Casey Wagner

<div id="highlights-block_6022e793ab348" class="highlights">
 <ul>
 <li>Investors are paying up for high yield bonds, even as treasury yields are rising </li>
 <li>The average yield on high yield bonds dipped below four percent for the first time in history Monday</li>
 </ul>
 
</div>



Investors are pouring into risky junk bonds as an alternative to low-interest treasury bonds, sending junk bond yields to historic lows.&nbsp;



The average yield on high yield bonds dipped below four percent for the first time in history Monday, down from nearly 12 percent in April 2020. 30-year Treasuries rose to two percent Monday before settling at 1.93 percent Tuesday afternoon.&nbsp;



“The high yield bond market is almost a general proxy for equities, telling you that investors don&#8217;t see any risk,” said Steve Van Metre, founder of Steve Van Metre Financial.. “When high yields or junk yields are low, investors are telling you that there is minimal risk, and I disagree. I think there is an immense amount of risk out there.”&nbsp;



<figure class="wp-block-image is-resized"><img loading="lazy" src="https://lh4.googleusercontent.com/6bK7AA9qXyCReyCOD5VYN5alrVBBKArZEGleQu_zCoiZs7mAbmL43PuyLmm4Q3fblBe5dyOnXuWNsGwYxuX1gAYyzCw_JWjGdVGaVUJnduhsqY21zT86OC47yB5fM4WfHExF0jWE" alt="" width="580" height="345"/><figcaption>[High Yield Corporate Bond Spreads minus 10-Year Treasury Yield] Source, Bloomberg</figcaption></figure>



What is happening in the high yield space, Van Metre said, is investors are chasing four percent to five percent junk yields because they perceive there is no default.&nbsp;



“In treasuries, there is a lot of speculative selling on the long end of the curve, and we’ve seen that since August,” said Van Metre. “We see that because there&#8217;s a belief that there&#8217;s going to be reflation and high rates of inflation due to the overwhelmingly false belief that the Fed actually is and can print money, which they cannot.”&nbsp;



Investors are front running this alleged money printing at the long end of the curve, said Van Metre, but the short end of the curve reveals something completely different.&nbsp;



There&#8217;s a collateral shortage in the banking system due to too much liquidity, which means that everything from three-year to 12-months-and-under treasury bill yields are all falling, said Van Metre. There is a high demand from banks for high quality, pristine collateral, and there isn&#8217;t enough in the market for it.&nbsp;



“This tells you that all these speculators who have been selling [the long duration treasuries] since August completely don&#8217;t understand what&#8217;s going on in the system,” said Van Metre. “They&#8217;re just front-running what they hope to be a big trend.”&nbsp;



Van Metre expects that as the Treasury starts to draw down its immense cash balance, likely through stimulus spending, there is a risk that the front of the curve will dip negative.&nbsp;



“If the front of the curve goes negative, which I believe it can, and even Yellen has stated that it is possible that it will, that will cause a massive unwinding on the long end of the curve and drag it lower because the long end always follows the front end,” said Van Metre.

High Yield Bonds Rally, Long Duration Treasuries Sell off

Michael Bodley

A private equity professional, helming a new crypto <a href="https://blockworks.co/news/sovereign-wealth-fund-vet-eyes-150m-for-crypto-fund-of-funds" target="_blank" rel="noreferrer noopener">fund of funds</a>, appears to be gaining fundraising traction as investors hunt for opportunistic strategies primed for uncommonly volatile markets, according to three sources familiar with the matter.



Managing Partner Joshua Manasseh previously spent more than six years at private equity firm Ardian. Manasseh’s London-based Arbury Advisors plans to launch in the first quarter of 2023 and is now closing commitments.



It’s unclear how much capital Arbury intends to raise, but sources said the fund of funds has landed the family office of an unidentified major private equity player as an anchor investor.&nbsp;



Manasseh tapped crypto veteran Joseph Cox as head of research. The New York-based Cox, formerly chief operating officer of a $100 million-plus asset manager, is tasked with bridging the US and Europe and assisting in capital deployment, as well as due diligence.&nbsp;



Following <a href="https://blockworks.co/news/the-last-10-days-in-the-ftx-saga-a-timeline" target="_blank" rel="noreferrer noopener">FTX’s blowup</a>, scores of blue-chip traders lost billions of dollars in days. The downturn, though, has triggered an impetus among limited partners to back opportunistic-minded investors — including long-biased, long-only and distressed strategies — in a bid to “buy the dip at scale,” one source said.&nbsp;



Contrary to the industry line, sources said it may be a good time to launch. One said it’s “refreshing” for Arbury to not have to buy into the bull market. Even so, it’s no simple task to ink commitments from investors who actually have dry powder left and have not been dissuaded from the market’s plunge.&nbsp;



Due diligence and risk are now paramount.



“Alpha is not that hard to come by when markets pick up, but it’s really the operational and risk [due diligence] that makes the difference,” one source said.



Manasseh declined to comment. Sources were granted anonymity to discuss sensitive business dealings.&nbsp;



But raising capital is continuing apace — with one source saying things seem to be “falling into place” after Arbury secured its private equity anchor. In the swiftly-changing asset class, limited partners who are less savvy on crypto due diligence take cues from more grizzled peers.&nbsp;



<h3>The Arbury pitch</h3>



The company is slated to deploy to 10 to 15 funds, both illiquid venture — including buyers of early stage, private token sales and debt, as well as pure-play equity — and liquid hedge structures, such as market-neutral.



The private equity-style, close-ended vehicle plans to deploy capital over a two-year period. Manasseh plans to write larger checks to established traders under the aim of allocating about 25% of his book every six months.



There’s an optional fund extension at the discretion of its backers. And performance fees only come into play after investors receive a 1.5x multiple and an 8% net internal rate of return, or hurdle.&nbsp;



Manasseh previously worked on the investment team at Ardian — which now has more than $140 billion in assets under management — and played a role in more than $8 billion of secondary fund of funds transactions. Cox is also an adviser to GoQuant.&nbsp;



There’s an emphasis on risk and diversification, including writing smaller checks to emerging traders, while reserving capacity to ramp up over time, as proven by performance.



The startup has also been working to negotiate discounted fees from the vehicles it’s considering backing. Lowered fees are “especially attractive” to would-be investors given market conditions and uncertainty, one source said.



On the due diligence front, Arbury has tapped Quentin Thom and James Newman’s perfORM. That operation, also based in London, has been capturing a <a href="https://blockworks.co/news/crypto-due-diligence-startup-vying-to-bring-transparency-to-opaque-industry" target="_blank" rel="noreferrer noopener">growing slice</a> of the market for deep dives on both digital asset investment firms and their service providers.&nbsp;&nbsp;



Manasseh has already deployed proprietary capital to at least one unidentified manager, which could be backed, in turn, by the fund of funds. And Thom and Newman are now assisting with due diligence on an up-and-coming pipeline of potential managers. The firm plans to predominantly employ a traditional <a href="https://blockworks.co/news/sources-fidelity-vet-launching-crypto-fund-of-funds" target="_blank" rel="noreferrer noopener">fund of funds model</a>, though Manasseh and Cox would selectively consider separately managed accounts.



Arbury has also inked a partnership with <a href="https://blockworks.co/news/ex-wall-street-execs-secure-funding-for-young-crypto-firm" target="_blank" rel="noreferrer noopener">Cloudwall </a>— a risk management startup founded by one-time Morgan Stanley executives — which facilitates “stress-tests” of portfolios against live and historical blockchain data.



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New Crypto Fund of Funds May ‘Buy the Dip at Scale,’ Sources Say

Shalini Nagarajan

Crypto lender BlockFi has sued a Sam Bankman-Fried holding company over his Robinhood stock, just hours after the crypto lender filed for bankruptcy.



Bankman-Fried pledged the <a href="https://restructuring.ra.kroll.com/blockfi/Home-DownloadPDF?id1=MTM1MjU3OQ==&amp;id2=-1" target="_blank" rel="noreferrer noopener">shares</a> to BlockFi as collateral on Nov. 9 — intended to back Alameda Research&#8217;s payment obligations on $680 million in loans — the same day Binance walked back plans to rescue FTX.



Bankman-Fried’s tangled web of companies would declare bankruptcy two days later, with BlockFi now following suit. BlockFi opted to suspend withdrawals after Alameda (an FTX-linked trading unit) defaulted on the loans, per court documents, indicating BlockFi really needed that money.



BlockFi’s lawsuit is directed at Bankman-Fried’s Emergent Fidelity Technologies, which the former crypto billionaire used to take a <a href="https://blockworks.co/news/ftxs-sam-bankman-fried-spots-opportunity-in-troubled-markets" target="_blank" rel="noreferrer noopener">7.6% stake</a> in the discount brokerage in May, equal to more than 56 million shares now worth about $521 million.



ED&amp;F Man Capital Markets (EDFM) is listed as Emergent’s broker in the suit. BlockFi claims the London-based firm declined to transfer the collateral to BlockFi and thus failed to satisfy its obligations.



BlockFi lawyers wrote: “As the holder of the first priority security interest in the collateral, which is property of the BlockFi bankruptcy estates, BlockFi is entitled to have all such collateral immediately surrendered to it and/or liquidated in whatever manner necessary to preserve as much value as possible with the proceeds from any and all such sales transferred to BlockFi.”



Bankman-Fried, who reportedly shopped his Robinhood stake even as he provided it for collateral to BlockFi, is not directly named as a defendant in the suit. Blockworks has reached out for comment.&nbsp;



<h3>With no Robinhood stock, BlockFi sold $239 million in crypto</h3>



BlockFi’s suit over the Robinhood stock swiftly followed BlockFi lodgement <a href="https://blockworks.co/news/blockfi-files-for-bankruptcy" target="_blank" rel="noreferrer noopener">for Chapter 11 bankruptcy</a>, which stated the <a href="https://blockworks.co/news/how-blockfi-went-from-tech-unicorn-to-crypto-burnout" target="_blank" rel="noreferrer noopener">former tech unicorn</a> faced a “severe liquidity crunch” throughout the collapse of FTX and its subsidiaries.&nbsp;



FTX was meant to be BlockFi’s white knight. Bankman-Fried struck a deal to potentially acquire the lender for up to <a href="https://blockworks.co/news/ftx-reaches-deal-to-acquire-blockfi-for-up-to-240m">$240 million</a> amid the first industry-wide downturn earlier this year.



In early November, BlockFi made a borrowing request under an FTX loan agreement part of the acquisition deal. FTX did not honor the request, court documents show.



BlockFi’s own demise naturally means the FTX bailout deal is now invalid.



A <a href="https://restructuring.ra.kroll.com/blockfi/Home-DownloadPDF?id1=MTM1MjM3NQ==&amp;id2=-1" target="_blank" rel="noreferrer noopener">declaration</a> filed by BlockFi legal counsel on Monday showed the lender sold almost $239 million in crypto to bolster cash for administrative costs. The firm believes this amount will be enough to fund its bankruptcy, so it is not seeking debtor-in-possession financing at the moment.&nbsp;



Questions remain as to whether that meant BlockFi dumped customer-deposited funds to cover legal costs. BlockFi didn’t return Blockworks’ request for comment by press time.&nbsp;



Before the lender filed for bankruptcy, some two-thirds of BlockFi’s remaining 300 employees were warned of impending job cuts, company adviser Mark Renzi said in a declaration.



FTX&#8217;s troubles has left the company with “no choice” but to seek court protection, he added. BlockFi now wants to organize a standalone reorganization in court rather than sell itself, but is open to alternatives that maximize value for its some 100,000 creditors.



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Bankrupt BlockFi Wants Bankman-Fried’s $520M Robinhood Stake

Sebastian Sinclair

Crypto bank Silvergate says its exposure to BlockFi amounts to less than $20 million in customer deposits — a move to quell concerns over exposure to the now-bankrupt lender.



