Base Protocol

Jack Kubinec

Solana’s validators are a bit like baristas flipping around an iPad — they’re nicer to you when you include a tip. And as traders keep cramming into Solana’s metaphorical coffee shop, the validator tip jar looks increasingly stuffed with money.&nbsp;



Validators are a group of 1,728 computers that run software to produce blocks on the Solana blockchain. Coinbase Cloud <a href="https://www.jito.network/stakenet/">is</a> a prominent Solana validator, as is Google Cloud. One revenue stream that validators earn is called maximal extractible value (MEV), which refers partly to tips paid by searchers to be included in Solana blocks.&nbsp;



This MEV revenue has been growing quickly since mid-March. Notably, Solana validators are earning more from MEV overall than Ethereum validators, <a href="https://app.blockworksresearch.com/analytics/l1?interval=daily&amp;dashboard=l1-sector-comparison-financial">according</a> to Blockworks Research. Just a few months ago, Solana’s MEV revenue was a rounding error compared to Ethereum’s.



Read more: <a href="https://blockworks.co/news/draft-mev-dydx-chorus-one">MEV doesn’t have to be a zero-sum game, research suggests</a>



Broadly defined, <a href="https://blockworks.co/tag/mev">MEV</a> refers to the largest amount of value that validators can create by packing transactions into blockchain blocks. Blockworks Research’s dashboard suggests Solana validators raked in a hair under $7 million from MEV last week.



At the moment, <a href="https://blockworks.co/tag/solana">Solana</a> MEV is almost entirely the product of a protocol named Jito. Jito offers a fork of the Solana validator called Jito-Solana, and 78% of Solana’s validators use this client, according to Jito’s website. The client lets searchers, or traders, arrange transactions in bundles. Searchers can include a tip to try getting validators to send their particular bundle to the blockchain.



Whether all this is good for Solana is something of a matter of perspective. Some forms of MEV can be predatory. Jito recently suspended its mempool, a kind of waiting area for transactions, due to “sandwich attacks” that let opportunists create MEV by trading right before and after a transaction to manipulate the price and take profit from the trader.&nbsp;



Read more: <a href="https://blockworks.co/news/jito-labs-suspends-mempool-functionality">Jito Labs ends mempool functionality citing impact on Solana users</a>



In Jito’s <a href="https://jito-labs.gitbook.io/mev">telling</a>, the protocol is making Solana more efficient while also minimizing negative forms of MEV like sandwich attacking. If it can pull that off, Solana could see a lot of benefit.&nbsp;



Continued long-term growth in Solana’s MEV would likely imply that less spam is being included in blocks, and Solana would have more available blockspace, Blockworks Research analyst Hayden Tsutsui said. In a best case scenario, more blockspace could free up room for more on-chain activity, which could also bring along more liquidity, Tsutsui said.



But it bears mentioning that as things currently stand, Solana is still staggering under a mountain of spam. More than 60% of non-vote transactions fail on Solana, according to Blockworks Research, largely due to bots <a href="https://blockworks.co/news/solana-network-congestion-transaction-volume">taking advantage of Solana’s cheap fees</a> by inundating the network in hopes of getting transactions to land.&nbsp;



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MEV collected by validators is now higher on Solana than on Ethereum

Ben Strack

Bitcoin is no longer merely that taboo thing your techie uncle awkwardly brings up at family gatherings.



Well, maybe the asset is only that for you —&nbsp;but if so, you’re in the minority at this point.&nbsp;



Whether you believe in bitcoin or not, it has increasingly perforated traditional finance in recent years and months. Institutions can gain exposure to crypto through a regulated liquid derivatives market, and more recently via bitcoin ETFs.



While some traditional finance bigwigs still criticize the asset (at least publicly), large financial companies are waking up to the potential of BTC, as well as <a href="https://blockworks.co/news/blackrock-tokenization-investment">blockchain tech more broadly</a>.



“Before, people had to buy coins,” said Lucas Kiely, chief investment officer at Yield App. “Now they can trade on [traditional finance] markets which means big market players can get involved.”



The increased market participation around bitcoin is one reason the asset has become more correlated to global markets — a fact that could spur investor concern in an environment like this one.&nbsp;



That’s because a range of macro factors are set to continue tussling with post-halving bitcoin price rally expectations in the coming months, industry watchers say.



Bitcoin halvings — when per-block rewards for mining bitcoin are reduced every four or so years — have historically helped catalyze crypto bull markets.&nbsp;



Read more: <a href="https://blockworks.co/news/post-bitcoin-halving-price-predictions">With halving just hours away, bitcoin price predictions proliferate</a>&nbsp;



Such events prior to the latest one last month have propelled BTC to new highs between 12 months and 18 months after the halving.



Before then, the macro environment this time around may push BTC downward.



