Headlines

Gensler Testifies to Congress, Stumbles
Ethereum Completes Shanghai Upgrade
LSD solutions now have more TVL than DEXsRocketPool Atlas upgrade goes live, unlocking 8 ETH minipools
Coinbase Sues SEC to Demand Answer for Rulemaking
Coinbase integrates Bitcoin Lightning
EU Parliament Approve Crypto Licensing and Fund Transfer Rules in Landmark MiCA Regulation
Avalanche introduces Evergreen Subnets
Polygon becomes the second biggest crypto gaming platform
Circle launches cross-chain transfer protocol.
Blur launches NFT lending.
Polygon launches PoS bridge for zkEVM.
Filecoin launches Filecoin Web Services.
Solana reveals low-cost NFTs with state compression
Trader Joe announce liquidity book v2.1 is live
Eigenlayer testnet launch
Uniswap mobile wallet launches on iOS
SEC Labels Algorand and Five Other Tokens as Securities in Bittrex Lawsuit
Binance US Backs Out of Voyager Digital $1B Acquisition
Peer-to-Peer Crypto Platform Paxful Shuts Down Operations Under Regulatory Pressure
Curve Finance’s crvUSD stablecoin deployed on Sepolia testnet
Block planning on bringing ‘open source’ Bitcoin mining rig design to market
Draft U.S. Stablecoin Bill Shows Major Difference Between Stablecoins and CBDCs
Binance-backed Trust wallet was compromised leading to the loss of user funds
Telegram users can now buy, withdraw and exchange BTC
A16z working on OP Stack client called Magi
Massive wallet hack drains 5k+ ETH from OG’s wallets

Regulation

In a pivotal move for the cryptocurrency industry, Europe and Hong Kong have recently made defining statements on the nature and regulation of crypto assets. The European Union's unprecedented law, "Markets in Crypto Assets" (MiCA), is set to be enacted in the forthcoming year and has sparked optimism among the crypto community. In a parallel move, Hong Kong has taken a decisive stance, classifying crypto assets as digital properties - an interpretation that carries significant weight in the global context.

MiCA

The passage of MiCA has been met with broad acclaim from cryptocurrency enthusiasts, particularly following the legislative body's decision to abandon the divisive provision proposing a ban on proof-of-work mining. This legislation provides a comprehensive regulatory framework aimed at ensuring the stability and security of the cryptocurrency industry across the 27 member states. The law is structured to prevent a repeat of significant market disruptions, such as those experienced by Terra Luna and FTX.

Hong Kong, on the other hand, has followed a different path by categorizing crypto assets as digital properties. This decision carries greater implications compared to similar determinations in other jurisdictions. This dynamic reveals a fragmented global perspective on crypto assets, with the U.S. still debating whether to classify them as commodities or securities.

Never-ending Regulatory Battles

Crypto exchanges have persistently sought clear regulations while diligently adhering to existing rules. A notable case involves Kraken, the world's third-largest crypto exchange, which has recently removed a substantial portion of its staked Ethereum (ETH) in settlement negotiations with the U.S. Securities and Exchange Commission (SEC). This move came as a response to the SEC's demand to halt its staking-as-a-service program earlier this year.

Interestingly, one day before the EU parliament endorsed the MiCA legislation, the Central Bank of Ireland granted Kraken authorization to operate as a virtual asset service provider (VASP). This development followed closely on the heels of Kraken's pre-registration filing with the Ontario Securities Commission, aiming to secure a Restricted Dealer status across Canada, despite the region's stringent regulations.

Coinbase, another prominent player wrestling with the SEC, has obtained a license from Bermuda and is now contemplating the launch of an offshore derivatives exchange. The U.S.-based exchange has initiated a narrow legal action in the U.S. Circuit Court, seeking a definitive response from the SEC to a rulemaking petition they filed the previous year. This petition requested specific regulatory guidance for the cryptocurrency industry.

