+ Jack Dorsey will speak — on Bitcoin?
This week, there were a number of signs that the regulatory questions about crypto are slowly getting resolved. First, the Office of the Comptroller of the Currency gave federally chartered banks the authority to hold reserves for fiat-backed stablecoins such as USDC and Tether. And then, two new bills in Congress proposed to make token pre-sales the purview of the SEC, while tokens on live decentralized networks would fall under the CFTC’s. However, crypto still isn’t out of the woods on the regulatory front: after Uniswap’s momentous launch of its token, $UNI, last week, a number of crypto lawyers said they believed the airdropped coin was a security.
Meanwhile, Ethereum continues to face a challenge regarding its high fees, which have already forced one startup to shut down, but a popular proposal to make block sizes more responsive to demand could also make Ethereum more vulnerable to attacks. And if you’re interested in hearing Twitter and Square CEO Jack Dorsey, a noted Bitcoin believer, speak, tune in to the Oslo Freedom Forum Friday morning.
On the podcasts, we’ve got Bloomberg reporter Matt Leising on his new book, Out of the Ether, which recounts the early days of Ethereum as well as his quest to find the DAO attacker, and Jake Brukhman, who gives us the breakdown of why everyone’s been chattering about non-fungible tokens this week.
This Week’s Crypto News…
National Banks Can Hold Stablecoin Reserves
Big news regarding fiat-backed stablecoins such as USDC and Tether: on Monday, the Office of the Comptroller of the Currency said that federally chartered banks can hold the reserves for such coins. Although stablecoin issuers have been using U.S. banks for years, the regulatory environment surrounding such use has been murky. The OCC guidance has now made it clear that federally regulated banks should feel comfortable providing services to stablecoin issuers as long as they are backed on a one-to-one basis with fiat currencies.
Publishing concurrently, the Securities and Exchange Commission released a statement from its FinHub unit, which focuses on digital assets, noting that certain stablecoins might not be securities under federal law, but each case would be decided on “a facts and circumstances determination.” Presumably fiat-backed stablecoins are not securities, but from previous cases such as Basecoin/Basis, algorithmic ones could be.
Is the Uniswap Token a Security?
In the latest twist to the Uniswap/SushiSwap saga, Uniswap went live with its token, UNI, last week. Immediately, crypto lawyers began saying they believe UNI looks like an unregistered security. First, it was airdropped and airdrops “may not spare you from securities regulation,” according to a 2017 Coin Center blog post, which Neeraj Agrawal, its communications officer, felt compelled to tweet out the night of the Uniswap airdrop. Second, as the price has shot up, people may be interested in obtaining it with the expectation of a profit, rather than to utilize the network. And the value of UNI could be influenced by the efforts of an identifiable party — Uniswap — and that would trip the final prong of the so-called Howey test, which determines whether or not an investment contract is a security.
Greg Lisa, a partner at Hogan Lovells who worked on a case involving EtherDelta, a crypto exchange that billed itself as decentralized, but which the SEC determined was not, said to The Block, “This really looks like a blimp crash — it can be seen from a mile away. … The biggest question is when, not whether, the SEC and other regulators (or law enforcement) are going to say/do something about this.”
On a related note, two bipartisan bills introduced to Congress this week could clarify how the SEC and the Commodities Futures Trading Commission handle tokens, since they can sometimes start out as securities but evolve into commodities, once their networks are sufficiently decentralized. One bill, called the Securities Clarity Act, would explicitly define SEC jurisdiction to token pre-sales. As Coin Center puts it, “A non-security is being sold (the future decentralized token), but it comes with a contractual promise from the issuer (the promise to build the token network as specified so that the tokens will actually do something of value in the future).”
The second bill proposes a way for the CFTC to regulate U.S. based crypto exchanges, and would give crypto exchanges the option to register as a Digital Commodity Exchange, or DCE. And any pre-sold tokens, meaning those that started out as securities, could only be traded on these CFTC-registered exchanges, but once the network is live and the token is sold to the public there, it would lose its security status.
High Gas Fees Have Forced UniLogin to Shut Down
UniLogin co-founder Alex Van De Sande announced that the DApp onboarding solution is closing up shop due to high gas fees on Ethereum, with the cost of onboarding a new user soaring to over $130 on some days. Although the provider considered a pivot to a Layer-2 DeFi-focused wallet, it would have required an almost total restart of the project. UniLogin has decided instead to return its remaining cash to investors, adding that even if gas prices were to improve, and its onboarding costs were lessened, it still can’t imagine a way forward because Ethereum’s high gas fees do not appear to be a temporary problem.