Those funds would represent less than 2% of all crypto customer deposits maintained by Silvergate, which <a href="https://ir.silvergate.com/news/news-details/2022/Silvergate-Provides-Statement-on-FTX-Exposure/default.aspx" target="_blank" rel="noreferrer noopener">totaled</a> $11.9 billion at the end of September (including FTX-related funds).



In a Monday statement, Silvergate also emphasized that BlockFi was not a custodian for its bitcoin-collateralized loans, nor did it hold any investments in the company.



Silvergate’s SEN Leverage loans allow customers to open US dollar credit lines backed by bitcoin held at crypto exchanges in the bank&#8217;s network.



Silvergate issued one such <a href="https://www.microstrategy.com/en/investor-relations/press/silvergate-bank-issues-205-m-loan-to-macrostrategy-collateralized-by-bitcoin_03-29-2022" target="_blank" rel="noreferrer noopener">loan</a> worth $205 million to business intelligence firm MicroStrategy in March, then led by bitcoin bull Michael Saylor, who pledged to use the cash to buy more BTC. To date, all loans continue to perform as expected with zero losses and no forced liquidations, Silvergate said.&nbsp;



Silvergate acts as a custodian for major players across the crypto space, many of which utilize its Silvergate Exchange Network (SEN) payment rails. SEN allows partner companies, including Kraken and Circle, to wire fiat money quickly around the clock, even at times when the US’ Automated Clearing House is offline.&nbsp;



Silvergate also serviced <a href="https://www.bloomberg.com/news/articles/2022-11-28/ftx-received-some-customer-deposits-via-bank-accounts-held-by-alameda" target="_blank" rel="noreferrer noopener">accounts</a> for Alameda in FTX’s stead right up until its demise, a move which has since drawn criticism.



Further mitigating <a href="https://blockworks.co/news/how-blockfi-went-from-tech-unicorn-to-crypto-burnout" target="_blank" rel="noreferrer noopener">BlockFi</a> exposure, Silvergate <a href="https://ir.silvergate.com/news/news-details/2022/Silvergate-Provides-Statement-on-Minimal-Exposure-to-BlockFi/default.aspx" target="_blank" rel="noreferrer noopener">said</a> it maintains a first-priority lien and security interest in a $10 million cash collateral account. The money was meant to assure ACH settlement with BlockFi, and it now gives the bank breathing room should its $20 million exposure solidify.



BlockFi — which had relied on a $400 million rescue deal from FTX earlier this year — filed Chapter 11 <a href="https://blockworks.co/news/blockfi-files-for-bankruptcy" target="_blank" rel="noreferrer noopener">bankruptcy protection</a> on Monday, two weeks after <a href="https://blockworks.co/news/blockfi-eyes-bankruptcy-as-ftx-fallout-continues-report" target="_blank" rel="noreferrer noopener">suspending withdrawals</a> in light of FTX’s collapse.&nbsp;



BlockFi had kept customer funds on the exchange as it went dark, exacerbating a liquidity crisis already strained by bad loans to FTX sister unit Alameda Research.&nbsp;



The Jersey City firm will focus on <a href="https://blockworks.co/news/blockfi-files-for-bankruptcy">recovering all obligations</a> it’s owed, Blockworks was told on Monday. BlockFi has around 100,000 creditors.



<h3>Silvergate stock bit by bear long before BlockFi bankruptcy</h3>



Silvergate previously disclosed maintaining up to $1.19 billion in deposits belonging to crypto exchange FTX as it went dark, money now apparently tied up in bankruptcy proceedings.&nbsp;



FTX&#8217;s funds represented about 10% of Silvergate&#8217;s total deposits. As such, Silvergate has since been working to downplay its exposure to embattled crypto counterparties while assuring its reserves are liquid enough to process sudden withdrawals — hence its statement about BlockFi.&nbsp;



Blockworks has reached out to Silvergate to clarify the status of its $20 million deposits tied to BlockFi.



Institutional trading platform FalconX <a href="https://blockworks.co/news/falconx-drops-bank-silvergate" target="_blank" rel="noreferrer noopener">paused settlement</a> via Silvergate out of an abundance of caution earlier this month. FalconX reinstated the functionality a few days later.



&#8220;As the digital asset industry continues to transform, I want to reiterate that Silvergate’s platform was purpose-built to manage stress and volatility,” said Alan Lane, CEO at Silvergate, in a statement. 



“The SEN continues to operate as designed, and our support teams are available 24 hours a day, 7 days a week to help our customers during this period of adversity.”



Silvergate stock, which has halved in the past month, is down about 85% year to date, from $148 to just over $25, tracking other major crypto stocks including crypto exchange <a href="https://blockworks.co/news/coinbase-microstategy-bonds-hammered" target="_blank" rel="noreferrer noopener">Coinbase</a> and bitcoin miners Marathon, Riot Blockchain and <a href="https://blockworks.co/news/hut-8-halts-bitcoin-mining-facility-amid-energy-dispute" target="_blank" rel="noreferrer noopener">Hut 8</a>.



David Canellis contributed reporting.



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Crypto Bank Silvergate Says BlockFi Exposure Limited to $20M

Bitcoin miner Hut 8 is seeking mediation with a third-party energy supplier after relations broke down over a shared power purchase agreement — bringing some of its operations to a halt.



The Canadian firm was forced to stop mining bitcoin out of its North Bay, Ontario facility after provider Validus suspended delivery of energy to the site. The mining firm operates two other mining sites in Southern Alberta.



The provider claims Hut 8 has failed to make regular payments. Hut 8 is categorically denying those allegations, according to a <a href="https://hut8mining.com/2022/11/28/hut-8-provides-update-on-north-bay-facility/" target="_blank" rel="noreferrer noopener">statement</a> on Monday. A spokesperson for Validus did not immediately return a request for comment.



<a href="https://hut8mining.com/2022/11/28/hut-8-provides-update-on-north-bay-facility/" target="_blank" rel="noreferrer noopener">Earlier this month</a>, Hut 8 said it had handed Validus a notice claiming the energy provider neared default on obligations of the two firms’ power purchase agreement, and blamed Validus for failing to hit certain operational milestones by key dates laid out in the terms.



Hut 8 also noted ongoing discussions with Validus, meant to mitigate related operational and commercial impacts, which have so far been unsuccessful. The Ontario site had about 5,800 miners installed as of June, consuming 20 MW of power and <a href="https://hut8mining.com/2022/08/11/hut-8-reports-operating-and-financial-results-for-q2-2022/" target="_blank" rel="noreferrer noopener">contributing</a> about 20% of Hut 8&#8217;s overall hashrate.



A spokesperson for Hut 8 confirmed the company was seeking mediation via a third-party and was hopeful it would reach a resolution with Validus outside of court. They declined to comment further on the operational milestones it claimed Validus had missed.



<h3>Bitcoin miner Hut 8 could do without the interruption</h3>



Most miners are struggling to navigate <a href="https://blockworks.co/news/bitcoin-price-drop-tests-miners-diamond-hands" target="_blank" rel="noreferrer noopener">significant headwinds</a> following a major drop in bitcoin’s price, which has shed 66% of its value year-to-date.



Indeed, high electricity costs, low bitcoin prices and soaring mining difficulty have taken a bite out of profits. As a result, Hut 8 saw a 36% decline in third-quarter revenue when compared to the same period a year ago, dropping from $50.3 million to $31.7 million, recent <a href="https://hut8mining.com/investors/" target="_blank" rel="noreferrer noopener">financial statements</a> show.&nbsp;



Mining profits over the same period stood at $9.3 million compared to $33.5 million in Q3 2021, a 72% decline. Bitcoin hovered around $60,000 this time last year, while it now trades for $16,500.



Hut 8 has publicly pledged to hold onto all its bitcoin despite the tough market conditions. It <a href="https://www.prnewswire.com/news-releases/hut-8-mining-production-and-operations-update-for-august-2022-301617489.html" target="_blank" rel="noreferrer noopener">maintained</a> 8,111 BTC ($133.6 million) as of Aug. 30, mining around 12.1 BTC ($200,000) per day.



The firm&#8217;s stock, which commands a market value around $220 million, has also suffered, dropping more than 85% year to date alongside most of its rivals — which makes getting its miners back online as soon as possible even more critical.



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Hut 8 Halts Bitcoin Mining Facility Amid Energy Dispute

Rival cryptocurrency exchanges Binance and Kraken — both once accused of violating US sanctions — are now backing a fraud detection and identity verification platform for digital assets.&nbsp;



The venture capital arms of the exchanges joined a number of existing investors in the $23 million AUD ($15.2 million) Series A+ of Australia-based API platform FrankieOne. The so-called A+ round is designed to continue fundraising — often to hit an internal target —while remaining at a similar valuation.



The venture divisions, Kraken Ventures and Binance Labs, join previous FrankieOne backers Apex Capital, Reinventure and Tidal Ventures. AirTree Ventures and Greycroft co-led the round. The startup did not disclose its new valuation. But it came in at a post-money valuation of $36.9 million in October, 2021, <a href="https://my.pitchbook.com/profile/432585-73/company/profile#comparisons" target="_blank" rel="noreferrer noopener">Pitchbook data show.</a>



The latest raise brings the platform&#8217;s total funding to date to $45 million AUD ($29 million), according to a statement Monday. New funding has been earmarked, predominantly, to scale operations across Asia Pacific and North America.



Both exchanges were previously accused of violating US sanctions, mainly by permitting customers in Iran to custody and trade cryptoassets on their respective platforms. And both companies initially denied the allegations.&nbsp;



Kraken agreed to pay about <a href="https://home.treasury.gov/system/files/126/20221128_kraken.pdf" target="_blank" rel="noreferrer noopener">$360,000</a> in a settlement with a division of the US Treasury on Monday after the financial regulator said the exchange was facing &#8220;potential civil liability&#8221; for &#8220;apparent violations&#8221; of broad sanctions the US had imposed on Iran.



Treasury officials said Kraken facilitated 826 transactions — totaling roughly $1.7 million — on the &#8220;behalf of individuals who appeared to be located in Iran&#8221; at the time. 



Though it had appropriate controls in place to prevent unauthorized customers from opening an account, Kraken failed to implement IP address blocking across its platform, the department said. It is unclear whether attempts to block an IP address could be skirted by a VPN.



After this story was published, Kraken Chief Legal Officer Marco Santori said the exchange &#8220;voluntarily self-reported&#8221; and &#8220;swiftly corrected&#8221; the oversight. 



“Even before entering into this resolution, Kraken had taken a series of steps to bolster our compliance measures,&#8221; Santori said in a statement. &#8220;This includes further strengthening control systems, expanding our compliance team and enhancing training and accountability.&#8221;



Binance, meanwhile, was accused of processing a much larger <a href="https://www.reuters.com/business/finance/exclusive-crypto-exchange-binance-helped-iranian-firms-trade-8-billion-despite-2022-11-04/" target="_blank" rel="noreferrer noopener">$8 billion</a> over four years, beginning in 2018, by allowing a regular flow of transactions between itself and local Iranian exchange Nobitex, Reuters reported. Nobitex reportedly offered guidance on how users could circumvent US sanctions.



Representatives for Binance and Kraken did not immediately return requests for comment.&nbsp;



“It&#8217;s incredibly difficult for companies to provide a world-class onboarding experience whilst mitigating fraud,” FrankieOne CEO Simon Costello said in the statement. “



The startup is in position to pull it off, though, according to Costello.



Frankie provides a single API to access identity and fraud prevention providers around the world by connecting banking, fintech, crypto and gaming companies to hundreds of data sources — across 48 markets.