In navigating these regulatory waters, Coinbase has effectively spearheaded the commodity versus security debate on behalf of the entire industry. At 21shares, we endorse this approach and believe it will lead to well-structured, unambiguous regulations that not only safeguard investors but also foster innovation in the crypto industry.

Gary’s Hearing

On April 18, the US House Committee on Financial Services (HCFS) organized an oversight hearing that focused on the Securities and Exchange Commission (SEC) and its approach to cryptocurrency regulation. Chairman Gary Gensler, representing the SEC, found himself in the hot seat, answering a spectrum of questions predominantly focused on the regulatory landscape of the digital asset sector.

The hearing was marked by a notable exchange where Gensler, when probed about whether he considered Ethereum (ETH) a security, abstained from a conclusive response. Furthermore, he offered no insights into the SEC's ongoing investigations, including the inquiry into the FTX collapse and the recent Wells Notice to Coinbase. Gensler's steadfast stance in justifying the SEC's methods, including prioritizing enforcement over regulatory transparency, didn't sit well with some members of the Committee.

Members expressed discontent over the existing regulatory framework, arguing that the rules designed for traditional markets may not be a perfect fit for the dynamic, constantly evolving crypto industry. The SEC's recent proposal to modify the definition of "exchange" to include "communication protocol systems" was met with criticism, as it could potentially augment the SEC's authority over Decentralized Exchanges (DEXes).

The SEC hearing brought to light the detrimental impact of the SEC's approach to cryptocurrency regulation on the industry. Concerns have been raised about Gensler's credibility following the FTX collapse, which raised fears of selective enforcement. Further, the SEC's history of promoting certain projects only to later classify the related token as a security has led to allegations of inconsistent regulation.

Stablecoin Legislation: A Promising Draft Bill and an Urgent Need for Regulation

On April 19, the HCFS subcommittee on digital assets convened to deliberate on stablecoins and the urgency for legislation. This follows the publication of a draft stablecoin bill earlier in the week. The draft bill proposes a number of key regulatory measures, including:

Regulation of insured depository stablecoin issuers by existing federal banking agencies, such as the OCC, the Federal Reserve, FDIC, and NCUA.
Implementation of reserve standards and oversight requirements that encompass aspects such as collateralization, types of collateral, custodial arrangements, and redeemability of the stablecoin.
A proposed 2-year ban on algorithmic stablecoins, while the Treasury conducts an in-depth study on "endogenously collateralized stablecoins".
A mandate for the Federal Reserve to study the potential impact of a Central Bank Digital Currency (CBDC).

The hearing featured testimonials from a range of industry figures, including Adrienne Harris from the New York Department of Financial Services (NYDFS), Dante Disparte from Circle, Austin Campbell, an adjunct professor at Columbia University, Jake Chervinsky from the Blockchain Association, and Delicia Hand from Consumer Reports.

The discussion underscored the importance of stablecoins, their practical benefits for consumers and financial inclusion, and the potential risks associated with the technology, including its potential misuse for criminal activities and the possible ripple effects on the broader US banking system. The panel was largely in agreement on the necessity for robust consumer protections, proper disclosures, surveillance tools, and restrictions on certain activities.

The stablecoin hearing provided an excellent platform for discussions on the potential and the need for the proper regulation of stablecoin technology. Despite some criticisms, constructive discussions led to a shared understanding of the importance of finding common ground. The draft bill’s provision allowing non-banks to compete, albeit under Federal regulation, is a progressive move. However, the practical viability of this path remains questionable.

Check out our latest CORE report on the USDC stablecoin.

Macro TL;DR

On May 3rd, 2023, the Fed raised the Fed Funds rate by 25 bps, marking the tenth consecutive raise. However, Jerome Powell did hint that this may be the last hike before a pause.

The regional banking crisis continues, as First Republic goes under (eventually bought by J.P. Morgan Chase), and PacWest looks like the next in line.

