After a week where basically nothing happened, there’s a ton going on this week.
- Exchanges are in the spotlight, with Reuters going after Binance, the CFTC going after Gemini, Coinbase freezing hiring and PayPal finally allowing withdrawals.
- Ethereum’s oldest testnet has successfully moved to Proof of Stake, meaning the August launch of Ethereum 2.0 is on-track.
- Regulators around the world are (predictably) cracking down on Stablecoins, after the Terra Luna UST fiasco.
- And Tron – the crypto it was cool to mock in 2018 – is trying to fill Terra’s shoes with an algorithmic stablecoin of its own promising a 30% yield… which is sure to end well.
All that and more in this week’s issue.
Oh, and next week I’ll be publishing my first deep dive in a while, into Avalanche.
Let’s get started…
Crypto exchanges are under fire
Coinbase on the ropes
There’s been a lot of FUD (fear, uncertainty, doubt) on the exchanges front this week.
Firstly, Coinbase declared it was no longer hiring new employees and rescinding recent job offers it had already made.
From The Hustle:
In the last year, Coinbase has grown from 1.7k to ~5k employees. The company seemingly had no intention of slowing down, with a plan to triple its headcount in India to ~1k workers by year’s end.
Then crypto winter froze over hiring:
The company announced it will not be making any new hires for the foreseeable future
Over 330 accepted offers were rescinded
Despite Coinbase offering severance packages and other services, the rescinded offers have led to a variety of personal problems for candidates:
One candidate turned down offers at Amazon and PWC in favor of Coinbase
Another was relying on Coinbase for a work visa, and now has ~150 days to find another job that will support one
Coinbase is pretty much the public face of crypto exchanges. It’s the biggest exchange to be listed on the Nasdaq, and its stock price has not been doing great of late.
Of course, all tech companies have been doing very badly this year – FAANG stocks ore down 37.7% year to date(YTD), while the S&P 500 benchmark is “only” down 15.7%.
But crypto tech companies have been doing the worst of all. Coinbase is down a massive 74.7% YTD. Wow.
So it’s no wonder it’s reneging on its job offers. What will happen if the company continues to decline?
Well, it really didn’t help Coinbase’s optics (as they would say in Succession) when last month Coinbase disclosed that if it goes bankrupt, people who keep their crypto there are basically screwed.
In its quarterly report, Coinbase added a risk disclosure: if the company were to file for bankruptcy, the court might treat customer assets that the exchange is custodian for -- their Bitcoin, Dogecoin or whatever -- as Coinbase’s assets. And they’d be at the back of the line for repayment, forcing normal people, unaccustomed to the ins and outs of federal bankruptcy court, to claw back their money along with everybody else owed money by the exchange.
It’s a huge amount at stake. Coinbase was custodian for $256 billion of customer money on March 31, according to the filing.
That Bloomberg article has some input from a law professor who specialises in bankruptcy and, concludes:
General unsecured creditors are the last to recover money. Ahead of them would be senior debtholders -- Coinbase has $2 billion of senior unsecured bonds outstanding -- along with the lawyers and bankers that help any company navigate bankruptcy, racking up potentially huge bills along the way.
Users would need to fill out paperwork demanding what they’re owed, file it on time and potentially wait months or years for payout. Often, low-ranking creditors are left with pennies on the dollar.
So if Coinbase ever did go bankrupt, it would be very, very bad for users. Although, even with the current market environment that is very, very unlikely to happen.
What is more likely is that a very rich person or group of people decide to take advantage of its super-low stock price and buy it out. Although, that’s also pretty unlikely.
Facebook twins’ Gemini exchange fires 10% of its workforce while being sued by US regulators
Meanwhile, Gemini – the exchange that tries the hardest to do everything by the book – is being sued by the Commodities Futures Trading Commission (CFTC) for… not doing things by the book.
The case hinges on assurances that Gemini staff made to the CFTC that its futures market could not be manipulated. Gemini announced its futures product on Dec. 8, 2017, basically at the crescendo of the initial coin offering-driven bull market of that year.