The platform has grown considerably over the past 12 months, increasing its revenue four-fold, the company said. The startup has one of Australia’s “big four” banks, Westpac, as a customer, as well as Shopify and Afterpay, plus Pointsbet, a sports betting platform.



Updated Nov. 16, 11:19 am ET: Kraken agreed to an approximately $360,000 settlement with a division of the US Treasury on Monday for &#8220;potential&#8221; and &#8220;apparent violations&#8221; of US sanctions on Iran. Treasury officials said the exchange processed transactions on the &#8220;behalf of individuals who appeared to be located in Iran at the time.&#8221; Also, adds a statement from Kraken&#8217;s chief legal officer. 



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Binance, Kraken, Accused of Violating US Sanctions, Back Anti-Fraud Startup

Ornella Hernandez

The 2022 FIFA World Cup kicked off in Qatar, but whether various NFT projects score with the public is another matter. Lionel Messi’s non-fungible token drop with Ethernity and Cristiano Ronaldo’s collection with Binance took two of the world’s biggest stars <a href="https://blockworks.co/news/messi-ronaldo-world-cup-nfts">to the blockchain last week</a>.



Aside from World Cup fever, there’s plenty more going on in the world of Web3. Blockworks spoke to one of the artists behind an artificial intelligence-based NFT collection that sold out via <a href="https://blockworks.co/news/qa-artist-refik-anadol-on-ai-based-nfts-for-instagram">Instagram’s recently launched NFT marketplace</a>.



Here are some other notable stories that caught the eye of the Web3 Watch.&nbsp;



<h3>NFT royalties recap</h3>



While Instagram’s NFT marketplace requires creators to set 5% minimum royalty fee in case their NFTs are sold in the secondary marketplace, many other marketplaces have been <a href="https://blockworks.co/news/nft-royalties-sometimes-they-work-sometimes-they-dont">eliminating royalties or going royalty-optional</a>.&nbsp;



This has caused controversy within the NFT community because royalties or residuals were considered a cornerstone of NFT technology — a key (and to many, definitive) use case that enables artists to garner recurring income when their works are resold.&nbsp;&nbsp;



OpenSea, the largest NFT marketplace, almost made creator fees optional for traders on existing collections, while it also launched a tool that would let creators of new Ethereum NFT projects block marketplaces that don’t fully honor royalties.&nbsp;



Due to community pushback, OpenSea backtracked in a matter of days and <a href="https://twitter.com/opensea/status/1590466334814785537?s=20&amp;t=7Vd8x1xcmW6Dd0iV1fURsA">tweeted</a> that it would continue to enforce creator fees on all existing collections. They cited that the economic downturn was a major factor: “Those looking to sell their NFTs are trying to sell them for as much as they can. Moving their listings to marketplaces that don’t enforce fees is one way to do this.”



Marketplaces such as Magic Eden, the top Solana NFT market, gave customers the choice of whether to pay the creator&#8217;s fee when they buy an NFT. The theory behind this model is that it encourages collectors to keep using the site because of the lower fees. The worry is that it sets a bad precedent for creators.



LooksRare also eliminated creator royalties, but buyers can still opt-in to pay royalties at checkout if they wish. The marketplace will instead share 25% of the LooksRare protocol fee with creators and collection owners.



SuperRare, on the other hand, has a mechanism that gives collectors the same opportunity to receive royalties-based rewards as artists do. And X2Y2 recently announced that it would start enforcing creator royalties.



In reaction to OpenSea’s “part-solution,” Michael Powell, product marketing lead at layer-2 blockchain scaling solution Immutable, told Blockworks that “While this particular situation was resolved in favor of artists and communities, there are always risks of Web3 losing its vision and core principles, shifting it much closer to traditional centralized frameworks that are not so fair toward content creators and fans.”



He added that supporting creators will win out in the long run against “what can quickly become a race to the bottom to drive short-term user acquisition.”



Immutable’s response to the debate was to <a href="https://blockworks.co/news/immutable-alex-connolly-on-protecting-nft-creator-royalties">enforce royalty payouts</a> and guarantee that creators can always add royalties to their collections rather than letting traders decide.&nbsp;



<h3>ApeCoin DAO launches marketplace; geo-blocks US APE stakers</h3>



ApeCoin DAO, the decentralized autonomous organization made up of ApeCoin (APE) holders, launched its own NFT marketplace for Bored Ape Yacht Club (BAYC), Mutant Ape Yacht Club (MAYC), Bored Ape Kennel Club, Bored Ape Chemistry Club and Otherdeed for Otherside NFTs.



The marketplace, which is not officially associated with Yuga Labs, was built by NFT&nbsp; infrastructure company Snag Solutions. The company’s founder Zach Heerwagen <a href="https://twitter.com/ZHeerwagen/status/1595462170996711433?s=20&amp;t=hhL1iqfTZ4pJxCtAtYMk7Q">tweeted</a> that the platform includes “unique features built specifically for the BAYC and Otherside communities, including ApeCoin staking and NFT metadata integrations.”



He also added there is a reduced fee scheme for sellers: 0.5% fees on ETH sales, 0.25% fees on ApeCoin transactions, and the platform retains 0.25% of each sale in a multi-signature wallet to fund future DAO initiatives.



ApeCoin, BAYC’s Ethereum-based governance and utility token, launched in March but staking will go live on Dec. 5, the ApeCoin DAO confirmed on Nov. 24.



However, the US was added to a list of regions geo-blocked from using the APE staking service ApeStake. Canada, North Korea, Syria, Iran, Cuba, Russia and the Russian-controlled areas of Ukraine, Crimea, Donetsk and Luhansk are also on the block list.



The DAO claimed that due “today’s regulatory environment, we had no good alternative.”



<h3>Mattel Creations — another day, another marketplace </h3>



Mattel, the toy manufacturer behind brands like Barbie and Hot Wheels, has also released its own NFT marketplace. Mattel Creations is built on the Flow blockchain, which also powers the NBA Top Shot project and is backed by Dapper Labs. The direct-to-consumer platform will not require users to use cryptocurrency to buy the NFTs.&nbsp;



The first NFT collection to drop will be a new series of the Hot Wheels NFT Garage project on Dec. 15, <a href="https://corporate.mattel.com/news/mattel-creations-launches-digital-collectibles-marketplace">according</a> to the company. This includes digital collectibles of 60 popular cars from McLaren, Chevrolet, Honda, Aston Martin and other brands. Holders of the rarest NFTs will be able to redeem physical die-cast replicas.



Mattel claims it is the first toy company to launch NFTs. Previous NFT projects include Barbie’s collection of digital collectibles in collaboration with fashion house Balmain, as well as the Barbie collab with the Boss Beauties NFT community.



The goal of the marketplace is to “to translate iconic Mattel IP into digital art,” stated Ron Friedman, Vice President at Mattel Future Lab. Other Mattel intellectual property includes Fisher-Price, American Girl, Thomas &amp; Friends and UNO.

Web3 Watch: NFT Royalty Roundup, Ape Stakes, And Digital Hot Wheels

Jack Kubinec

Terra founder Do Kwon is still <a href="https://blockworks.co/tag/interpol" target="_blank" rel="noreferrer noopener">wanted by Interpol</a>, but the team behind the protocol’s stablecoin has launched a platform for building DAOs on its blockchain.



Terraform Labs built Enterprise, a “no-code” solution for DAOs looking to build on Terra. The new product illustrates that Terraform Labs believes Terra — irrespective of its missing-in-action founder — is worth building on, rather than rebranding or even sunsetting the project. But demand remains to be seen.



Enterprise <a href="https://blockworks.co/news/terra-looking-to-build-daos" target="_blank" rel="noreferrer noopener">was one of the first pieces of so-called Terra 2.0</a> — the blockchain’s attempted comeback after Terra’s native token LUNA death spiraled, torpedoing $30 billion in value in May.&nbsp;



Enterprise provides the raw digital material for DAO creation, allowing users to create multi-signature wallets, new tokens or NFT communities on Terra’s blockchain with a couple clicks.



A source close to the matter confirmed Kwon was involved with Enterprise’s creation in an advisory role.



Nick Almond, protocol lead at fellow DAO builder FactoryDAO, told Blockworks the setup, really, is not purely a DAO, but “DAOs 1.0 or 0.8.”&nbsp;



Though Terra flirted with catastrophe, largely due to technological shortcomings, Almond doesn&#8217;t see much to criticize when it comes to the new product’s backbone. 



“Investing in the whole application layer around DAOs — that&#8217;s what&#8217;s going to convince people to set up shop on their blockchain,” Almond said. “So, in a sense, [Terra is] somewhat ahead of a lot of the other [layer-1s].&nbsp;



But it’s unclear if a significant number of DAOs are ready to entrust their wallets, NFTs and tokens to Terra again.&nbsp;



“What blockchain you set your DAO upon is like what city you set your home upon. Why would you build it on Terra?” Almond said.



“Enterprise offers developers and our community value. They can trust what is being built because they can inspect the open-source code for the project themselves,” a spokesperson for Terra told Blockworks.&nbsp;



As of Monday afternoon in New York, Enterprise’s <a href="https://beta.enterprise.money/daos" target="_blank" rel="noreferrer noopener">beta version</a> housed seven DAOs and just a handful of users. The price of LUNA — the Terra 2.0 iteration launched in late May — actually fell somewhat on the news, finishing down 5% on Monday.&nbsp;



In crypto, attention often begets economic benefit, and Terra is nothing if not notable. Do Kwon still has more than a million Twitter followers. LUNA still has nearly $200 million in market cap. Almond said Terraform Labs may be hoping whatever is left of its once-formidable community will buy into whatever it does next.



Following FTX’s bankruptcy, Terraform Labs appears to be doing some brand rehabilitation. Earlier this month, Terra <a href="https://medium.com/terra-money/lfg-technical-audit-report-ddaf3f51e7d" target="_blank" rel="noreferrer noopener">posted</a> an audit report showing none of its funds were misallocated in the leadup to its May snafu. The post ends with a quote from Kwon, seemingly saying Terra’s fall from grace was more respectable than that of FTX, which misused customer funds.



FTX’s chances of operating an exchange in the near future appear slim to none. But Terra — which lost billions of dollars in a matter of days&nbsp; — is still building.



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Terra’s DAO Platform Is Open for Business

Most everyone in crypto is waiting for a regulatory <a href="https://blockworks.co/news/european-crypto-regulations-enter-final-phase" target="_blank" rel="noreferrer noopener">crackdown</a>. 



Financial regulators, especially in the US, namely the CFTC and SEC, were already playing a game with steep stakes — rule-making catch-up — before FTX <a href="https://blockworks.co/news/the-last-10-days-in-the-ftx-saga-a-timeline" target="_blank" rel="noreferrer noopener">cratered</a>. Its demise has given fresh ammunition to lawmakers who started calling for more stringent investor protection <a href="https://blockworks.co/news/americans-understand-crypto-risks-but-not-regulations-survey-finds" target="_blank" rel="noreferrer noopener">safeguards</a> earlier this year, when the <a href="https://blockworks.co/news/bipartisan-stablecoin-regulation-has-a-slim-chance-of-passing-this-year" target="_blank" rel="noreferrer noopener">stablecoin</a> UST depegged and digital asset lending lost its mooring.



The question now is not if, but when. And the outcome has massive implications for the industry — especially how the cryptoassets of <a href="https://blockworks.co/news/whats-next-for-ftx-and-its-customers-after-bankruptcy-filing" target="_blank" rel="noreferrer noopener">individual traders</a> and firms are accounted for come <a href="https://blockworks.co/news/the-bright-side-of-inflation-tax-breaks" target="_blank" rel="noreferrer noopener">tax season</a>. 



Blockworks sat down with Paul Brody, EY’s global blockchain leader, to discuss his roadmap for regulation in the coming months, as well as how the tax landscape is shifting, plus the evolving relationship of TradFi and digital assets — a relationship, in some ways, abruptly reset by recent events. 



