This week demonstrated that crypto is on the minds of those at the highest levels of government, biggest companies in tech, and oldest media institutions around. However, it also demonstrated that regulators still hold the levers of power when it comes to which companies in the industry will flourish and which will struggle.
Read on to find out just how regulators will affect the development of the space. And, if you're looking for commentary on the biggest news story of the week, be sure to check out my conversation with Aidan Mott, research analyst at Messari, about the 17-hour outage on the Solana network, which raises a number of questions about just how decentralized Solana is.
In a speech before the Senate Banking Committee, US Securities and Exchange Commission Chair Gary Gensler reiterated his belief that crypto exchanges need to register as securities exchanges. In his opening statement, he remarked: “Many platforms have dozens or hundreds of tokens on them. While each token’s legal status depends on its own facts and circumstances, the probability is quite remote that, with 50, 100, or 1,000 tokens, any given platform has zero securities.”
In response to a question from Senator Elizabeth Warren regarding Coinbase, Gensler specifically singled out the exchange, lamenting the fact it had not registered with the SEC “even though they have dozens of tokens that might be securities.”
Gensler’s comment comes shortly after Coinbase CEO Brian Armstrong took to Twitter to accuse the SEC, and Gensler in particular, of “sketchy” behavior regarding the regulation of different crypto products. Notably, the SEC threatened to sue Coinbase if the exchange released its Lend product, which offers users yield in return for users staking certain crypto assets with the company.
In a conversation with The Block, Gensler also spoke on lending products this week, saying, “if you're investing on a centralized exchange or a centralized lending platform, you no longer own your token. You've transferred ownership to the platform. All you have is a counterparty risk. And that platform might be saying, as many of them do, we'll give you a four percent or seven percent return if you stake your coins with us or you actually transfer ownership and we the platform will stake your tokens. That takes on all the indicia of what Congress is trying to protect under the securities laws.”
The House Ways and Means Committee, which is in charge of any legislation dealing with taxation, approved draft legislation that would apply wash sales rules to digital assets.
The draft came as part of the “Build Back Better” reconciliation package that could see an increase of $3.5 trillion in taxes to offset the cost of future spending. According to The Block, the current language is likely to remain intact, as House Democrats are determined to push the budget bill through to the Senate.
At the moment, wash sale rules only apply to securities, not property, which is how the Internal Revenue Service classifies crypto. That means that currently, crypto can serve as a loophole for tax-loss harvesting. Traders can sell losses and almost immediately buy back at the same position, while retaining the tax write-off.
However, if this version of the bill were to pass, crypto holders would be held accountable to standard wash sale rules, meaning that crypto owners would have to wait 30 days after selling a coin at a loss to purchase the coin back. Additionally, tokens sold and purchased within 30 days would not be deductible as a capital loss.
OpenSea’s head of product Nate Chastain was caught buying NFTs based on insider information and has resigned, according to a statement issued by the company.
“Yesterday, we learned that one of our employees purchased items that they knew were set to display on our front page before they appeared there publicly,” said CEO Devin Finzer, who also announced the largest NFT marketplace is commissioning a third-party review.
The revelations began Tuesday, when Twitter user @ZuwuTV accused Chastain of purchasing certain NFT projects just before they would show up on the front page -- meaning he nabbed them before the prices spiked and could net easy profits.
The next day, OpenSea acknowledged the allegations were true, calling Chastain’s actions “incredibly disappointing.” Although the technical definition of insider trading does not apply to crypto assets, OpenSea treated Chastain’s actions as similar to frontrunning, and according to the Block, legal experts say that such behavior could invite regulatory scrutiny.
The NFT marketplace immediately instituted new guidelines forbidding employees from 1) buying or selling from collections or creators while OpenSea was featuring or promoting them, and 2) from using “confidential information” to buy or sell NFTs, whether they are on OpenSea or not.
A false press release published early Monday morning announced that Walmart partnered with Litecoin to accept cryptocurrency as payment.
