All Been Crypto — Week 10 March 2023

So I’m finally back after two packed weeks in Denver and a LOT has happened. On the ground as well as with regards to regulation. Clearly that was the elephant in the room that actually wasn’t much talked about but I’ll focus this week’s edition on US regulatory action and then a bit of my major takeaway from Denver announcements. Price action has been lower and ironically we are now back to the ATH from last cycle with Market cap again sub 1tn as BTC and ETH taking a teens hit WoW. A lot of that is again due to macro but also concerts that the debanking is now actually impacting our industry. Silvergate is winding down and there’s a renewed risk with GBTC as Alameda started suing Grayscale. Mt Gox locked BTC now looks to come to market 2H and of course Powell hawkish comments didn’t help. In crypto specific news Oasis managed to recover assets stolen in the wormhole hack which sounds like a good thing but also clearly raises concerns about immutability and permissionlessness of their set up. Yuga Labs auctioned off their first ordinals collection ‘successfully’ and in Denver we heard a lot about DAO tooling, Decentralized Science, and the launch of Account Abstraction ERC-4337. It’s good to be back and honestly despite the drop in prices and draw downs of developers we have seen over the past 12 months there is no doubt about the future of our industry and the mood and vibe was excellent on the ground. Enjoy reading!

Bat Tai Chi — btc21@mail.com

HEADLINES:

Silvergate liquidating

One of the favorite bank in crypto (there’s only really two ‘major’ ones serving US clients) has been in trouble for a while. Ever since being caught up in the FTX saga things have turned south for the bank. But things started to get really bad to the extend that this week they have announced to go into liquidation. Now fingers are pointing on whether it was poor risk management on their side or more due to external factors of chilling effects cutting them off from interbank market and generally ‘unbanking’ of crypto (see ABC 10th Feb). Fact is they experienced a good old fashioned bank run and ended up being underwater due to classic asset/liability duration mismatch that of course all banks have and need to manage. Over the past couple of days we had pretty much every major institution come out and say that they are doing the right thing to cautionary stop/halt Silvergate support and withdrew assets. Now what’s interesting here is that SI is not the only small tech friendly bank that has been in trouble Silicon Valley Bank is also experiencing similar liquidity issues. This suggests that there are wider factors in play and we could probably see further stress with small banks. It’s ironic though because a rising interest rate environment is generally good for banks and while they might experience some mark to market loss on their fixed income portfolio generally NIMs should widen. Looking over at the other major crypto bank Signature they actually bought back some shares and announced updated financials to show the market that they are in a healthy shape but of course they are feeling the heat with share price also under pressure after SI collapse and so they are taking a much more cautious approach on crypto.

Lawsuits — Alameda vs Grayscale and NYC vs Kucoin/CoinEx

By now we know a lot of the (regulatory) faith of our industry will be battled out in court and so it’s no surprise lawsuits are increasingly becoming more the norm. The two above are picked because they show very interesting insights and might actually lead to drastic changes in how crypto gets regulated. Alameda vs Grayscale is in a nutshell the HF suing Grayscale for their inability to convert GBTC into BTC and thereby close the discount. Now we are closely watching this because it’s the SEC who’s denied conversion into a spot ETF (alongside with all listing of spot BTC ETFs). There is hope that through this lawsuit we will get some clarity on SEC’s decision making and while unlikely anything will improve for the better in the near term congress might start to pay attention here. And well market is pricing in some chance of a resolution (might be GBTC forced to wind down or tender) as discount has narrowed form -45% to -35%. The second lawsuit is from the New York Attorney General against two crypto exchange for failing to register as a security and commodities broker-dealer. The suits is interesting because NYC has successfully sued Celcius and Blockfi and this suit is among the first in which a state regulator is claiming in court that ETH is a security. We know Gery Gensler is also claiming everything but BTC is a security but there are a number of other voices that have opinions which differ. This is now in front of a Judge and while unlikely to be resolved quickly could provide strong direction of regulatory oversight.

Account abstraction via ERC4337

One of the major challenges for crypto to date remains onboarding of new users. Web3 still doesn’t feel like Web2 and many believe form a user experience we need to get there to really get mainstream adoption. The reason being of course wallets and private keys and here we had an interesting announcement over ETH Denver. Account abstraction is a way to introduce both programmable smart contract features for wallets as well as social recovery methods for lost keys. This is being made possible via a new ERC-4337 standard which was revealed at the WalletCon event last week a day ahead of ETH Denver main festival. Via this new smart contract wallets will be able to be more dynamic in their interaction and get a less clunky signing transactions feel. Of course this comes with different trust assumptions and might not be the fist choice for crypto native and OGs but will certainly help onboard new users who care more about UX and less about traditional crypto values like NYKNYC et al. To give you an idea — Visa already end of last year wrote a blogpost about how ERC-4337 could be used for autopay balances a la credit card settlement — wild!

QUOTES:

Yuga is establishing REALLY bad precedence running an auction like this. They are taking custody of bidders’ bitcoin with a promise to send back unsuccessful bids. Not doubting they’ll do that, but this model is a scammer’s dream, and credible players need to set better example.

ordinally

We stress that this access was there with the sole intention to protect user assets in the event of any potential attack, and would have allowed us to move quickly to patch any vulnerability disclosed to us

Oasis.APP

It seems to me that [what] the Commission really needs to explain is how it understands the relationship between bitcoin futures and the spot price of bitcoin […] one is just essentially a derivative. They move together 99.9% of the time. So where’s the gap, in the Commission’s view?

Judge Neomi Rao to SEC Senior Counsel Emily Parise