The complaint alleges that Gemini staff misrepresented how their business operates, withholding key information from regulators. It states:
"The false or misleading statements and omissions prevented the Commission from having a complete and true picture from which to evaluate whether, in what manner, under what conditions, and subject to what changes the proposed Bitcoin Futures Contract should be allowed to be listed or continue to be listed following self-certification."
However, according to the most fun financial writer of all time, Matt Levine, this isn’t really that big of a deal:
The stuff in the complaint isn’t that bad. Mainly the claims are that Gemini encouraged trading on its platform — by lending Bitcoins to some traders, by giving fee rebate incentives, etc. — in order to juice trading activity and liquidity, but lied to the CFTC about it, so the CFTC thought that all the trading was, as it were, “natural” rather than driven by incentives. …
None of it is like “Gemini’s Bitcoin prices were fake”; it is all “we would have been slightly less confident in Gemini’s Bitcoin prices if we had had the complete details.” The message here is not so much that the CFTC has lost confidence in Bitcoin futures, but rather that the CFTC really does not appreciate being tricked. Which is reasonable.
But I guess it doesn’t really help that it comes at a time when Gemini is ditching 10% of its employees.
The crypto revolution is well underway and its impact will continue to be profound. But its trajectory has been anything but gradual or predictable. Its path can best be described as punctuated equilibrium — periods of equilibrium or stasis that are punctuated by dramatic moments of hypergrowth, followed by sharp contractions that settle down to a new equilibrium that is higher than the one before. This is where we are now, in the contraction phase that is settling into a period of stasis — what our industry refers to as “crypto winter.” This has all been further compounded by the current macroeconomic and geopolitical turmoil. We are not alone. …
After much thought and consideration, we have made the difficult but necessary decision to part ways with approximately 10% of our workforce.
Reuters writes Binance hit-piece, Binance responds by publishing entire email chain
I’m no Binance fanboy. But it really looks like Reuters is in the wrong here…
So, on the 6th of June, Reuters published a pretty damming article, titled: “How crypto giant Binance became a hub for hackers, fraudsters and drug traffickers”.
Binance isn’t exactly loved. So at first, it was taken at face value.
Then Binance fired back.
It published the entire email chain between Reuters and itself, which showed Binance basically disproving every accusation, with solid evidence.
Here’s what Binance had to say about the article:
We highly suggest you ignore those authors and pundits who cherry pick data, rely on conveniently unverifiable “leaks” from regulators, and feed into the cult of crypto paranoia for fame or financial gain. Instead just look at the facts. …
According to Chainalysis, a blockchain analysis company that specializes in crypto and blockchain analysis, of all transactions made with cryptocurrencies in 2021, 0.15% were associated with some type of illicit activity. The UN estimates that between 2% to 5% of traditional fiat (cash), about $800 billion to $2 trillion in current US dollars, was associated with some type of illicit activity. Crypto is incredibly transparent, infinitely moreso than the traditional cash economy, and this is well-documented. So you tell us where the real issue is regarding money laundering?
Of course, only people who are already very into crypto will ever read Binance’s response and email chain. Whereas most of the world will simply take Reuters’ article at face value.
Coincidentally, on the same day Reuters published its piece, the Securities and Exchange Commission (SEC) announced it was investigating Binance’s BNB token.
US regulators are investigating whether Binance Holdings Ltd. broke securities rules by selling digital tokens just as the crypto exchange was getting off the ground five years ago, according to people familiar with the matter.
The Securities and Exchange Commission’s review pries into the firm’s origins and those of its BNB token, which is now the world’s fifth-biggest. Investigators are examining if the 2017 initial coin offering amounted to the sale of a security that should have been registered with the agency, said the people who were granted anonymity to discuss the confidential probe.
So not a great week for Binance.
PayPal finally allows crypto withdrawals
PayPal got into crypto back in October 2020.
