Headlines

Binance.US to pay $1.3 billion in an agreement to acquire Voyager’s assets
Sushi hit with SEC subpoena and proposes to establish a legal fund for core contributors
Magic Eden launches Ordinals marketplace
Arbitrum to airdrop ARB governance tokens to users on March 23
Ethereum developers set April 12 for the launch of the Shanghai-Capella upgrade on the mainnet
Tether's first-quarter profit was estimated at $700M
MakerDAO votes to retain USDC as the primary reserve despite depegging. Also passes vote for the “End Game” plan
Coinbase to take unstaking requests a day after the Shanghai-Capella update
Lido expects staked Ethereum withdrawals in May
Uniswap v3 launched on BNB Chain
Uniswap V3 Business Source License has officially expired, and now anyone can fork it
Filecoin successfully implemented its own virtual machine, enabling smart contract support
Compound III has been deployed to Polygon
Rocket Pool announce April 18th for Atlas launch and benefits of upgrade
Kucoin was sued by New York's Attorney General, and alleges ETH is a security
SEC believes Binance.US is operating an unregistered securities exchange
US Fed announces $25B in funding to backstop banks
Signature Bank shut down by state regulator
Binance converting the remaining $1B industry recovery funds from BUSD to BTC, ETH and BNB
Euler Finance exploit - more than $185M suspected to have been stolen. Hacker has returned the majority of funds and apologized but is that the end?
Coinbase has acquired One River Asset Management, leading to the creation of Coinbase Asset Management. Additionally, Coinbase unveiled its Wallet as a Service offering, allowing developers to incorporate MPC wallets into new or existing applications. This Wallet as a Service feature has the potential to facilitate the introduction and launch of numerous wallets, especially for conventional e-commerce brands interested in launching their own wallets without the desire to build them from scratch.
Amazon NFT Rumors: Rumors suggest that Amazon is developing an NFT offering, potentially linked to real-world assets, with an official announcement expected in late April. Amazon has already collaborated with Avalanche in relation to AWS services. With 160 million annual subscribers in the US alone, Amazon Prime is a dominant subscription platform. Upon launching the digital collectibles initiative, Amazon intends to inform all its subscribers via email. Although it remains uncertain whether the NFTs will be created on a private blockchain, speculations indicate that Amazon might build on Immutable X.

Key events March 2023 — Key crypto events in March 2023. Source: Grayscale

crypto q1 2023 performance by sector — Source: Kaiko

Rollups

zkSync Era (zkEVM) mainnet alpha goes live just days before Polygon’s own zkEVM launches
Taiko (zkEVM) alpha-2 testnet: uses Sepolia testnet
Immutable zkEVM announced, using Polygon zkEVM, gas to be paid in $IMX
Optimism two-step withdrawals in Bedrock upgrade, improves bridge security
ARB token airdrop takes place with 600k addresses qualifying for the free ARB tokens.
Scroll, an Ethereum L2 network that uses zk-rollups technology, raised $50M
ConsenSys opening its EVM-equivalent zkEVM rollup to public testnet on March 28th
zkSync network experienced downtime over weekend and why

Optimism and Arbitrum have long been the forerunners in Ethereum's layer-2 landscape, capturing the market's attention with their optimistic rollups and airdrop incentives. However, zero-knowledge rollups (ZKRs) are gaining traction as Polygon and ZkSync unveil their EVM-compatible, ZK-rollup solutions on the mainnet.

Layer-2 projects generally record transactions on a separate chain (the layer-2) before "rolling up" these transactions into a single one and settling them on Ethereum (the layer-1). By sharing gas costs among all transactions, fees are reduced. However, layer-2 networks differ in their approaches to processing and settling transaction bundles on Ethereum.

Ethereum co-founder Vitalik Buterin has previously expressed his belief that ZKRs will ultimately triumph as Ethereum's preferred scaling solution, citing advantages such as the absence of a seven-day withdrawal period.

Over the past week, Polygon and zkSync have launched their respective zkEVMs on the mainnet. Polygon's zkEVM offers EVM-equivalent rollup, allowing existing EVM-compatible smart contracts to function without altering languages or tooling. On the other hand, zkSync Era's EVM-compatible rollup requires projects to use its LLVM-based compiler, enabling additional features such as native account abstraction, hyperchains, and data compression.

While zkSync Era has no plans for a token launch, speculation about a future airdrop persists as the network aims to decentralize. Meanwhile, Polygon's zkEVM is anticipated to share fees with MATIC stakers, and it has implemented a Proof Of Efficiency (POE) consensus mechanism to enhance decentralization and network security.

zkSync Era

Matter Labs has opened public access to its Layer 2 network, zkSync Era, marking the first zkEVM launch on the Ethereum blockchain. Initially tested internally during its baby alpha phase in October 2022, the network granted whitelisted access to development teams in February. Now, the zkSync Era is accessible to everyone.

