for individual Americans a move that could significantly disrupt the banking industry.
During her May testimony, Brainard said that the Fed would need support from Congress and the executive branch to issue a digital currency. Republicans signing the letter pressed for an explicit answer as to whether that meant the Fed thought a digital dollar would require a new law from Congress.
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Gensler: Securities Laws Cover 'Vast Majority' of Crypto Tokens
CFOdive.com, September 8, 2022
Securities and Exchange Commission (SEC) Chair Gary Gensler signaled Thursday that he would cooperate with the Commodity Futures Trading Commission (CFTC) saying that, to the extent that "it needs greater authorities with which to oversee and regulate crypto non-security tokens and related intermediaries, I look forward to working with Congress to achieve this goal," according to a copy of his prepared remarks.
Addressing an industry conference, Gensler also forcefully made the case for the SEC's broad authority over crypto, saying that the "vast majority" of the nearly 10,000 tokens in the crypto market meet the definition of a security and are therefore covered under the securities laws.
A former head of the CFTC, Gensler also outlined limits to his assistance, saying he was looking forward to working with Congress on various legislative initiatives but didn't want to "inadvertently undermine existing securities laws underlying $100 trillion capital markets."
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Franklin Templeton Preps First Institutional Crypto Accounts
Blockworks, September 8, 2022
Franklin Templeton is set to offer cryptocurrency-focused separately managed accounts (SMAs) to investment professionals for the first time. The move is the latest example of a traditional finance giant diving into digital assets — despite the ongoing bear market. Separately managed accounts are sometimes favored by institutional investors over commingled funds, because they come with customized strategy and risk profiles, as well as instant liquidity.
The launches follow Franklin Templeton's strategic investment in SMA platform Eaglebrook Advisors in April. The $1.4 trillion asset manager's first crypto strategies will be available to financial advisers and wealth managers working with US investors via Eaglebrook's turnkey platform by mid-October.
Eaglebrook Advisors CEO Christopher King said Franklin Templeton's new offerings represent "an inflection point" for crypto, as the US wealth management market is demanding professionally managed digital asset SMA strategies from trusted asset managers. He called the segment the "lowest-hanging fruit" for the crypto market in an interview with Blockworks last year, adding at the time that about 95% of the adviser market had not yet invested in cryptoassets.
Franklin Templeton's Digital Assets Core SMA is a market cap-weighted strategy that invests in 10 to 15 of the largest digital assets, excluding stablecoins and meme coins.
Though competing asset managers, such as BlackRock and Fidelity, launched ETFs focused on blockchain technologies in April, Bayston said then that Franklin Templeton was still mulling the right time for an entrance. Fidelity in April moved to allow certain US workers to allocate a portion of their retirement savings to bitcoin through the company's 401(k) plan investment lineup. BlackRock, the world's largest asset manager with roughly $8.5 trillion, partnered with Coinbase last month and days later launched a bitcoin private trust.
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News Articles
The news articles cover relevant content from September 7 through September 13. Access may require subscription.
Citadel Securities, Fidelity, Schwab Back New Crypto Exchange
WSJ, September 13, 2022
A consortium of financial heavyweights including electronic trading giant Citadel Securities and brokerages Fidelity Investments and Charles Schwab Corp. on Tuesday announced plans to launch a new cryptocurrency exchange.
The launch of the exchange, to be called EDX Markets, is a sign that Wall Street continues to see opportunity in digital assets despite this year's slump.
Other backers of the new exchange include high-speed trading firm Virtu Financial Inc. and venture-capital firms Sequoia Capital and Paradigm.
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Crypto Lending Now Pays Less Than Safest US Government Debt
Bloomberg Tax, September 13, 2022
Cryptocurrencies are facing a new threat: the lure of Treasuries offering a similar payout for a whole lot less risk.
In a rare reversal, crypto yields that institutions typically seek out have fallen below what the US government pays to borrow for three months, giving the hedge funds and family offices that have flocked to the digital space one less reason to keep investing.
The Federal Reserve's hawkish stance is driving up interest rates almost everywhere -- except in the speculative world of crypto, where yields have collapsed alongside volumes, wiping out some of the main avenues for generating double-digit returns, while the implosion of the Terra stablecoin project and the failures of crypto lenders like Celsius Network shook confidence.