But there was just one problem.
While you could buy and trade crypto on its platform, you couldn’t withdraw it, which meant you couldn’t really trust it.
Well, it’s taken more than two and a half years, but this week, PayPal finally announced it will be allowing crypto withdrawals.
In a long-awaited announcement, PayPal, which claims over 400 million users, is giving them the option to take full control of crypto that they buy on the app. Now that withdrawals are enabled, the company becomes a piece of the infrastructure of the crypto economy.
This is significant because sending crypto through PayPal is free. So you can now use PayPal to get around Bitcoin and Ethereum transaction fees. Well, some of them.
Governments rush in new stablecoin regulation
Japan legalises yen-backed stablecoins
By now you should know about the mess that the Terra/UST collapse caused. If you don’t, then check out my coverage of it here: I declare bankruptcy!
Well in the wake of that, Japan has passed a new bill to regulate stablecoins.
(Although the bill has been a good few years in the making.)
From the Financial Times:
The upper house of Japan’s parliament on Friday passed a bill that essentially defined stablecoins as digital currencies, imposed a mandatory link with the yen and enshrined the right to redeem them at face value. The legal structure will come into effect in 2023, with the FSA expected to clarify the rules for stablecoin issuers in the coming months.
CNBC had an interesting take on the bill, suggesting it may help revive the crypto industry:
The latest Japanese legislation resonates with the FSA's earlier push to recognise Bitcoin as a currency back in April 2017. Japan was also the first economy to give 11 companies licenses to operate as crypto exchanges in September 2017. Therefore, it is fair to say that the nation has led the curve before and might just be doing it now. Their move could help bolster the dwindling confidence of investors in the crypto markets. …
The bill could also pave the way for other nations to recognise and legalise stablecoins. "We see Japan's landmark law as a standard-setting example of smart policy. It fosters innovation and economic development while providing guidelines to keep stakeholders safe. This is exactly the kind of leadership and balanced approach to stablecoin legislation we hope to see from other countries," said Dante Disparte, chief strategy officer and head of Global Policy at Circle, in an interview with Decrypt.
UK government has big plans for stablecoins
The UK has been doing a lot of consultations into crypto over the last couple of years. And this latest one comes as a direct response to the Terra/UST collapse.
Britain wants to make sure stablecoins don’t end up threatening the wider financial system following the collapse of controversial crypto project Terra.
The government on Tuesday proposed amending existing rules to manage the failure of stablecoin firms that may pose a “systemic” risk. The proposal is separate from previously announced plans to regulate stablecoins under laws governing electronic payments. …
The government is looking to implement additional safeguards to existing legislation around insolvency of firms operating key financial market infrastructure. Such a provision would take into account the return or transfer of the private keys that protect users’ funds. The Bank of England would serve as the lead regulator enforcing the rules. A consultation on the proposal is currently underway and will close on Aug. 2.
Maybe this is a good thing?
I mean, I like the spin eToro put on this news:
Glen Goodman, a crypto advisor to eToro, said the proposal was “pretty dramatic.”
The government has “effectively accepted that some stablecoins may become as systemically important as banks and so should be treated as special cases and assisted if they’re failing,” he said.
US government proposes some very favourable crypto rules, including taking the toys away from the SEC and giving them to the CFTC instead
So, this bill is very unlikely to pass. But the fact it is a bipartisan one says a lot. And it could be a sign of where US regulation of crypto will go in the future. Overall, it seems very positive.
Here are the most important parts, courtesy of Axios:
Exemption for small payments: Any expenditure of cryptocurrency is a taxable event right now. If passed, purchases of goods and services of less than $200 would not incur a tax obligation (well below the $600 proposed by Rep. Schweikert in 2017).
Homework for the IRS: It directs the IRS to take on a lot of the weird new sorts of income that crypto has created and clarify how they should be treated. For example, if a person gets an unexpected airdrop they didn't ask for, does that go on their tax bill if they don't sell?