2023 bank failures — Source: The New York Post

The U.S. debt ceiling, once thought to be reached around the September 2023 timeframe, has been brought forward to ~June thanks to lower-than-expected tax receipts. The government has one month to strike a deal or default.

Bitcoin’s New Use Case? BRC-20, Ordinals, and Memecoins

The BRC-20 token standard on the Bitcoin blockchain, inspired by Ethereum's ERC-20, has become a notable trend within the cryptocurrency landscape, particularly in light of the recent surge in Pepe (PEPE) memecoin. Thousands of distinct tokens have been minted using the BRC-20 standard, with memecoins like PEPE and Memetic (MEME) make up the majority.

The BRC-20 standard enables developers to create and transfer fungible tokens through the Ordinals protocol, even though it doesn't utilize smart contracts like its Ethereum-based analog, the ERC-20. BRC-20 tokens require a Bitcoin wallet for minting and trading. The market capitalization of BRC-20 tokens has witnessed explosive growth over the past month, currently standing at $120 million.

While BRC-20 tokens are often compared to their ERC-20 counterparts, it is crucial to understand that they possess fundamental differences in their implementation. One of the most significant distinctions between BRC-20 and ERC-20 tokens is that BRC-20 tokens do not utilize smart contracts. Instead, each deployment, minting, and transfer of a BRC-20 token generates a new inscription within the Bitcoin network. This approach provides the unique advantage of bypassing the need for traditional cryptocurrency exchanges or decentralized exchanges (DEXs) when trading BRC-20 tokens, as the Bitcoin blockchain serves as the exchange medium.

To interact with a BRC-20 token, users must initiate the process with the corresponding inscription on the Bitcoin network. This inscription data is composed of a script file that assigns tokens to satoshis, facilitating the trading of BRC-20 tokens via Partially Signed Bitcoin Transactions (PSBTs). Consequently, to complete a BRC-20 token trade, an interested buyer merely needs to finalize the transaction.

Bitcoin wallets, such as UniSat, simplify this process by offering an interface and tool specifically designed to index BRC-20-related on-chain data. Users can then create the inscriptions necessary to execute deployment, minting, and transfer functions directly within the wallet.

The proliferation of BRC-20 tokens has remarkably outstripped the original volume of Bitcoin transactions on the blockchain. Between April 29 and May 2, BRC-20 transactions accounted for more than half of the activity on the Bitcoin blockchain, outpacing conventional BTC transactions.

The surge in BRC-20 transactions has also led to an uptick in transaction fees due to the increased token activity. Since its inception in late April, the network has produced an additional 109.7 BTC in transaction fees for miners.

Ethereum Post-Shanghai

The Shanghai upgrade to Ethereum has significantly mitigated the risk associated with ETH staking, triggering a surge of institutional investors into the platform. Data indicates a ~30% rise (~463k ETH) in ETH staked through institutional staking services, alongside a 5% increase (~356k ETH) in liquid staking protocols.

eth staking by institution may 2023 — Source: Grayscale

Liquid staking has gained traction among individual and institutional traders due to its dual benefit—exposure to ETH and staking yield without compromising on DeFi functionality. Post the Shanghai upgrade, exchanges have facilitated over 44% of total ETH withdrawals, with Kraken leading the pack. Kraken withdrawals were expected due to the regulatory measures levied at Kraken a month earlier, resulting in Kraken agreeing to shutter its staking product.

ETH staking post withdrawals may 2023 — Source

However, the significant withdrawal volume doesn't necessarily indicate an impending sale of ETH. It is plausible that a portion of this withdrawn ETH might be re-staked through liquid staking protocols or alternate service providers, thereby preserving its market utility. The impact of ETH withdrawals on the market has been marginal. The total volume of staked ETH continues to rise, registering an increase of over 1.5 million ETH in April.

eth withdrawals/deposits may 2023 — Source: Messari

Loading...