Blockworks: First, give me your big-picture take on the last few weeks.&nbsp;



Brody: So, my general take on the last [few] weeks is that what we are seeing here is there&#8217;s no happy middle in this blockchain ecosystem.



There seem to be two extremes that work well. One extreme is you’re a fully on-chain, fully transparent, fully decentralized entity. So, those entities seem to have fared pretty well, and you will hear a lot of people say, “The key lesson from [recent] weeks is that DeFi works, and CeFi doesn&#8217;t.” And I will at least buy into the part that fully on-chain, fully transparent, fully visible DeFi has seemed to fare very well.&nbsp;



That doesn&#8217;t mean people didn&#8217;t lose lots of money, but it means that they didn&#8217;t lose their money to miss-allocation or a lack of business controls.&nbsp;



Of course, there&#8217;s another extreme, which is the fully traditional, fully regulated and intensively audited side. You&#8217;re a publicly traded entity. You&#8217;re regulated by the SEC; you&#8217;re audited by a big four firm; you&#8217;re subject to really, really big, very traditional financial services business controls — the kind that all banks and brokerages have been subject to for a very long time.



We know who those players are. They&#8217;ve also fared fairly well through this crisis, right? The people who have done poorly are the people in the middle. They&#8217;re not fully regulated, audited and rigorously inspected in a traditional model, nor are they fully transparent in the new model. They fall into this gray area. And that lack of supervision appears to be the gateway to temptation to fix problems without actually fixing problems, taking advantage of a lack of business controls — over and over, again.&nbsp;



Blockworks: So, two models. OK. Is overlap possible? And what do the twin models mean for auditing and oversight more broadly?



Brody: So, my problem is, you’re either one extreme or the other, but not a happy one in the middle. And I would go one step further.&nbsp;



I would say, ‘If you have to choose between the two, the fully regulated TradFi model is actually a lower risk model.’ And the reason it&#8217;s a low-risk model — and I feel like this is gonna’ make me somewhat unpopular with a lot of crypto purists — starts with thinking about some of the really excellent firms on the DeFi side. I admire what they&#8217;re doing greatly. And I&#8217;m very impressed.&nbsp;



However, they&#8217;re entering uncharted territory. We don&#8217;t have a couple of centuries of auditing and banking and checklists for a pure DeFi ecosystem. We have a couple centuries of supervision history to know how to make the checklist if you come to EY and say, ‘Hey, I would like to be audited by EY.’&nbsp;



We have a very lengthy checklist of all the things you need to do to prepare for an audit. That&#8217;s an excellent guide…There is no DeFi equivalent. So, how do we be the most rigorous possible on the DeFi ecosystem?&#8230;We know how to do that in TradFi. We’re [working on it] when it comes to DeFi.&nbsp;



Whereas, if you want to be an SEC-regulated audit client, you have this checklist, and if you follow the checklist, you&#8217;re going to implement a lot of good, basic business controls.



Blockworks: Are you seeing a slowdown when it comes to TradFi firms you deal with looking to do business in crypto? Given the last few months…



Brody: None of our clients are deterred from crypto. It’s a fact, because 100% of the family offices and 100% of the high net-worth individuals [we deal with] have some form of crypto. Nobody wants to be out of this business. They know, now, market goes up, market goes down. That’s probably here to stay.&nbsp;



But [there’s a difference] between what you do immediately versus what you plan to do in the near future.&nbsp;



There&#8217;s definitely some reticence, and the larger banks are much more careful and conservative. But mid-sized banks are a bit more adventurous. They are ready. They&#8217;re very close to going live with multiple products, especially things like stablecoins.&nbsp;



Yeah, they&#8217;re waiting for regulatory approval. And this is where [it boils down to the] unfortunate mess of the last six months. There are some people who say, ‘Great. We didn&#8217;t really allow crypto into the regulated model.’&nbsp;



I actually take a slightly different perspective, which is that the lack of rules has meant that some of the really top-quality firms that are highly regulated have stayed out. And it&#8217;s possible, therefore, that bad actors ended up with a larger share of the market than they would have otherwise — right in a period of high market uncertainty.&nbsp;



People tend to want to migrate. They feel there&#8217;s a flight to quality. They want to migrate to what they perceive as the lowest risk player. And, maybe, if there were some of the more blue-chip names in this business that offered services, they would have a bigger share.&nbsp;



And some of the less well-documented and regulated players would have a smaller share. And maybe the damage from some of these insolvencies would actually be smaller.



Brody, a principal at EY, heads the accounting firm’s blockchain business lines, encompassing consulting, audit and tax. He has about 20 years of professional experience, including spending more than 12 years at IBM in executive roles.



This interview has been edited for brevity and clarity. Brody declined to discuss specific EY clients, citing privacy concerns.



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‘Uncharted Territory’ for Crypto Come Tax Season: EY Blockchain Head

Investors drawn to double-digit yields in the convertible bond market should be prepared to raise their risk tolerance, analysts say.



Coinbase and MicroStrategy, two crypto-related companies, saw their convertible bond yields surge as prices plummeted this month amid ongoing fallout from <a href="https://blockworks.co/news/the-last-10-days-in-the-ftx-saga-a-timeline" target="_blank" rel="noreferrer noopener">FTX’s bankruptcy</a>.&nbsp;



Coinbase’s <a href="https://blockworks.co/news/coinbase-wants-to-raise-1-5b-via-debt-offering" target="_blank" rel="noreferrer noopener">bond — maturing in 2026</a> — dipped to an all-time low of 53 cents on the dollar last week, a level typically associated with distressed debt, Kaiko analysts said in a note Monday. The bond later recovered slightly to 59 cents on the dollar on Monday, trading <a href="https://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C1040076&amp;symbol=COIN5424425" target="_blank" rel="noreferrer noopener">data</a> shows. Bond price and yield move in opposite directions.&nbsp;



“Coinbase bonds look cheap to their stock,” trader Greg Foss said. “I would short Coinbase equity versus long the bonds.”&nbsp;



Coinbase shares are down more than 40% over the past month, to around $42 as of Monday.&nbsp;



MicroStrategy <a href="https://blockworks.co/news/microstrategy-is-selling-debt-to-buy-more-bitcoin-heres-what-that-means" target="_blank" rel="noreferrer noopener">bonds</a>, set to mature in 2028, also slumped on Monday to 78 cents on the dollar. The software company’s 2027 bonds trade at around 33 cents on the dollar and come with a 28% yield.&nbsp;



If MicroStrategy and Coinbase survive until their respective bonds’ maturity dates and pay the debt in full, investors will pocket a gain.&nbsp;



At the end of the third quarter of 2022, Coinbase reported about $3.4 billion in long-term debt, according to <a href="https://s27.q4cdn.com/397450999/files/doc_financials/2022/q3/a2c76620-9756-4268-9d08-4c7856f25a14.pdf" target="_blank" rel="noreferrer noopener">company filings</a>. The exchange also posted a net revenue of around $576 million for the quarter.&nbsp;



“We ended Q3 with $5.6 billion in total $USD resources, in addition to $483 million in crypto assets, which we believe puts us in a strong position to manage through the crypto winter,” Coinbase executives wrote in their third quarter <a href="https://s27.q4cdn.com/397450999/files/doc_financials/2022/q3/Q32022-Shareholder-Letter.pdf" target="_blank" rel="noreferrer noopener">shareholder letter</a>.



MicroStrategy reported about $2.4 billion in long-term debt at the end of the third quarter in 2022, according to <a href="https://www.microstrategy.com/content/dam/website-assets/collateral/financial-documents/press-release-archive/microstrategy-announces-third-quarter-2022-financial-results_11-01-2022.pdf" target="_blank" rel="noreferrer noopener">filings</a>. The company had about $2.5 billion in assets, including bitcoin holdings worth around $2 billion at the time, MicroStrategy said.



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Coinbase, MicroStrategy Bonds Hammered by Industry Turmoil

In its latest move to fend off exploits, the DAO governing DeFi lender Aave has voted to freeze credit pools with low liquidity. The change comes in response to <a href="https://blockworks.co/news/aave-curve-bad-debt" target="_blank" rel="noreferrer noopener">a weakness uncovered in the protocol’s lending parameters</a>, exploited by the same trader who saddled Solana-based <a href="https://blockworks.co/news/mango-dao-readies-42m-to-make-users-whole" target="_blank" rel="noreferrer noopener">Mango Markets</a> with bad debt.



Liquidity has taken a hit in decentralized credit markets <a href="https://blockworks.co/news/the-last-10-days-in-the-ftx-saga-a-timeline" target="_blank" rel="noreferrer noopener">post-FTX bankruptcy</a>. But, in this instance, the temporary pause in withdrawals and deposits to certain Aave pools appears to be strictly related to security concerns.&nbsp;



The move stems from a recent <a href="https://app.aave.com/governance/proposal/?proposalId=121" target="_blank" rel="noreferrer noopener">proposal</a> on Aave’s <a href="https://app.aave.com/governance/" target="_blank" rel="noreferrer noopener">governance forums</a>. The proposal dubbed “the market situation of [certain assets as] currently volatile” — and lobbied for the freeze out of an “abundance of caution.”&nbsp;



About a dozen and a half assets that trade on the protocol have been, at least in part, shut down for the time being, including MANA, 1INCH and xSUSHI.



In last week’s incident, the protocol lent out tens of millions of dollars in CRV tokens against USD Coin collateral, but when the price of CRV spiked, arbitragers were unable to fully liquidate the collateral to repay the trader’s debt. The outcome, ultimately, was more of a flesh wound: Aave <a href="https://blockworks.co/news/aave-curve-bad-debt" target="_blank" rel="noreferrer noopener">wrote down</a> $1.7 million of bad debt. But that was enough to briefly cause its native token AAVE to plummet on the news.



In a crisis, AAVE stakers are on the hook to cover protocol debts, although, at the time, protocol representatives said the shortfall was small enough to be covered via the protocol’s treasury instead.



The salve — or the latest proposal — which went into effect this week with overwhelming community support, is not the only liquidity-driven halt to Aave’s credit pools in the works.&nbsp;



Aave participants Llama and Chaos Labs recently put forward their <a href="https://app.aave.com/governance/proposal/?proposalId=125" target="_blank" rel="noreferrer noopener">own suggestions</a>, which would stop trading on a number of separate cryptoassets. Voters were more than 99% in favor as of publication. The mechanism, if passed as expected, would freeze new lending, but continue to facilitate deposits.



“In response to recent market events and the continued contraction of liquidity across markets, this proposal seeks to reduce the risk profile across many higher volatile assets,” the proposal said.



And yet another <a href="https://app.aave.com/governance/proposal/?proposalId=124" target="_blank" rel="noreferrer noopener">proposal</a> — also carrying overwhelming approval at publication time — recommends halting much of Polygon’s Aave integration, while waiting for a pending protocol upgrade to improve “risk controls.” The move would affect six digital assets, including LINK, SUSHI and CURVE.



“This isn’t about FTX, for once,” one institutional trading source said. “But it does appear to demonstrate how volatility throughout the market is slamming credit now, as well.”



The source was granted anonymity because they are not authorized to speak to the media. Aave representatives did not immediately return a request for comment.&nbsp;&nbsp;



The crypto lender has been closely watched in institutional crypto circles after it earlier this year <a href="https://blockworks.co/news/aave-arc-to-provide-30-financial-institutions-access-to-private-pools-of-defi-liquidity" target="_blank" rel="noreferrer noopener">struck deals</a> with a number of high-profile TradFi asset managers who agreed to tap its liquidity pools via a permissioned offering.