Mining and staking: Lots of hobbyists earn crypto through various activities, and the law clarifies that those earnings won't be taxed until they are exchanged for dollars (the legislation comes down on the side of the complainant in a live court case against the IRS).
Crypto retirement: The bill directs the General Accounting Office to look into rules around adding crypto to retirement portfolios, an issue that has been spicy ever since Fidelity moved to allow some cryptocurrency in its customers 401(k) accounts.
Cybersecurity standards: As you probably know, companies that hold other people's crypto for them often get robbed. This legislation starts the process to create better security practices at these firms, which should help, but it also probably means fees for users will go up.
User protection in exchange bankruptcy: The legislation would protect users' digital assets if the company storing them went bankrupt.
Lots more transparency. In various ways the legislation requires issuers to be more clear about what they are selling, what a token is, what it does and how it might change.
You can read the full bill for yourself here.
So it looks like we might not have to worry so much about crypto exchanges going bankrupt in the future.
And, most exciting of all, this bill proposes not taxing staking and mining rewards until they’re traded back to fiat currency. That would be absolutely huge for the industry, and for anyone who holds crypto.
I wonder if the UK will take notice.
Okay. That’s enough regulation and industry news. What about individual cryptos?
Tron tries to take Terra’s place
First a bit of background on Tron.
Here’s what I wrote about Tron, way back in August 2018, when it was a laughingstock (I guess it still is).
If there is one crypto in the top 20 that is universally panned by commenters it is Tron.
Between 5 December and 5 January, it rose in price more than 14,000%. Shot up the rankings in Coin market cap seemingly out of nowhere and no one knew why.
Where did it come from? Surely it was a scam.
Articles popped up everywhere denouncing Tron and calling out its CEO, Justin Sun.
Then, even worse, people discovered its white paper (where a crypto explains how it works, what its purpose is, and what it aims to achieve) was plagiarised.
If it couldn’t even write its own white paper, how the hell was anyone supposed to trust its crypto credentials?
Clearly, this was a money grab and anyone investing in it was in for a rude awakening.
And in April, Ethereum’s creator Vitalik Buterin even publicly called out Tron in an interview with the Financial Times:
“’There’s projects that never had a soul, that are just like, ra-ra, price go up’ he flaps his long hands, ‘Lambo[rghini], vrromm, buybuybuy now!’ Then he blurts out a critique of the digital token, Tron, breaking the tension by laughing uproariously. Tron’s market valuation hit $17bn without any discernible product.
The outlandish valuations are, he says, ‘far ahead of what this space has actually accomplished for the world’.”
However, to many people’s surprise, at the end of May Tron successfully launched its mainnet.
It was no longer all hype and no product.
It now had a working blockchain of its own.
A blockchain that handles 2,000 transactions per second (compared to Ethereum’s 25), and had a huge team of developers behind it.
Still, as Buterin said in his interview, the valuations of crypto, and Tron in particular, “are far ahead of what this space has actually accomplished for the world.”
But do you know a technology that really has accomplished a lot? BitTorrent.
If you’re not familiar with BitTorrent, it is a peer-to-peer protocol that lets people transfer very large files very easily and without needing to host massive server farms.
It is one of the most important technologies ever developed for file sharing.
The protocol’s creator, Bram Cohen, could never make it into a successful business. He and various others tried may different avenues, but none of them really panned out.
There is a great in-depth article Wired wrote on the whole fiasco in January 2017. You can read it here if you want to know more.
Still, even if the business side of BitTorrent didn’t work out, its technology changed the way the internet works.
It is “used by more than 170 million people and its protocols move as much as 40% of the world’s internet’s traffic on a daily basis,” according to its website.
What does BitTorrent then have to do with Tron?
Well, Tron’s mission statement is to “decentralise” the internet.
And BitTorrent is the internet’s main decentralised protocol.
So, on 24 July, to everyone’s surprise Tron announced it had bought BitTorrent for $126 million.