In related news, a progress report on EIP-1559, which promises a significant change to Ethereum’s fee market, was posted on Wednesday. First proposed by Ethereum creator Vitalik Buterin in 2019, the transaction pricing mechanism offers a “fixed-per-block network fee that is burned and dynamically expands/contracts block sizes to deal with transient congestion.” The main concern is that since EIP-1559 could stretch blocks up to three times their current size, any denial of service attack could now be three times as effective.
Analytics Roundup
Dragonfly Capital led a seed funding round in Ethereum-centric analytics platform Dune Analytics, which enables people to create their own charts and dashboards and share them with others. For those of you who haven’t yet tried Dune Analytics, I highly recommend this resource, which a lot of my sources use to explain things to me!
Calling it a “Missing Link in the Ecosystem,” Blocknative unveiled Mempool Explorer on Wednesday, which enables people, for instance, to detect when more than $10,000 of liquidity moves into or out of a specific protocol, or to find out when your smart contact is party to a pending transaction and more. If you recall the story by Dan Robinson of Paradigm about the $10,000 that he tried to rescue but could not because a bot spotted his rescue attempt in the mempool and stole it first, that helps in explaining how this tool could be useful.
DeFi Roundup
After initially deciding in early April to refund washed out investors from March’s Black Thursday crash, on Tuesday, larger MKR holders dominated a vote and decided against making whole the same investors who lost a cumulative $8.33 million. Only 38 unique votes were cast, the equivalent of 8.74% of all MKR token holders. Participants were incentivized to vote against any compensation because additional printing of MKR would dilute the value of their holdings.
The tBTC network, which launched earlier this year but quickly pulled the plug, has relaunched “with unprecedented security measures in place,” allowing users to deposit and redeem Bitcoin in DeFi without intermediaries. Users can now exchange BTC for tBTC, an ERC-20 token for use on DeFi platforms. At a 1:1 rate, “each TBTC is fully backed and matched by at least 1 BTC held in reserve.”
After a wild three-day launch and then crash in August, last Friday, DeFi token YAM relaunched. By Monday, it had its first rebase, with $571,000 in yUSD added to its treasury.
A New Alternative to Buyback-and-Burn
In a blog post, Joel Monegro of Placeholder Capital examines the common “buyback-and-burn” model and points out that though this model works for currencies, it has pitfalls, particularly for governance tokens. He writes, “when it comes to capital assets like governance tokens, issuance is key to capitalization and burning can get in the way of growing fundamental value.” He defines currency as an asset whose value comes from exchange, such as to consumer goods or services. However, an asset used for governance or equity participation is capital. He cites MKR and ZRX as examples of networks that generate income in ETH but then redistribute value via their governance tokens. He says that, if you draw an analogy to buybacks in the equities world, stock buybacks typically do not result in shares being destroyed — they tend to be held by the company as treasury shares, and just reduce the number of outstanding shares.
On the flip side, issuance is how a crypto network such as a DAO or a protocol can obtain the resources it needs to scale. He says, “This is why tools like mining, proof-of-stake, and liquidity rewards can work so well. … There’s far more upside to smart issuance than there is in clutching to scarcity.” He then proposes a Balancer smart pool that is 10% ETH and 90% of a capital token that could function as what he calls an “automatic buyback machine, token issuance pool and liquidity provider,” since it would automatically rebalance by selling excess ETH or the capital token to retain that ratio. This functions as a buyback. The post gets more in the weeds than this, but it’s definitely worth checking out for creative ways to provide liquidity in a token.
How to Value the YFI Token
The YFI token, which governs Yearn, was launched with the disclaimer that the token itself “has 0 value.” However, investors disagreed with that initial assessment, and YFI, limited to only 30,000 tokens, has reached a price as high as $44,000 since its launch. But how should such a wide-ranging crypto network be valued? The newly formed Mechanism Capital did a deep dive into potential valuation methods, first discounting the usefulness of total value locked and price-to-earnings ratio.
The article then makes a case for two future-oriented valuation models: Forward Price/Earning and Discounted Cash Flow. It presents base, conservative, and aggressive forecasts with the bear case being for a $15,800 YFI and the aggressive case for a much higher-priced token — $315,500 YFI.
Jack Dorsey to Speak Friday at The Oslo Freedom Forum
I realize this is somewhat last minute, but if you are listening the morning this episode drops, you can see Twitter and Square CEO Jack Dorsey speak at the Oslo Freedom Forum. The prominent Bitcoin proponent will be on stage as it were at 10:45am ET, and the conference will be live-streamed on the Oslo Freedom Forum’s YouTube page.