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Crypto Lender Aave Moves To Tighten Risk Controls

Macauley Peterson

Crypto pros like to have a laugh, sometimes at neophytes’ expense. But when the joke is obscure enough — in this case wrapped ether memes — it can have real consequences.



Over the weekend, crypto Twitter was alight with riffs on the <a href="https://blockworks.co/tag/bankruptcy" target="_blank" rel="noreferrer noopener">wave of insolvencies</a> that have plagued the industry, by pretending that wrapped ether (WETH) was somehow a risk to Ethereum. Spoiler: It’s not.



But when enough otherwise serious people pile on to a meme, it can metastasize into market-moving “news.” For instance, Gnosis co-founder Martin Koeppelmann joined in the fun on Sunday.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">As ETH gets constantly burned wrapped ETH (WETH) is no longer fully backed by it. We might see a bank run on redeeming WETH soon.&mdash; Martin Köppelmann 🇺🇦 (@koeppelmann) <a href="https://twitter.com/koeppelmann/status/1596862942750085127?ref_src=twsrc%5Etfw">November 27, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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For crypto natives with an understanding of WETH and how ether is burned <a href="https://blockworks.co/tag/eip-1559" target="_blank" rel="noreferrer noopener">post-EIP-1559</a>, the joke is fairly obvious.



To review: WETH is an ERC-20 version of ether that can be used in smart contracts like Uniswap. It <a href="https://blog.0xproject.com/canonical-weth-a9aa7d0279dd" target="_blank" rel="noreferrer noopener">dates back to 2017</a> and is not in any way like a custodial version of ether. For all intents and purposes, it is ether. As such, there’s no connection between WETH and fluctuations in the ETH burn rate due to transaction fees. Ether used as WETH is not being burned and cannot depeg.



But the joke got out of hand. Even quality crypto sources like Bloomberg were taken in. Bloomberg <a href="https://archive.ph/H4XKI" target="_blank" rel="noreferrer noopener">reported</a> that “crypto watchers also pointed to worries about wrapped Ether, which is meant to have the same value as Ether while allowing access to more applications,” with the caveat merely that “some reports suggested the concerns stemmed from joke Twitter posts.” (They later <a href="https://www.bloomberg.com/news/articles/2022-11-28/bitcoin-drops-as-tremors-from-china-unrest-spook-global-markets" target="_blank" rel="noreferrer noopener">quietly removed</a> the offending paragraphs.)



In fact, there were no actual worries. It was 100 percent a joke from the start.



Dankrad Feist, a researcher at the Ethereum Foundation — the upcoming EIP-4844, also known as “<a href="https://notes.ethereum.org/@vbuterin/proto_danksharding_faq" target="_blank" rel="noreferrer noopener">Proto-Danksharding</a>,” is partially named after him — found the Bloomberg fracas <a href="https://twitter.com/dankrad/status/1597252241962209280" target="_blank" rel="noreferrer noopener">a bit off-putting</a>.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">A lot of people making jokes about WETH. Please be aware it may not be obvious to outsiders that it&#39;s completely different from bridged assets and there is literally almost zero risk. I think it would be better to mark these more clearly as jokes.&mdash; Dankrad Feist (@dankrad) <a href="https://twitter.com/dankrad/status/1596864596421189632?ref_src=twsrc%5Etfw">November 27, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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Koeppelmann <a href="https://twitter.com/koeppelmann/status/1597203104273166337" target="_blank" rel="noreferrer noopener">also came clean</a>, explaining the joke and why it made no literal sense in the first place.



To be abundantly clear: WETH is <a href="https://twitter.com/iamDCinvestor/status/1597184547875016705" target="_blank" rel="noreferrer noopener">unruggable</a>. It’s <a href="https://twitter.com/TimBeiko/status/1597263129695879170" target="_blank" rel="noreferrer noopener">not like wBTC</a> — wrapped bitcoin on Ethereum, which relies on <a href="https://wbtc.network/dashboard/audit" target="_blank" rel="noreferrer noopener">a central custodian, BitGo</a>, although there are plenty of <a href="https://twitter.com/mikebelshe/status/1596208748187353088" target="_blank" rel="noreferrer noopener">misconceptions</a> around the safety of wBTC as well. WETH can always be unwrapped to ETH on a one-to-one basis, as sure as the Ethereum network itself — it&#8217;s baked into the immutable code and there is no counterparty.



<h3>Staked ether withdrawals are the top priority</h3>



This one was less of a meme and more of a misunderstanding, but also one propagated by <a href="https://twitter.com/CryptoCrystal_B/status/1592678358718255104" target="_blank" rel="noreferrer noopener">random folks on Twitter</a>. The “concern” was that somehow the withdrawal of staked ether planned in the next major Ethereum upgrade, known as Shanghai, has been delayed.



That was news to Ethereum developers, such as Prysmatic Labs’ Terence Tsao, developer of the leading Ethereum proof-of-stake consensus implementation, Prysm, who <a href="https://twitter.com/terencechain/status/1595822304822530051" target="_blank" rel="noreferrer noopener">tweeted</a> that “withdrawal remains the highest priority for Prysm.”



“As core devs, our biggest responsibility today is to enable stakers to withdraw their funds as fast and as securely as possible,” he said.



The Shanghai upgrade is expected to take place roughly six months after the Merge, or around the second quarter of 2023. Some pointed to a change in the Ethereum Foundation website regarding the timeline, but the Ethereum Foundation isn’t in the business of specifying dates because they don’t control Ethereum — its development is decentralized.



The best way to keep tabs on what’s actually happening with Shanghai is to follow <a href="https://github.com/ethereum/pm/issues/450" target="_blank" rel="noreferrer noopener">its progress on GitHub</a> or tune into <a href="https://github.com/ethereum/pm#previous-meetings" target="_blank" rel="noreferrer noopener">Ethereum core developer calls</a> — the latest was on Nov. 24, and was <a href="https://twitter.com/TimBeiko/status/1595860968298672128" target="_blank" rel="noreferrer noopener">summarized by Tim Beiko</a>.



Once again, beware the memes — some observers took the opportunity to turn the entire concept of staked ether into a joke.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">hearing rumors that ethereum is insolvent, withdrawals are disabled for all staked eth&mdash; foobar (@0xfoobar) <a href="https://twitter.com/0xfoobar/status/1592403855572025344?ref_src=twsrc%5Etfw">November 15, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Withdrawals are disabled by design until the Shanghai upgrade — this is neither new nor remotely alarming.



The moral of the story: <a href="https://twitter.com/Fullbeerbottle/status/1597068972653805568" target="_blank" rel="noreferrer noopener">Crypto memes happen fast</a>. If you don’t stop to look around once in a while — or, say, are celebrating Thanksgiving weekend with your family — <a href="https://youtu.be/vsYBtfQ3QDo?t=9" target="_blank" rel="noreferrer noopener">you could miss it</a>.



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WETH FUD Is All a Joke, ETH Withdrawals Still a Priority

Bessie Liu

Troubled lender BlockFi has filed for Chapter 11 bankruptcy protection, making it the next victim of FTX’s fallout.



Once one of the biggest and most rapidly growing startups in the cryptocurrency space, BlockFi has been <a href="https://blockworks.co/news/how-blockfi-went-from-tech-unicorn-to-crypto-burnout" target="_blank" rel="noreferrer noopener">struggling to keep afloat since</a> the collapse of Three Arrows Capital and other crypto companies in May.



In July, competitor crypto lender Nexo offered to acquire BlockFi for an estimated $850 million. But that offer was turned down by the company <a href="https://blockworks.co/news/blockfi-eyes-bankruptcy-as-ftx-fallout-continues-report" target="_blank" rel="noreferrer noopener">in favor of a $400 million revolving credit offer</a> from FTX US. 



Now, with FTX in shambles — facing <a href="https://blockworks.co/news/the-last-10-days-in-the-ftx-saga-a-timeline" target="_blank" rel="noreferrer noopener">legal and financial troubles</a> of its own — BlockFi is once again left to fend for itself.



“As part of its restructuring efforts, the Company will focus on recovering all obligations owed to BlockFi by its counterparties,” the company said in a <a href="https://www.businesswire.com/news/home/20221128005451/en/BlockFi-Commences-Restructuring-Proceeding-to-Stabilize-Business-and-Maximize-Value-for-all-Clients-and-Stakeholders" target="_blank" rel="noreferrer noopener">statement</a>, adding, “the Company expects that recoveries from FTX will be delayed.”



A representative of BlockFi declined to comment further.



<h3>No surprise</h3>



BlockFi filing for bankruptcy should not come as a surprise, a source who has closely worked with BlockFi told Blockworks.



“[It] was obvious once FTX went bust, because they had a Fugazi bailout,” the source said.



This sentiment is shared by many in the crypto community.&nbsp;



“There have been a lot [of] totally unexpected things that have happened in the crypto space over the past 2 months. BlockFi filing for bankruptcy is not one of those things,” Guy Turner from Coin Bureau <a href="https://twitter.com/coinbureau/status/1597250360154132485" target="_blank" rel="noreferrer noopener">tweeted</a>.



Early signs of the crypto lender’s insolvency were apparent after it <a href="https://blockworks.co/news/blockfi-eyes-bankruptcy-as-ftx-fallout-continues-report" target="_blank" rel="noreferrer noopener">suspended withdrawals</a> earlier this month amid FTX developments.



Its latest <a href="https://pacer-documents.s3.amazonaws.com/109/1094078/118164199368.pdf" target="_blank" rel="noreferrer noopener">bankruptcy filings</a> reveal that BlockFi has roughly 100,000 creditors with $1 billion to $10 billion in liabilities and assets. 



Among them is the Securities and Exchange Commission, which the now-bankrupt company is said to owe roughly $30 million.



In February, BlockFi reached a $100 million settlement with the SEC after it failed to register as a securities company and made misleading statements about its risk estimates on loan portfolios.&nbsp;



Although BlockFi’s next steps are undetermined, activity on its platform has all been halted for the time being and its remaining $256.9 million at hand will be used to support its restructuring process.



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BlockFi’s ‘Fugazi Bailout’ Condemns Crypto Lender to Bankruptcy

Andre Cronje, a long-serving figure in the DeFi space, says the Fantom blockchain project he advises is cash-flow positive, earning more than $10 million in annual revenue.



Cronje shared a blog post on Monday that claims the Fantom team maintains more than $300 million in assets without specifying how much is considered liquid. “We are still scaling up,” Cronje said.



Fantom&#8217;s <a href="https://andrecronje.medium.com/fantom-an-inside-financial-peak-at-being-a-crypto-company-323d29fb5e81" target="_blank" rel="noreferrer noopener">reported</a> treasury, as yet unproven on-chain, is made up of around 450 million FTM ($85.7 million). There’s also $100 million in stablecoins and $100 million in undisclosed cryptocurrencies, as well as $50 million in non-crypto assets, per Cronje’s post.



Fantom is a layer-1 blockchain compatible with Ethereum Virtual Machine (and Ethereum dapps). The network competes with the likes of Solana, Avalanche and Polygon for Ethereum’s market dominance.



Cronje&#8217;s blog works to reassure investors the Fantom Foundation&#8217;s solvency while detailing its financial history. The non-profit firm, which currently employs over <a href="https://rocketreach.co/fantom-foundation-profile_b457b6c7fca4bc38" target="_blank" rel="noreferrer noopener">40 staff</a> according to RocketReach, has an annual salary burn rate of $7 million. Cronje expects Fantom’s coffers to last for another 30 years without touching its FTM stash.&nbsp;



DeFi strategies are currently bringing in $6 million per year for the Foundation, said Cronje, revenue it uses to buy its own FTM tokens. Yield farming on Compound and Synthetix were cited as previous plays.



Transaction fees alongside validator and delegate earnings brings Fantom&#8217;s total yearly revenue beyond the $10 million mark, although that figure excludes capital gains tax and appears based on FTM&#8217;s current valuation.