"Two years ago, interest rates in crypto were at least 10% and in the real world rates were either negative or near-zero," said Jaime Baeza, chief executive officer of ANB Investments, a hedge fund focused on digital assets. "Now it's almost the reverse, because yields in crypto have collapsed and central banks are raising rates."
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Ethereum Merge Explained: Experts Break Down the Risks of the Long-awaited Crypto Update
Market Insider, September 12, 2022
The long-awaited Ethereum merge event is set to happen around Thursday, according to the Ethereum Foundation, and experts say it will reduce the blockchain's energy consumption by 99%.
The update, which is six years in the making, will transform Ethereum from a proof-of-work to a proof-of-stake consensus mechanism. That means so-called gas fees, or transaction costs, will come down, and the network will be able to process transactions faster.
Some have called the merge the most important crypto event after the creation of ether and bitcoin, noting the blockchain contains hundreds of billions of dollars of value. Ethereum underpins some of the top crypto-related applications like NFTs and smart contracts.
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NY State Bar Launches Task Force To Study Cryptocurrencies
Law360, September 12, 2022
The New York State Bar Association announced Monday the launching of a task force to make recommendations on how virtual currencies and digital assets should be regulated within New York, while also studying how the technologies can help the state's legal community.
The group, dubbed the Task Force on Emerging Digital Finance and Currency, will be led by Jacqueline J. Drohan, a partner at Drohan Lee LLP, and Dana V. Syracuse, the co-chair of Perkins Coie LLP's fintech industry group.
"We are already seeing the effects of this trillion-dollar industry in many areas of practice including entertainment, business, intellectual property, tax, criminal and environmental law and trusts and estates," Sherry Levin Wallach, president of the NYSBA, said in a statement on Monday. "The Task Force on Emerging Digital Finance and Currency will ensure that the New York State Bar Association has a voice in this innovative and emerging field."
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SEC Wrong To Reject Bitcoin ETF Bids, Advocacy Group Says
Law360, September 12, 2022
Cryptocurrency advocacy group Chamber of Digital Commerce released a report Monday arguing the U.S. Securities and Exchange Commission hasn't offered a good reason in repeatedly rejecting bids for exchange-traded funds that hold bitcoin, saying the U.S. is falling behind the rest of the world.
Monday's report — titled "The Crypto Conundrum" — notes the SEC received its first filing seeking to register shares of an exchange-traded fund that would hold bitcoin back in 2013, and has rejected every effort to list a bitcoin ETF on a national securities exchange since then. But while the regulator has cited concerns about investor protection and fraud, the Chamber of Digital Commerce said those issues have been "fully addressed by asset managers seeking to offer responsible, transparent and regulated bitcoin exposure to retail and institutional investors."
"Unfortunately, it is becoming increasingly probable that it will take litigation or focused efforts by Congress to break through the SEC's increasingly arbitrary and unwarranted treatment of this important investment product," the report reads. "Moreover, if the SEC's ability to transform itself into a merit-based regulator goes unchecked, the future of innovation and capital raising in the United States will be dark indeed."
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New Defiance ETF Aims to Capitalize on the Crypto Downturn
Bloomberg Tax, September 8, 2022
A new exchange-traded fund is aiming to capitalize on the lackluster performance of digital assets as the Federal Reserve moves aggressively to tamp down inflation.
The Defiance Daily Short Digitizing the Economy ETF (ticker IBIT), which debuts on Thursday, tracks the inverse performance of the roughly $540 million Amplify Transformational Data Sharing ETF (BLOK), a blockchain-focused product that has MicroStrategy Inc., Silvergate Capital Corp., Coinbase Global Inc. and CME Group Inc. among its top holdings. BLOK is down about 50% this year.
"BLOK is the granddaddy of the blockchain ETF space, which will help IBIT from a branding perspective," said Nate Geraci, president of The ETF Store, an advisory firm.
BIT will not invest in digital assets directly and instead will use derivatives to short BLOK, according to the prospectus. The new ETF, which has a management fee of 0.95%, joins Defiance's roughly $1.3 billion ETF lineup.
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