Major Ethereum projects, including Uniswap, Curve, Balancer, Maker, SushiSwap, Circle, and Argent, are already building on zkSync Era. One of its key features is native support for account abstraction, which enhances crypto wallet functionality and simplifies user onboarding. It also offers a unique level of data availability, publishing state differences rather than transaction inputs, enabling data compression, more frequent oracle updates, cheaper privacy, and better integration with off-chain storage extensions.

Although zkSync Era will not launch with a token due to its centralized nature, Matter Labs CEO Alex Gluchowski anticipates decentralizing the sequencer in about a year. Once the prover and core virtual machine engine is stable, a decentralized sequencer mechanism with validators and some form of the stake will be introduced, with a dedicated team already working on this aspect.

To safeguard the network at launch, Matter Labs has implemented a 24-hour transaction confirmation delay to provide a buffer in case of issues. This delay will be reduced over time as the network proves its stability. The plan is to gradually hand over control of zkSync to its community, following the model of zkSync Lite. After a year or more, the network is expected to become decentralized, with a security council established to oversee emergency protocol upgrades.

Users have been bridging to the new network at a rapid pace. ~188,000 addresses have deposited assets worth almost ~$76 million:

zkSync march depositors — Source: Dune Analytics

Arbitrum Governance Off to a Rocky Start

The Arbitrum Foundation recently engaged in a pre-emptive sale of ARB tokens for stablecoins, prior to obtaining approval from the governance community for the organization's budget. The foundation acquired 750 million ARB governance tokens, valued at approximately $1 billion, without the consent of token holders.

For operational expenses, the foundation converted 10 million governance tokens into fiat currency and allocated 40 million tokens as a loan to Wintermute, a prominent market maker in the financial markets sector. The tokens are intended to finance a "special grants" program designed to promote growth within the Arbitrum ecosystem.

Proposal AIP-1 seeks to enable the centralized Arbitrum Foundation to bypass full on-chain governance when allocating grant funds. This proposal served as a procedural formality to inform the community of decisions already made, including the establishment of a foundation to administer the DAO's decisions and disburse funds. The contentious aspect of this situation lies in the fact that the Arbitrum Foundation sold these tokens before the vote's conclusion, rendering the governance process effectively irrelevant.

The foundation's rationale for this course of action is that certain parameters must be established before genuinely decentralized governance can be achieved. Furthermore, they assert that the special grants are essential to the project's long-term viability in the face of competition.

Macro in March

TL;DR

The Fed hiked rates 25bps to a 4.75%-5% range, adding "some additional firming may be appropriate." This statement was interpreted as more dovish than the Fed’s previous stance of “higher for longer.” The market is now pricing in a pause in May and 25bps of cuts at the following five meetings, potentially indicating a recession.
Numerous sizable regional banks faced extraordinary withdrawals, with SVB, Signature, and Silvergate all “failing” to varying extents
A 166-year-old financial establishment, Credit Suisse, collapsed following years of fiscal mismanagement
The Fed and global central banks established urgent initiatives to reinforce dollar liquidity and stabilize the financial industry while grappling with persistent inflation
Russia revealed its intention to employ the Chinese yuan for global commerce (a possible initial move that might challenge the dominance of the US dollar)
The Federal Reserve's preferred core Personal Consumption Expenditures (PCE) measure reported a monthly increase of 0.3% (down from 0.5%) and a yearly increase of 4.6% (vs. 4.7% expected), marking the smallest increase since October 2021.
Liquidity continues to surge. Although the Fed's balance sheet contracted by approximately $28 billion at the end of March, it expanded it by around $366 billion in early March in response to the banking crisis. Furthermore, China injected a net CNY 850 billion ($125 billion) in the past week to manage quarter-end liquidity and mitigate volatility from its still-struggling domestic economy. This massive influx of liquidity is expected to continue driving risk assets and cryptocurrencies.

The recent failures of Silicon Valley Bank, Signature Bank, and the voluntary liquidation of crypto-focused Silvergate Bank have caused significant turbulence in the banking sector. The Federal Reserve's aggressive rate hikes have pushed deposits away from banks in search of higher money market yields, resulting in liquidity and solvency issues.

To mitigate the crisis, US Regulators and the Fed guaranteed deposits at the affected banks and introduced the Bank Term Funding Program (BTFP), offering up to one-year liquidity in exchange for eligible collateral. However, this solution is only short-term, as banks continue to face deposit outflows and become increasingly dependent on Fed liquidity.