<h3>Cronje returns to Fantom as it struggles to maintain growth</h3>



Cronje’s re-emergence comes as Fantom’s native asset flounders along with much of the crypto space. FTM is down more than 90% year to date, dropping from $2.25 to less than $0.20. FTM&#8217;s market cap is now less than $500 million, ranked 73rd by <a href="https://www.coingecko.com/en/coins/fantom/historical_data#panel" target="_blank" rel="noreferrer noopener">CoinGecko</a>.



Cronje is a prolific DeFi developer, credited with creating projects such as Yearn Finance, SushiSwap and Cream V2. He deactivated his Twitter account after declaring <a href="https://blockworks.co/news/defi-star-developer-andre-cronje-calls-it-quits" target="_blank" rel="noreferrer noopener">departure</a> from the crypto space in March — about two months after the pseudonymous CFO for DeFi collective Frog Nation, Sifu, was <a href="https://curve.substack.com/p/january-27-2022-sifu-not-safu-" target="_blank" rel="noreferrer noopener">outed</a> as <a href="https://www.vanityfair.com/news/2019/11/the-strange-tale-of-quadriga-gerald-cotten" target="_blank" rel="noreferrer noopener">QuadrigaCX</a> co-founder Michael Patryn. 



Cronje, while heralded for his commitment to the core tenets of decentralized finance, has faced <a href="https://thedefiant.io/andre-cronje-yearn-finance-quits-defi-fantom" target="_blank" rel="noreferrer noopener">criticism</a> for launching crypto projects only to leave them abruptly. On <a href="https://www.linkedin.com/in/andre-cronje/" target="_blank" rel="noreferrer noopener">LinkedIn</a>, the South African-native has been listed as an “architect” at Fantom Foundation for the past month, having made his unofficial comeback in late October. Blockworks has reached out for comment.



But Fantom&#8217;s total value locked is suffering even more than its token price — just $424 million is staked inside Fantom DeFi protocols, down from more than $8 billion in March, a 95% reduction, per <a href="https://defillama.com/" target="_blank" rel="noreferrer noopener">DeFiLlama</a>.



For scale, there’s $23.5 billion locked in Ethereum&#8217;s DeFi apps and more than $5.25 billion in BNB Chain&#8217;s, with the former losing about 70% of its TVL since March.



Fantom initially raised $40 million in a June 2018 token sale, Cronje said, which mostly brought in ether worth between $450 and $700 at the time (now valued at close to $1,200).&nbsp;The project was left with just $5 million in operational capital, however, having sold its ether for US dollars at significantly less than its raise value.



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe class="wp-embedded-content" sandbox="allow-scripts" security="restricted" src="https://flo.uri.sh/visualisation/11978459/embed#?secret=UGBm50UfET" data-secret="UGBm50UfET" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div><figcaption>Fantom and Solana&#8217;s native tokens have practically tracked each other over the past three years (toggle linear and logarithmic scale at the top of the chart)</figcaption></figure>



Cronje said the Fantom Foundation was earning more than $1 million per week by February 2021. The crypto market was roaring back then: DeFi tokens were surging, bitcoin was approaching $60,000 for the first time and yield farming was still lucrative.



In the same month, the project sold 81.5 million FTM to Sam Bankman-Fried’s now-bankrupt trading unit Alameda Research for nearly $35 million ($0.428831 per token), as well as an additional 10.4 million FTM to Blocktower for $5 million.&nbsp;FTM is now worth less than half of that price.



Cronje said Alameda sought further participation but Fantom opted against it. He also said the team declined to pay $300 million to an unnamed exchange for a listing and $100 million to an NFT marketplace for integration.



<h3>Fantom prefers to buy FTM over selling it</h3>



Fantom now opts to buy its own token rather than exchange it for partnerships, integrations or crypto exchange listings, according to Cronje. 



He claimed that unlike most of Fantom’s competitors, its foundation owns a relatively small amount of FTM’s supply — at launch less than 3%. 



On the other hand, Messari <a href="https://messari.io/asset/fantom/profile/launch-and-initial-token-distribution" target="_blank" rel="noreferrer noopener">indicates</a> Fantom&#8217;s founders, team and advisors collectively garnered roughly 20% of the token supply, more-or-less in line with <a href="https://messari.io/asset/avalanche/profile/launch-and-initial-token-distribution" target="_blank" rel="noreferrer noopener">Avalanche</a> and <a href="https://messari.io/asset/solana/profile/launch-and-initial-token-distribution" target="_blank" rel="noreferrer noopener">Solana</a>. Polygon&#8217;s team however <a href="https://messari.io/asset/polygon/profile/launch-and-initial-token-distribution" target="_blank" rel="noreferrer noopener">kept</a> almost 42% of the initial supply, per Messari.



In any case, based on Cronje’s blog post, Fantom’s FTM stash now equals around 18% of the circulating supply.&nbsp;And despite recording $50 million in losses throughout the Terra-inspired market chaos in May, Cronje appears confident the project can weather the bear market.



“If your entire revenue model is selling your token, you are doing a disservice to yourself, your blockchain, and your supporters,” Cronje said. “If [DeFi] didn’t exist, we would likely not be operational today. I believe the same is true for many companies out there.”



“Crypto is dead. Long live crypto.”



David Canellis contributed reporting.



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Cronje Says DeFi Saved Fantom: ‘We Are Cash Flow Positive’

FTX <a href="https://blockworks.co/news/the-last-10-days-in-the-ftx-saga-a-timeline" target="_blank" rel="noreferrer noopener">failed</a>, in part, because it was too centralized, according to DeFi adherents — with decentralized advocates now saying the debacle has unexpectedly given DAOs an opening.&nbsp;&nbsp;



There was little to no&nbsp;transparency of where the crypto exchange custodied customer cryptocurrencies, industry participants told Blockworks. A purported lack of transparency in crypto —&nbsp;ironically, long considered the first open, traceable financial system — is nothing new, from <a href="https://blockworks.co/news/alleged-bitcoin-launderers-lawyer-seeks-prisoner-swap-russia" target="_blank" rel="noreferrer noopener">Mount Gox</a> onward.&nbsp;



Decentralized autonomous organizations (DAOs), on the other hand, have mostly managed to stay out of trouble. And they argue an inherent openness to where their funds are kept and how they move is a key reason as to why.&nbsp;



While decentralized protocols are still nascent — with infrastructure models and tokenomics setups still in their relative infancy — supporters argue there are lessons to be learned from DAOs in an effort to head off future digital asset blowups on the centralized side.&nbsp;



DAOs have held their own in the latest market downturn. The stalwart performance, coupled with structural maturations, ought to lead to a “large exit out of centralized institutions into decentralized ones,” according to Nick Almond of FactoryDao, who goes by <a href="https://twitter.com/DrNickA" target="_blank" rel="noreferrer noopener">drnick</a> on Twitter.



“Then, it begins to influence centralized governance,” Almond told Blockworks.&nbsp;



<h2>Technology at the center</h2>



The rise of DAO governance functions — with parallels to activism in equities markets — have especially bolstered the legitimacy of such collectives, according to a DAO governance consultant who goes by the pseudonym <a href="https://twitter.com/emjicy" target="_blank" rel="noreferrer noopener">mel.eth</a>.



The outcome, so far: DAOs have made it possible to legitimize how decisions are made in a public, trackable manner via on-chain governance tokens, mel.eth told Blockworks.&nbsp;



“DAO technology at the middle, people at the fringes — [this] is a good mental model for how a DAO is different to a company which tends to be more like a republic than a true person to person democracy,” mel.eth said.



The purpose of DAOs is to diffuse power among geographically distant people, but there is no cookie-cutter solution. Centralized exchanges, meanwhile, likewise diffuse trading and transaction power around the world. But key decisions are not in the hands of customers or other stakeholders.&nbsp;



“In my mind, the best way to build a DAO is — the good, the bad, the ugly — you bake it into the process and you learn from it and you hopefully grow the technology,” he said. “If you think of atoms, very simple bacteria cells, mitochondria — it’s all just code. We are massively complex mechanisms, and DAOs are almost an extension of our desire to multiply and propagate and take our initiatives out of our bodies.”



Blockchain technology is now limited to enabling general financial transactions, according to mel.eth. The majority of powerhouse DAOS use the blockchain to enable token-swapping, lending and aggregating — similar to centralized exchanges. But what’s next for DAOs ought to become a real differentiator, he said.&nbsp;



<h2>How do DAOs scale?</h2>



MakerDAO and dYdX recently proposed to switch up to governance by moving into a <a href="https://blockworks.co/news/are-subdaos-the-future-of-dao-governance" target="_blank" rel="noreferrer noopener">subDAO structure</a>.



Unlike hierarchical organizations that require management structures and require coordination costs, the model shift totally eliminates the need for layers of management to function.&nbsp;



“If you allow anyone to create a substructure about anything and integrate a funding mechanism in it, then anyone could build anything — that becomes a fractal organization structure,” Almond said.&nbsp;



So, what’s stopped DAOS from implementing fractal systems, so far? A lack of clarity around how to track what everyone is working on, according to Almond. His proposition solution: impose a meta governance structure on top of individual subDAOs, tracking the organization’s progress as a whole via a consensus-driven sum of its disparate parts.&nbsp;



“At the moment, DAOs are stuck in an 100% direct democracy which is entirely plutocratic…but by creating different structures, it allows you to find out the bits that people are actually good at and can contribute to — the game is about decentralizing that power down the long tails of participants,” Almond said.



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DAOs: FTX Demise Is Win For Decentralization 

David Canellis

The US Securities and Exchange Commission (SEC) has long been a thorn in the side of the crypto ecosystem — and chairman Gary Gensler represents the very tip.



Securities regulations and the token economy don’t exactly mix. SEC watchdogs still map digital assets to the 76-year-old Howey Test with varying success: small-time operators are often stung while major cases tend to end in settlement.



The SEC issued <a href="https://www.sec.gov/files/dlt-framework.pdf" target="_blank" rel="noreferrer noopener">guidance</a> on how it squares digital assets with Howey back in 2019. Gensler has previously stated that most tokens on the market could be securities or investment contracts, bar bitcoin and potentially ether — toeing the line etched by his predecessor Jay Clayton.



&#8220;Nothing about the crypto markets is incompatible with the securities laws,&#8221; says Gensler. But until the SEC builds a clear and novel framework in which to operate, tailored specifically for the crypto space, startups and their legal teams must read between the lines before launching in US jurisdictions.



Many firms nix the US altogether (and New York especially so) to avoid sudden SEC strikes. Crypto exchanges too are also unsure which tokens are indeed securities. This leads to fewer listings on US platforms compared to offshore counterparts operating in comparatively lax jurisdictions.&nbsp;



Clear regulations have rarely felt so important, now, some three weeks after the FTX calamity. But what does Gensler’s SEC career thus far reveal about what’s in store for the digital asset space?



<h3>2021: Gensler pushes for broader SEC powers to police crypto</h3>



President Joe Biden first nominated Gensler to the role of SEC chair in Feb. 2021, a move ratified by the Senate two months later. Years earlier, Gensler was <a href="https://www.youtube.com/watch?v=EH6vE97qIP4" target="_blank" rel="noreferrer noopener">teaching</a> blockchain and crypto topics at the Massachusetts Institute of Technology, with his lectures still available online.



“I would be surprised if 10 years from now [blockchain] isn’t somewhere in the financial system in a meaningful way,” Gensler <a href="https://www.nytimes.com/2018/04/22/technology/gensler-mit-blockchain.html" target="_blank" rel="noreferrer noopener">said</a> in 2018. Gensler previously served as chairman of the Commodity Futures Trading Commission (CFTC) for nearly five years, between 2009 and 2014. 