Now, the quintessential “scam coin with no working product” owed a product more successful and widely used than anything any crypto has created.
So now Tron has a working mainnet, tens of millions of dollars at its disposal, and arguably the most successful file-sharing protocol ever created.
The question is, when does a scam stop being a scam?
Is Tron going to turn out to be the biggest “fake it till you make it” story of all time?
Or is it really going to turn out to be a big scam?
As time goes on, the former is looking far more likely than the latter.
It’s a story I’ve been following ever since Tron burst on to the scene in December. And I still don’t know what I make of it.
But one thing is for sure. No one is laughing at Tron anymore.
Well, it’s four years later and I’ve been proved wrong… everyone is still laughing at Tron.
This time, Tron saw the disaster, ruined lives and lost billions that Terra’s collapse had, and decided to imitate it.
But instead of its stablecoin promising 20% yield, like Terra’s Anchor Protocol did, Tron’s promises 30%.
And as a result of this, Tron is now the third biggest player in DeFi, behind only Ethereum and Binance.
It’s also the only DeFi platform crypto in the top 10 to have gained locked value over the last month. Take a look:
It’s all thanks to Tron’s new stablecoin, USDD, and the fact people can get up to 30% yield on it.
The USDD was literally only launched in June (here’s the whitepaper) and it already has a supply of $703 million, which is growing all the time.
Just like Terra’s failed UST, it maintains its peg by burning Tron (whereas UST burned Tarra Luna).
And it also has reserves of other cryptos it can use if it needs to. There are currently 14,000 BTC and 140 million USDT in these reserves.
Maybe it will work?
I mean, it is overcollateralized to a ratio of 200% (apparently).
But, come on. Let’s be serious for a second. This is surely all going to end in tears.
And I’m sure it will also provide a lot of entertainment along the way.
I bet 90% of people in crypto right now know nothing about Tron’s scandalous birth, or its founder, Justin Sun’s antics… like when he paid $4.5 million to have dinner with Warren Buffett.
Actually, thinking about it, Justin Sun was really the original Do Kwon. It all makes sense now.
Ethereum 2.0 probably no longer happening in August
This week, Ethereum successfully upgraded its oldest testnet to Proof of Stake, which is what people call “the merge”.
The merge is basically joining Ethereum’s original proof of work chain with its Proof of Stake “beacon” chain.
It’s what most people think of as Ethereum 2.0. And now it’s done it successfully on its oldest testnet it’s ready to do it for real.
Really the merge is just one stop on the journey to Ethereum 2.0, but it’s a big one. It’s what will finally make Ethereum Proof of Stake.
I covered what a big deal this is last month in this article: all eyes on Ethereum 2.0. So take a look at that if you want to know why you should care.
However, the Ethereum developers have also decided to delay Ethereum’s “difficulty bomb”, which is needed before it can go Proof of Stake.
So, really, it’s impossible to say when the merge will happen for real. But the Ethereum developers say there’s “only a 1% to 10% chance it won’t happen this year.”
Here’s Bloomberg’s take:
Developers decided to delay the difficulty bomb on Friday after they discussed ironing out various bugs they’ve discovered when they ran the software for the Merge on Ropsten, one of the oldest testnets of the network. While developers hadn’t officially set a particular date for the Merge -- Ethereum co-founder Vitalik Buterin said it could happen as soon as August if there are no major issues -- the decision to push back the difficulty bomb raises fears that the much-anticipated upgrade could take more time.
“Delaying it gives you time,” said Thomas Jay Rush, a participant in the call. “It looks bad to the community, but there’s nothing you can do about that.”
The difficulty bomb had been delayed multiple times before. Though it went off this month, developers are planning to disable it and then deploy it again at another time. It is unclear when they’d do so. Many hoped it wouldn’t have to be delayed, as the Merge would happen soon.
The Merge could be pushed back to September or October if developers need more time, Buterin said last month. There’s only a 1% to 10% chance that the Merge won’t happen this year, Tim Beiko, who coordinates Ethereum developers, said in a recent interview with Bloomberg. During the Friday call, developers emphasized the difficulty bomb delay has no implications for the timing of the Merge.