Subsequently, other banks such as Credit Suisse and First Republic Bank experienced financial stress, with the Swiss National Bank providing a CHF 50 billion liquidity backstop for Credit Suisse and major US banks committing to deposit $30 billion to support First Republic Bank. The Fed now faces a challenging decision between tackling inflation or supporting the financial system. With the Fed's balance sheet expanding significantly due to banks tapping into various liquidity facilities, the prospect of further rate hikes while simultaneously providing liquidity for the struggling banking sector appears unlikely. The unfolding crisis reinforces the original narrative that gave rise to cryptocurrencies, making the case for decentralized finance even stronger.

Silvergate Bank, which has played a pivotal role in the cryptocurrency industry, announced its decision to enter voluntary liquidation, citing recent industry and regulatory developments. However, industry experts believe that the move will have a minimal impact on the digital asset ecosystem. Another specialist bank that investors should monitor is Silicon Valley Bank, which is facing a capital shortage.

Silicon Valley Bank (SVB) experienced extreme stress last month. Reports emerged regarding SVB's exposure to interest rate risk on $91 billion in bonds, leading to a sale of a $21 billion bond portfolio resulting in a significant loss of $1.8 billion. To cover these losses, SVB announced a $2.3 billion share sale.

The bank's financial instability prompted a run on accounts beginning last week, with customers withdrawing over $40 billion in two days. Credit agencies cut SVB's credit ratings, causing market pressure that erased $80 billion in market cap across other US banks. The bank's stock price fell by 60%, followed by an additional 22% after hours. Companies are advised to withdraw from SVB amidst the ongoing turmoil.

In an effort to prevent bank runs and help companies maintain payroll and operations, the Biden administration guaranteed on Sunday that customers of the failed Silicon Valley Bank (SVB) and Signature Bank will have access to their money starting Monday. This comes after SVB's voluntary liquidation and Signature Bank's shutdown, which were the third and fourth bank collapses in under a week. The Federal Deposit Insurance Corporation (FDIC) will make all deposits, including uninsured money, whole, and the Federal Reserve will provide additional funding for eligible financial institutions to prevent runs on similar banks in the future. The move was well-received by investors, with Dow futures up nearly 300 points, S&P 500 and Nasdaq futures up 1.3%. The regulators emphasized that US taxpayers will not be responsible for the failed facilities, but shareholders and holders of unsecured corporate bonds will not be protected.

Wrapping up the banking drama, New York-based Signature Bank, which serves several clients in the crypto industry, was closed by state regulators, according to a statement by the Federal Reserve. This marks the third bank collapse in under a week, following Silvergate Bank's voluntary liquidation and Silicon Valley Bank's shutdown on Wednesday and Friday, respectively. The Federal Depository Insurance Corporation (FDIC) has taken receivership of the bank to protect depositors, according to the New York Department of Financial Services Superintendent Adrianne Harris. The Federal Reserve, FDIC, and U.S. Treasury Department have issued a joint statement that all depositors who used Signature would be made whole, outlining actions the federal regulators would take to protect depositors in Silicon Valley Bank.

Regulation: Two Top Exchanges, Two Lawsuits

Coinbase Wells Notice

On March 22nd, Brian Armstrong posted a tweet announcing that the SEC had issued a Wells Notice to Coinbase regarding staking and asset listings. A Wells Notice is a letter indicating that the SEC intends to take enforcement action against a person or firm following an investigation. This notice suggests that the SEC's staff has made an initial decision to recommend enforcement action against the firm for alleged violations of federal Exchange and Securities Act regulations. Several aspects of Coinbase's business are under the regulatory microscope, including digital asset listing, staking services, institutional custody and trading solutions, and self-custodial wallets.

brian armstrong wells notice tweet march 2023

While specific details about the investigation are not yet available, the broad scope of products under scrutiny is cause for concern. Although Coinbase has not received explicit information on which cryptocurrencies the SEC considers securities, it is likely that digital assets mentioned in SEC v. Wahi, such as Rari and Ampleforth governance tokens, are included.

Coinbase's attempts to modify the terms of service for its Earn platform have not appeased regulators. It appears that the SEC may be focusing on "pooled" rewards models and could potentially seek to impose fines on Coinbase for past misconduct. A more alarming scenario involves the SEC attempting to classify staking as a security, with the intention of setting a legal precedent in court.

Interestingly, the Wells notice lists Coinbase Prime and Coinbase Wallet as products under investigation. This is the first instance of a regulatory inquiry targeting a licensed institutional custody solution and a smart contract wallet. If Coinbase fails to defend these products in court, it could result in further obstacles for both institutional and retail access to cryptocurrency markets.

All products under investigation were included in Coinbase's Form S-1 registration filing with the SEC, a necessary step for listing a publicly traded company in the United States. The reason behind the SEC's sudden decision to raise questions remains unclear. If the SEC succeeds in its case against Coinbase, it could establish a harmful precedent and hinder cryptocurrency adoption in the US. The outcome of this case will undoubtedly have far-reaching implications for the future of the cryptocurrency industry and its regulation.