His resume, combined with a working understanding of blockchains and cryptocurrencies, had some hopeful of a more nuanced SEC.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">If crypto is going to be widely adopted, it needs some rules of the road &amp; a cop on the beat to enforce them. To be clear, I am technology-neutral. What I&#39;m not neutral about: Investor protection. <a href="https://t.co/e6GsSAyXhB">pic.twitter.com/e6GsSAyXhB</a>&mdash; Gary Gensler (@GaryGensler) <a href="https://twitter.com/GaryGensler/status/1422607603708870663?ref_src=twsrc%5Etfw">August 3, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div><figcaption>SEC chair Gary Gensler appeared in a number of short clips detailing the SEC&#8217;s view on crypto last year.</figcaption></figure>



But the veteran regulator still inherited the Ripple Labs case, arguably the most significant SEC action since <a href="https://www.sec.gov/news/press-release/2019-202" target="_blank" rel="noreferrer noopener">Block dot one</a> back in 2019. The matter, which declares XRP a security, was pushed by former chair Clayton some 16 months prior to Gensler’s appointment.



The Ripple case could be headed for summary judgment after nearly two years of legal squabbling, with the outcome set to impact the crypto industry more than the Block dot one settlement.



In fact, there were only a handful of crypto-related SEC actions under Gensler in 2021, including charging promoters of <a href="https://www.sec.gov/news/press-release/2021-172" target="_blank" rel="noreferrer noopener">BitConnect</a>, a fraudulent crypto scheme from 2018, and <a href="https://www.sec.gov/news/press-release/2021-237" target="_blank" rel="noreferrer noopener">operators</a> of a phony investment firm promising outsized returns through digital asset trading.



Gensler’s first year at the SEC is more appropriately surmised as a push for a wider purview. The SEC had historically focused on token-related cases involving fraud or harm to investors, but Gensler made his case to Senator Elizabeth Warren last August for Congressional authority to police crypto exchanges, DeFi protocols and centralized lenders, claiming that many deal in unregistered securities.&nbsp;



Patrick McHenry, top Republican on the House Financial Services Committee, quickly labeled the move a “<a href="https://republicans-financialservices.house.gov/news/documentsingle.aspx?DocumentID=408074">blatant power grab</a>.”



One month later, top US crypto exchange Coinbase announced it would cancel plans to launch a crypto lending product after the SEC threatened legal action.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">7/ Look….we&#39;re committed to following the law. Sometimes the law is unclear. So if the SEC wants to publish guidance, we are also happy to follow that (it&#39;s nice if you actually enforce it evenly across the industry equally btw).&mdash; Brian Armstrong (@brian_armstrong) <a href="https://twitter.com/brian_armstrong/status/1435439676429537281?ref_src=twsrc%5Etfw">September 8, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div><figcaption>Coinbase CEO Brian Armstrong remained defiant in the face of SEC&#8217;s legal threats</figcaption></figure>



Coinbase Lend accounts would’ve offered users up to 4% interest on USDC deposits, but Gensler’s SEC deemed the products securities, a view emphatically denied by Coinbase.&nbsp;



The SEC’s action against Coinbase over Lend only ever amounted to a Well’s Notice — basically written intention to sue if the product was launched — with no case actually filed.



<h3>2022: Coinbase case a Trojan horse for securities suits</h3>



Gensler’s SEC has been more prolific in its crypto cases this year. In January, Gensler <a href="https://www.bloomberg.com/news/articles/2022-01-19/crypto-exchanges-will-face-more-scrutiny-from-sec-gensler-says" target="_blank" rel="noreferrer noopener">directed</a> staff to figure out how to get “these platforms inside the investor protection remit,” amid emerging hints of probes into crypto lending products offered by Celsius, Voyager and Gemini.



One month later, the agency fined crypto lender <a href="https://blockworks.co/news/how-blockfi-went-from-tech-unicorn-to-crypto-burnout" target="_blank" rel="noreferrer noopener">BlockFi</a> $100 million for <a href="https://www.sec.gov/news/press-release/2022-26" target="_blank" rel="noreferrer noopener">failing to register</a> its own retail crypto lending product as a security. The case marks the first of its kind against crypto lenders, fulfilling in part Gensler’s intent outlined in his letter to Warren. 



Gensler again pushed the idea of greater crypto exchange oversight in Apr. 2022. He raised compelling trading platforms to register with the regulator while requiring segregation of asset custody to minimize risk of losses.



“There’s no reason to treat the crypto market differently just because different technology is used,” Gensler said at the <a href="https://www.sec.gov/news/speech/gensler-remarks-crypto-markets-040422" target="_blank" rel="noreferrer noopener">Penn Law Capital Markets Association’s annual conference</a> at the time. “These crypto platforms play roles similar to those of traditional regulated exchanges. Thus, investors should be protected in the same way.”



Of the 1,300 people working at the agency, roughly 30 were dedicated full-time to crypto enforcement. The SEC in May <a href="https://www.sec.gov/news/press-release/2022-78" target="_blank" rel="noreferrer noopener">pledged</a> to bolster its crypto headcount to 50, while Gensler criticized crypto exchanges for offering multiple services — custody, trading and market making — which is frowned upon in traditional markets. 



Reports have indicated that the SEC is investigating failed projects including Terra and the bankrupt crypto lenders, but the agency is yet to disclose enforcement actions against any of them.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">The SEC claims to be a &quot;cop on the beat&quot; for crypto. It should be! But unfortunately, as Jim Chanos puts it, they&#39;re more archaeologists than detectives: they wait until things go wrong &amp; then show up to dig for details. Case in point: ignoring Celsius, but going after BlockFi.&mdash; Jake Chervinsky (@jchervinsky) <a href="https://twitter.com/jchervinsky/status/1562788909238480896?ref_src=twsrc%5Etfw">August 25, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div><figcaption>SEC cases against big name failed projects could be on the horizon</figcaption></figure>



Instead, the SEC has brought seven cases related to cryptocurrency in 2022, aside from BlockFi. Some are on brand for the SEC and cover overt fraud, such as a $300 million <a href="https://www.sec.gov/news/press-release/2022-134" target="_blank" rel="noreferrer noopener">pyramid scheme</a> and a dodgy profit-sharing <a href="https://www.sec.gov/news/press-release/2022-37" target="_blank" rel="noreferrer noopener">scam</a> that reaped investments worth $124 million.



There’s also the charges against apex influencer <a href="https://www.sec.gov/news/press-release/2022-183" target="_blank" rel="noreferrer noopener">Kim Kardashian</a> for touting SafeMoon clone EthereumMax to her Instagram followers, echoing cases against Steven Seagal, Floyd Mayweather and DJ Khalid in years past. Both case genres are worthy pursuits.



The SEC’s action against a former Coinbase product manager over <a href="https://blockworks.co/news/ex-coinbase-employee-accused-of-insider-trading-pleads-not-guilty" target="_blank" rel="noreferrer noopener">alleged insider trading</a> appears more significant. For one, it’s a crypto exchange matter, which Gensler flagged intent to police. But the case could ultimately deem a string of tokens as securities, providing a springboard for future SEC enforcement — especially if the Ripple Labs case ends in anticlimactic settlement.



It’s this kind of regulation by enforcement that has much of the crypto industry at arms with Gensler’s SEC, with neither side appearing eager to meet in the middle any time soon.



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SEC Under Gensler: Crypto Power Grab or Effective Protection?

Ben Turtel

When most people think of NFTs, they think of overpriced art, digital collectibles and very expensive pictures of cartoon monkeys.



But NFTs can enable all sorts of practical applications, from securing loans to AI-powered interior design.&nbsp;They do this by revolutionizing how people — not Big Tech — benefit from their data. Here’s why:



<ul><li>Everything you care about is non-fungible.</li><li>Digital representations of non-fungible things are useful (and common).</li><li>Decentralizing these representations makes them vastly more useful to the end user.</li></ul>



<h3>Everything you care about is non-fungible</h3>



Something is fungible if it is interchangeable with and indistinguishable from other items of the same type. A fungible item can be replaced by another identical item without any loss of value, like trading a dollar for another dollar.&nbsp;&nbsp;



Fungible assets, like money or gasoline, while valuable, are typically only important to the extent they help us acquire something non-fungible (belongings, experiences).&nbsp;



Something non-fungible, on the other hand, is unique.



<figure class="wp-block-image size-large"><img loading="lazy" width="1024" height="501" src="https://cms.blockworks.co/wp-content/uploads/2022/11/Screen-Shot-2022-11-25-at-14.58.35-1024x501.png" alt="" class="wp-image-39975" srcset="https://cms.blockworks.co/wp-content/uploads/2022/11/Screen-Shot-2022-11-25-at-14.58.35-1024x501.png 1024w, https://cms.blockworks.co/wp-content/uploads/2022/11/Screen-Shot-2022-11-25-at-14.58.35-300x147.png 300w, https://cms.blockworks.co/wp-content/uploads/2022/11/Screen-Shot-2022-11-25-at-14.58.35-768x376.png 768w, https://cms.blockworks.co/wp-content/uploads/2022/11/Screen-Shot-2022-11-25-at-14.58.35-1536x751.png 1536w, https://cms.blockworks.co/wp-content/uploads/2022/11/Screen-Shot-2022-11-25-at-14.58.35-2048x1002.png 2048w, https://cms.blockworks.co/wp-content/uploads/2022/11/Screen-Shot-2022-11-25-at-14.58.35-428x209.png 428w, https://cms.blockworks.co/wp-content/uploads/2022/11/Screen-Shot-2022-11-25-at-14.58.35-470x230.png 470w, https://cms.blockworks.co/wp-content/uploads/2022/11/Screen-Shot-2022-11-25-at-14.58.35-389x190.png 389w, https://cms.blockworks.co/wp-content/uploads/2022/11/Screen-Shot-2022-11-25-at-14.58.35-80x39.png 80w, https://cms.blockworks.co/wp-content/uploads/2022/11/Screen-Shot-2022-11-25-at-14.58.35-50x24.png 50w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Bored Apes are cryptographically unique (source: OpenSea)</figcaption></figure>



This includes your belongings, such as your home, your car, and even your cup of coffee. It includes your relationships, your body, and your preferences. Experiences, credentials, memories, and reputation are all non-fungible. Each is unique and cannot be replaced by an identical equivalent.



Even things that start out as fungible can become non-fungible. Cars of the same make, model, and year might seem fungible when they’re brand new, but if you’re buying a used car, you definitely want to evaluate the specific vehicle’s condition. You might not care which cup of coffee the barista hands you out of the same pot, but you probably don’t want to trade after the first sip.



<h3>Digital representations of non-fungible things are useful (and common)</h3>



Retailers keep records of their customers and what they buy. This helps them support buyers when something breaks, or determine what warranties are applicable. Interior designers and architects use blueprints to propose solutions within the limitations of a space. Doctors and dentists use health records to treat patients.&nbsp;



Many tech-enabled businesses are built on digital representations of non-fungible things. Spotify, YouTube, Netflix, and GoodReads model users’ tastes to recommend content. 