Lots of Celsius FUD this week, and fears stETH might depeg from ETH (this could be a big deal)
As I write this, Lido-staked Ethereum (stETH) is depegging from Ethereum.
And as it depegs more, people are panicking and selling their stETH for Ethereum.
There is currently $6.2 billion of Ethereum staked with Lido. So if it were to all unravel, it would have dire consequences.
But that’s a big, and likely impossible, “if”. As Lido points out, stETH is backed 1:1 for actual Ethereum.
It's not like the situation we saw with Terra/UST.
People use stETH right now because Ethereum 2.0 isn’t live yet (see above story) and until it is, you can’t trade any Ethereum you’re staking.
So services like Lido have popped up that let people stake their Ethereum and get a stETH token in return.
Once the merge happens for real, people will be able to swap their stETH for real Ethereum at a 1:1 ratio.
At least, that’s the theory. But as we know, in crypto, there’s always risk.
So as the merge is delayed more and more, and as the market crashes, people are deciding they want real Ethereum and not stETH.
And through the forces of supply and demand, that means stETH is currently worth less than real Ethereum.
You know who holds a lot of stETH? Celsius. Well, at least according to twitter user, SmallCapScience who’s been quoted a lot in the news this week.
According to SmallCapScience, Celsius holds $1.5 billion stETH. And if stETH continues to depeg from Ethereum, Celsius – and its users – could be in real trouble.
It’s worth reading SmallCapScience’s thread in full if you want to know more about this.
Like most things in crypto, It’s hard to say how big of a deal this could be. But it’s probably worth learning about… especially if you’re a Celsius user.
Here’s the thread:
Although. Like I said, Lido (the company that runs stETH) went on to point out that all stETH is backed 1:1 with real Ethereum.
The only way it could depeg for real is if there was a bug in the smart contract code, or if someone managed to hack it.
And that is highly, highly unlikely.
But markets often move on perceptions not reality. So who knows how this will all play out.
Adding this all together, it’s fair to say Celsius might be a risky place to store crypto right now.
Or this could all just be a very well-orchestrated FUD campaign. I guess we’ll find out eventually.
VeChain still making moves – signs $100 million deal with the UFC
I haven’t seen a lot from VeChain in recent months. But back in the day it was one of the most hyped cryptos out there.
I wrote a “mini dive” on VeChain back in April 2021, you can read it here if you’re a Premium subscriber (it’s #5).
Well, VeChain has emerged from the wilderness and just signed a deal with the UFC.
From Coin Telegraph:
Blockchain logistics firm the VeChain Foundation has signed a multi-year marketing partnership with the Ultimate Fighting Championship (UFC) worth nearly $100 million, becoming the UFC’s first-ever layer-1 blockchain partner.
The UFC is the largest promoter and event organizer for Mixed Martial Arts (MMA) and VeChain’s marketing assets and brand will be integrated across the UFC in live events, in-arena promotion, social media and other areas.
The deal is reportedly worth almost $100 million over a minimum five-year partnership, according to an anonymous source quoted by Sports Business Journal. The UFC’s senior vice president of global partnerships, Paul Asencio, said the UFC’s sponsorship revenues are up 30% from an already record-breaking 2021 as a result of the deal.
I don’t really know what UFC has to do with supply chain tracking.
But I guess VeChain is also a layer-1 crypto that can do a lot of things besides just tracking supply chains.
As I said in that mini dive, it can pretty much do everything Ethereum can, except be decentralised (lol).
Okay that’s all for this week.
If you’re a premium subscriber, you can expect my deep dive into Avalanche to hit your inbox one week today. And if you’re not a premium subscriber, you can join here.
Thanks for reading.
Full disclosure: At time of writing, I held the following cryptos: Ethereum, IOTA, Radix, Mina Protocol, Aleph Zero.
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