Brian noted that the SEC had thoroughly reviewed Coinbase's business prior to its IPO and that the S1 document provided extensive information on the company's asset listing process, with 57 references to staking. He expressed his expectation that the upcoming process will be fair and open, and that Coinbase will have the opportunity to demonstrate that the SEC's engagement on digital assets has not been reasonable, fair, or serious.

The Coinbase team has stated that they plan to defend the rule of law by taking the issue to court. This legal battle will have significant implications for the future of cryptocurrency in the United States.

Binance and the CFTC

Binance and its founder CZ have been sued by the US Commodity Futures Trading Commission (CFTC) for offering unregistered crypto derivatives products to US customers. Binance has reportedly been under investigation by multiple US agencies, including the CFTC, IRS, and federal prosecutors, for suspected violations of Anti-Money Laundering regulations and allowing US traders to access unregistered securities. The CFTC alleges that Binance has been engaging in unregistered trading activity in the US since 2017, despite publicly stating its intention to block or restrict US customers.

Binance is accused of using a complex web of corporate entities to obscure the ownership, control, and location of the platform and directing employees to use VPNs to spoof their locations. The CFTC also cites internal chats between Binance employees, including Samuel Lim, the exchange's Chief Compliance Officer. Despite the lawsuit, Binance has pledged to cooperate with regulators. This move comes as the US government continues to target major players in the crypto space in an effort to send a clear message.

This is not Binance’s first skirmish with regulators. The company has a long history of playing “fast and loose” with the rules. Binance has moved headquarters from country to country to avoid regulation, most recently seeming to indicate there is not a headquarters after Malta denied Binance under its jurisdiction, the last known location of Binance’s headquarters. This represents a regulatory risk as businesses must fall under some jurisdiction. It is unprecedented for a legitimate business not to submit to some regulation scheme.

Binance is currently under investigation by the U.S. Internal Revenue Service as well as the Department of Justice for money laundering as well as dealing with inquiries from the Commodity Futures Trading Commission (CFTC) over whether Binance allowed U.S. residents to trade on its exchange. It is important to note that of Q2 2022, "[t]he federal agencies haven’t accused Binance of wrongdoing." However, over the course of 2021, Binance hired a slew of high-profile individuals to join its regulatory advisory team, including former U.S. senator Max Baucus as a regulatory advisor and two former members of the Financial Action Task Force (FAFT) to its advisory team. Announced in July 2021, Binance is also seeking a new CEO, one with a regulatory background, to replace Changpeng Zhao (CZ). This change may have been spurred by the onslaught of recent regulatory backlash or that the US subsidiary of Binance is planning to IPO, most likely sometime in 2022.

Binance's legal issues are not isolated to the US. in 2020, Binance faced regulatory pushback in Europe for providing stock token trading on its exchange. Additionally, in June 2021, the UK's lead financial regulator announced that Binance's UK division is not permitted to conduct operations related to regulated financial activities in the country. This order followed a similar one from Japan, stating that Binance isn't registered to do business in the country. Binance's regulatory troubles again intensified in late July 2021 when Malaysia's Securities Commission ordered the company to cease operations in the country.

However, as of May 2022, Binance is officially a fully regulated digital asset service provider (DASP) in France. This regulatory breakthrough for the often "marooned" exchange makes Binance the first major global exchange to legally operate in France. A Digital Asset Service Provider (DASP) designation aligns with the Crypto-Asset Service Providers guidelines set forth by the EU commission under MiCa (Markets in Crypto Assets), a proposed regulatory framework for crypto businesses operating in the EU. The DASP designation permits Binance to custody digital assets, exchange digital assets for legal tender, and operate a trading exchange.

Grayscale vs. the Courts

Grayscale recently completed oral arguments in its lawsuit against the SEC, which has been obstructing the conversion of GBTC into a spot ETF. Grayscale aims to reduce the discount by transforming GBTC into a spot ETF, but the SEC continues to hinder the process. The prevailing sentiment is that Grayscale emerged victorious in this round of debate, with the next stage being a final court decision.

Over the past week, the discount on GBTC has shrunk from 45% to 30%, and approval of an ETF could provide significant momentum amidst a bear market. The court expressed skepticism towards the SEC's stance, which might offer a more objective perspective on the future of crypto regulation. Market cornerstones include consumer protection, market integrity, fairness, and reasonable regulation for crypto and token issuers, which should be kept in mind.

The legal system has seen some victories, such as the SEC losing the Voyager case and encountering a setback in the GBTC case. Insiders anticipate a verdict in the ongoing SEC case against XRP in the coming months, which could have substantial implications for the crypto industry.

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