<figure class="wp-block-image size-large"><img loading="lazy" width="1024" height="570" src="https://cms.blockworks.co/wp-content/uploads/2022/11/platformsnft-1024x570.jpg" alt="" class="wp-image-39985" srcset="https://cms.blockworks.co/wp-content/uploads/2022/11/platformsnft-1024x570.jpg 1024w, https://cms.blockworks.co/wp-content/uploads/2022/11/platformsnft-300x167.jpg 300w, https://cms.blockworks.co/wp-content/uploads/2022/11/platformsnft-768x428.jpg 768w, https://cms.blockworks.co/wp-content/uploads/2022/11/platformsnft-1536x855.jpg 1536w, https://cms.blockworks.co/wp-content/uploads/2022/11/platformsnft-428x238.jpg 428w, https://cms.blockworks.co/wp-content/uploads/2022/11/platformsnft-470x261.jpg 470w, https://cms.blockworks.co/wp-content/uploads/2022/11/platformsnft-389x217.jpg 389w, https://cms.blockworks.co/wp-content/uploads/2022/11/platformsnft-80x45.jpg 80w, https://cms.blockworks.co/wp-content/uploads/2022/11/platformsnft-50x28.jpg 50w, https://cms.blockworks.co/wp-content/uploads/2022/11/platformsnft.jpg 1600w" sizes="(max-width: 1024px) 100vw, 1024px" /></figure>



Zillow and AirBnB use real estate data to help buyers find homes and approximate prices. Facebook and Twitter map relationships to populate feeds. TicketMaster and StubHub digitally represent specific seats for unique experiences.



These digital representations allow platforms to provide services based on user data, but they don&#8217;t allow the user to leverage that data directly. This optimizes value for the platform, not the end user. 



For example, I can’t use my GoodReads or YouTube history to automatically follow all my favorite creators on Twitter. I can’t use my Spotify taste model to find local events on TicketMaster. I can’t use blueprints from my home to find fitting furniture on Wayfair.



<figure class="wp-block-image size-large"><img loading="lazy" width="1024" height="625" src="https://cms.blockworks.co/wp-content/uploads/2022/11/wallsnft-1024x625.jpg" alt="" class="wp-image-39986" srcset="https://cms.blockworks.co/wp-content/uploads/2022/11/wallsnft-1024x625.jpg 1024w, https://cms.blockworks.co/wp-content/uploads/2022/11/wallsnft-300x183.jpg 300w, https://cms.blockworks.co/wp-content/uploads/2022/11/wallsnft-768x469.jpg 768w, https://cms.blockworks.co/wp-content/uploads/2022/11/wallsnft-1536x938.jpg 1536w, https://cms.blockworks.co/wp-content/uploads/2022/11/wallsnft-421x257.jpg 421w, https://cms.blockworks.co/wp-content/uploads/2022/11/wallsnft-427x261.jpg 427w, https://cms.blockworks.co/wp-content/uploads/2022/11/wallsnft-359x219.jpg 359w, https://cms.blockworks.co/wp-content/uploads/2022/11/wallsnft-80x49.jpg 80w, https://cms.blockworks.co/wp-content/uploads/2022/11/wallsnft-50x31.jpg 50w, https://cms.blockworks.co/wp-content/uploads/2022/11/wallsnft.jpg 1600w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Illustration by <a href="https://twitter.com/TheGhostDesignr" target="_blank" rel="noreferrer noopener">@TheGhostDesignr</a></figcaption></figure>



Even if users could access this data directly, it wouldn’t be very useful, because these representations aren’t standardized or portable — they’re different from provider to provider, and incompatible with other services. In most cases, the end user has no control over who or what has access.



For these digital representations to achieve their full potential, users need ownership and interoperability.&nbsp;&nbsp;



<h3>Decentralizing representations makes them vastly more useful to end users</h3>



Decentralization gives users control over their data, which creates ownership. It removes barriers to data access imposed by centralized platforms, which allows for interoperability. These properties unlock new services and capabilities for end users, upgrade the utility of the underlying non-fungible item, and enable entire ecosystems of data-driven businesses.&nbsp;



NFTs, or non-fungible tokens, are uniquely identifiable blockchain assets used to certify ownership and authenticity. NFTs can denote off-chain assets, like artwork, memberships, or actual land deeds. 



Stored on decentralized blockchains instead of centralized databases, no one controls an NFT except its owner. Although most NFTs today are publicly visible, technologies such as <a href="https://scrt.network/about/secret-nfts" target="_blank" rel="noreferrer noopener">secret NFTs</a> and <a href="https://ethereum.org/en/zero-knowledge-proofs/" target="_blank" rel="noreferrer noopener">Zero-Knowledge Proofs</a> are quickly giving owners more control over who can access their data.



Portability and ownership enable many new use cases. For example, a single NFT representing my home could contain its blueprint, location, purchase history, up-to-date photos, and other metadata. That data could be plugged into a variety of applications. I could use it to find furniture that fits in each room, to calculate property taxes, to rent my home on marketplaces, or to secure a loan.



<figure class="wp-block-image size-large"><img loading="lazy" width="1024" height="630" src="https://cms.blockworks.co/wp-content/uploads/2022/11/housenft-1024x630.jpg" alt="" class="wp-image-39987" srcset="https://cms.blockworks.co/wp-content/uploads/2022/11/housenft-1024x630.jpg 1024w, https://cms.blockworks.co/wp-content/uploads/2022/11/housenft-300x185.jpg 300w, https://cms.blockworks.co/wp-content/uploads/2022/11/housenft-768x472.jpg 768w, https://cms.blockworks.co/wp-content/uploads/2022/11/housenft-1536x945.jpg 1536w, https://cms.blockworks.co/wp-content/uploads/2022/11/housenft-418x257.jpg 418w, https://cms.blockworks.co/wp-content/uploads/2022/11/housenft-424x261.jpg 424w, https://cms.blockworks.co/wp-content/uploads/2022/11/housenft-356x219.jpg 356w, https://cms.blockworks.co/wp-content/uploads/2022/11/housenft-80x49.jpg 80w, https://cms.blockworks.co/wp-content/uploads/2022/11/housenft-50x31.jpg 50w, https://cms.blockworks.co/wp-content/uploads/2022/11/housenft.jpg 1600w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Illustration by <a href="https://twitter.com/TheGhostDesignr" target="_blank" rel="noreferrer noopener">@TheGhostDesignr</a></figcaption></figure>



NFTs can also be combined to enable use cases that are impossible when data is siloed. Representations of our style and physical form can personalize shopping experiences. NFTs of our calendars, tastes, locations, and relationships can be combined to auto-plan personalized events for every group, or schedule dates. 



Data about belongings can be used to surface qualified services and add-ons, like insurance or integrations. Credentials, schedules, and interests can be used to identify professional or educational opportunities across platforms.



User-owned data also unlocks new applications of AI. AI needs to process user data to generate user-specific solutions. For example, <a href="https://portrait.vana.com/" target="_blank" rel="noreferrer noopener">Vana</a> requires a user to upload multiple photos of their face to generate a gallery of artistic portraits &#8211; without access to that data, it can’t generate relevant portraits.



<figure class="wp-block-image size-large"><img loading="lazy" width="1024" height="256" src="https://cms.blockworks.co/wp-content/uploads/2022/11/aifacesnft-1024x256.jpg" alt="" class="wp-image-39988" srcset="https://cms.blockworks.co/wp-content/uploads/2022/11/aifacesnft-1024x256.jpg 1024w, https://cms.blockworks.co/wp-content/uploads/2022/11/aifacesnft-300x75.jpg 300w, https://cms.blockworks.co/wp-content/uploads/2022/11/aifacesnft-768x192.jpg 768w, https://cms.blockworks.co/wp-content/uploads/2022/11/aifacesnft-1536x384.jpg 1536w, https://cms.blockworks.co/wp-content/uploads/2022/11/aifacesnft-428x107.jpg 428w, https://cms.blockworks.co/wp-content/uploads/2022/11/aifacesnft-470x118.jpg 470w, https://cms.blockworks.co/wp-content/uploads/2022/11/aifacesnft-389x97.jpg 389w, https://cms.blockworks.co/wp-content/uploads/2022/11/aifacesnft-80x20.jpg 80w, https://cms.blockworks.co/wp-content/uploads/2022/11/aifacesnft-50x13.jpg 50w, https://cms.blockworks.co/wp-content/uploads/2022/11/aifacesnft.jpg 1600w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Op-ed author Ben Turtel goes through Vana AI</figcaption></figure>



As AI becomes more powerful, it will require standardized user data to generate unique solutions to unique problems. Decentralizing this data incentivizes AI-enabled startups to build highly-tailored solutions. There are many potential use cases:



<ul><li>Interior design proposals based on the blueprint of your home, taste, and budget (including highly-custom AI-generated art!).</li><li>Educational content tailored to your knowledge, goals, and learning style.</li><li>Personalized recipes based on your health, tastes, and goals.</li><li>Wardrobe suggestions tailored to your size and style.</li><li>Personal AI assistants who know everything about you, your schedule, your relationships, and have full access to all of your data, but share none of it with anyone.</li></ul>



Startups are already building the foundations for many of these use cases:



<figure class="wp-block-image size-large"><img loading="lazy" width="1024" height="570" src="https://cms.blockworks.co/wp-content/uploads/2022/11/protocolnft-1024x570.jpg" alt="" class="wp-image-39989" srcset="https://cms.blockworks.co/wp-content/uploads/2022/11/protocolnft-1024x570.jpg 1024w, https://cms.blockworks.co/wp-content/uploads/2022/11/protocolnft-300x167.jpg 300w, https://cms.blockworks.co/wp-content/uploads/2022/11/protocolnft-768x428.jpg 768w, https://cms.blockworks.co/wp-content/uploads/2022/11/protocolnft-1536x855.jpg 1536w, https://cms.blockworks.co/wp-content/uploads/2022/11/protocolnft-428x238.jpg 428w, https://cms.blockworks.co/wp-content/uploads/2022/11/protocolnft-470x261.jpg 470w, https://cms.blockworks.co/wp-content/uploads/2022/11/protocolnft-389x217.jpg 389w, https://cms.blockworks.co/wp-content/uploads/2022/11/protocolnft-80x45.jpg 80w, https://cms.blockworks.co/wp-content/uploads/2022/11/protocolnft-50x28.jpg 50w, https://cms.blockworks.co/wp-content/uploads/2022/11/protocolnft.jpg 1600w" sizes="(max-width: 1024px) 100vw, 1024px" /></figure>



Much of this will be incredibly positive, although there may be drawbacks — we’ve already seen the echo chambers that can result from highly personalized content feeds. Advances in both technology and regulatory frameworks will be needed to ensure data isn’t accessed and copied without the NFT owner’s permission. 



However, it’s worth keeping in mind that all of this data is already out there — it’s just currently controlled by platforms and service providers, instead of end users.



<h3>We&#8217;re just getting started</h3>



Everything you care about is non-fungible. Companies have been using digital representations of your non-fungible assets for years to pad their bottom lines. These centralized players lack both the incentives and the coordination to open up these representations to other data-driven systems.



Decentralization makes data vastly more useful to the end user. NFTs put data back in the hands of individuals, and incentivize the development of all kinds of new capabilities, by making digital representations more portable and accessible.



JPEGs are a proof of concept. The best is yet to come.



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Why NFTs Will Upgrade Everything

Dan Smith

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THORChain Savers Vaults: A Decentralized Earn Program

Permissionless is the brainchild of Blockworks and Bankless. Over 5,500 people attended the inaugural event in 2022, making Permissionless the world’s largest DeFi conference.&nbsp;



What sets Permissionless apart? It’s a crypto native’s paradise, crafted specifically for both builders and investors who are dedicated to scaling the industry.&nbsp;



Permissionless is headed to Austin in 2023, and you know what they say… Everything is bigger in Texas.&nbsp;



Permissionless 2023 will feature the biggest names in Web3, a gargantuan exposition hall filled with the top brands in the space, an awe-inspiring NFT Gallery, inclusive, community-focused parties and events, metaverse experiences, and so much more.



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<h2>Why Sponsor Permissionless 2023?</h2>
If you’re serious about crypto, you have to be at Permissionless. Permissionless brings together DeFi builders, DAO participants, protocol developers, crypto companies, funds and institutions, and more. It’s a true crypto-native’s paradise, where you’ll have the opportunity to showcase your offerings and form lasting connections with the community.
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