The news was quickly picked up by various mainstream media outlets, such as Reuters, Zerohedge, Bloomberg, and CNBC, along with multiple crypto publications, like CoinDesk, Decrypt, the Litecoin Twitter handle, and the Unchained editorial assistant (who deleted the tweet in under 30 seconds thank you very much).
Litecoin’s price immediately jumped on the news, reaching $231 at its peak, good for a 30% increase in price, before dipping back down to $170 in about 90 minutes.
In a statement, the superstore later clarified its non-partnership: “Walmart was the subject of a fake news release issued on Monday, Sept. 13, that falsely stated Walmart announced a partnership with Litecoin (LTC). Walmart had no knowledge of the press release issued by GlobeNewswire, and it is incorrect. Walmart has no relationship with Litecoin.”
Coinbase announced its filing with the National Futures Association to register as a futures commission merchant (FCM). The exchange explained the move on Twitter as part of its goal to grow the cryptoeconomy. Coinbase tweeted: “This is the next step to broaden our offerings and offer futures and derivatives trading on our platforms.”
For exchanges like FTX and Binance, derivatives market volume is sizably larger than spot volume. An example of a derivative is a futures contract, which allows customers to buy and sell contracts speculating on the price of specific cryptocurrencies on a particular future date.
To sell derivatives in the US, businesses must be approved by the US Commodity Futures Trading Commission (CFTC), the regulator in charge of all derivatives products. However, typically the first step in the process is gaining approval from the NFA, which then handles the registration process.
Speaking of Coinbase, the exchange announced plans to sell $1.5 billion of debt offerings. The company will use the influx of cash for general purposes, such as product development and future acquisitions.
According to Binance CEO Changpeng Zhao, the exchange is scrapping plans to decentralize its business model. Zhao explained in an interview with the South China Morning Post, “Four years ago when we started it, we wanted to embrace the decentralized model so we wanted to have decentralized teams everywhere. But we do run one centralized exchange, which is the biggest part of our business. Now we have come to realize that for the regulators, we need to be centralized.”
Zhao believes that regulators view Binance’s current status of not having a central headquarters as “dodgy.” To win back regulators, the CEO explained, “we need to be centralized.”
Zhao’s comments come after a slew of regulatory warnings from multiple jurisdictions, including the US, UK, Hong Kong, Japan, and more.
On Wednesday, technology giant Google announced a partnership with Dapper Labs, the company behind the popular NFT projects CryptoKitties and NBA Top Shot. According to Forbes, it is a multi-year deal, with Google Cloud planning to act as a network operator and providing infrastructure to help scale Flow, the blockchain upon which CryptoKitties and NBA Top Shot exist. The new relationship should allow developers to access nodes more efficiently.
“It’s really about helping them with rapid and sustainable growth,” said Google Cloud North America VP Janet Kennedy. “Blockchain technology is becoming more and more mainstream. So companies like Dapper need scalable, secure infrastructure to grow their business, and even more importantly, support their networks.”
The new partnership with Flow is not Google’s first foray into blockchain. Since last year, the tech giant has been a member of the governing council of Hedera Hashgraph, a high throughput distributed ledger. Interestingly, the Hedera Governing Council made headlines this week, too, by announcing a $5 billion ecosystem fund on Thursday, which will provide grants to accelerate the development of Hedera’s network, along with funding new partnerships and initiatives.
Time Magazine named Ethereum co-founder Vitalik Buterin as one of the top 100 most influential people of 2021. In the profile, Reddit co-founder Alexis Ohanian described Vitalik as a “builder’s builder.” Ohanian went on to add: “No one person could’ve possibly come up with all of the uses for Ethereum, but it did take one person’s idea to get it started. From there, a new world has opened up, and given rise to new ways of leveraging blockchain technology.”
Vitalik is not the lone member of the cryptocurrency industry included in Time’s list. Tesla CEO Elon Musk, President of El Salvador Nayib Bukele, and Nvidia CEO Jensen Huang also made the cut.
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