<h2 class="wp-block-heading">Macro headwinds lingering</h2>



Though bitcoin has rebounded from its recent stint below $57,000, “investors should be wary of being lulled into a false sense of security,” Kiely noted.



The asset’s price hovered around $63,000 at 4 pm ET Tuesday — down 9% from a month ago, but up nearly 7% in the last five days.&nbsp;&nbsp;



“The macro headwinds that pushed BTC south have not eased,” he said in an email. “If anything, global political uncertainty is only more pronounced, while inflation in the US is still not under control.”



K33 research analysts Anders Helseth and Vetle Lunde said in a Tuesday note that global macro conditions have “re-emerged to become a relevant market mover.” Bitcoin’s 30-day correlation to the S&amp;P 500 has reached a seven-month high, they added. “BTC first followed the market down on increased interest rate expectations on Wednesday, before following the markets up on decreased interest rate expectations on Friday.



The analysts are referring to the “higher for longer” posture from the Federal Reserve last Wednesday, which held interest rates at their current level.&nbsp;



Fed Chair Jerome Powell called the path forward “uncertain,” noting that central bankers will need to see more evidence that inflation is easing before cutting rates.



Two days later, bitcoin’s price rose on news that the economy added 175,000 positions in April — a number closer to the pre-pandemic monthly average of 183,000 job gains.



Read more: <a href="https://blockworks.co/news/bitcoin-back-above-60k">Bitcoin is back above $60K, stocks rally on cooler jobs data</a>



The crypto market has been “consumed” in recent months by the first US spot bitcoin ETF launches and the Bitcoin halving, according to LMAX Group market strategist Joel Kruger.&nbsp;&nbsp;&nbsp;



“As these risks have played out and the market has settled down, attention is shifting to the other side of the equation where there has been more pressing volatility risk around the state of the US dollar, yield differentials and the outlook for fiat monetary policy,” Kruger told Blockworks.&nbsp;



Market participants previously expected the Fed to cut rates by 0.75% or 1% in 2024, Finequia International research analyst Matteo Greco said in a research note.&nbsp;



After Powell’s comments last week, many now anticipate lower cuts amounting to 0.25% or 0.50% — and only if inflation doesn’t worsen.



<h2 class="wp-block-heading">How far down before a possible rally?</h2>



Outside of monetary policy, the war in the Middle East rages on, and the US domestic situation is “increasingly volatile” ahead of the November presidential election, Kiely said.



Oh yeah, and the Securities and Exchange Commission appears to be continuing its regulation-by-enforcement approach, with <a href="https://blockworks.co/news/robinhood-wells-notice-sec">Robinhood most recently receiving a Wells notice</a>.&nbsp;



In other words, tailwinds for bitcoin are few and far between right now, Kiely added.



“Best case scenario, we will see a very boring summer,” he explained. “Worst case scenario, bitcoin will lose some key support and take a long journey back down to recent lows.”



Such a retreat could mean BTC sinking to between $50,000 and $55,000, Kiely predicts.



Aside from central bank policy developments, bitcoin investors should monitor the pace of traditional finance adoption of bitcoin ETFs, Kruger noted. Some institutions and corporations are also considering adding bitcoin to their balance sheet.&nbsp;



“We believe any setbacks should be exceptionally well supported into the $50,000 area, with any dips below to be short-lived,” he said. “As far as the topside goes, we wouldn’t at all be surprised to see bitcoin making fresh record highs towards and through the next major barrier at $100,000.”



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Macro headwinds could spur a ‘boring’ bitcoin summer — or something worse

Casey Wagner

Democrats and Republicans clashed over how the Securities and Exchange Commission is handling crypto enforcement actions during a House Financial Services subcommittee hearing Tuesday.&nbsp;



Capital Markets Subcommittee Chair Ann Wagner, R-Mo., kicked off the hearing titled “SEC enforcement: balancing deterrence with due process,” with a jab at the securities regulator, mentioning the recent sanctions the SEC received in its case against Debt Box.&nbsp;



“Public trust in the SEC will only decline when its employees are sanctioned and forced to resign for their quote gross abuse of power, as they were in the recent case against the crypto platform known as Debt Box,” Wagner said.&nbsp;



Read more: <a href="https://blockworks.co/news/secs-gensler-crypto-disclosures-for-investors">SEC’s Gensler calls for more crypto disclosures for investors</a>



Rep. Brad Sherman, D-Cali., was quick to counter Wagner’s point, arguing that the agency <a href="https://blockworks.co/news/sec-overreach-failure-debt-box">handled the misconduct appropriately</a>.&nbsp;



“There were two SEC lawyers who acted wrongfully in the Debt Box case,” Sherman said. “They&#8217;ve been fired, and I think that sets an example that will assure that other <a href="https://blockworks.co/tag/sec">SEC</a> lawyers do not act similarly.”&nbsp;



Rep. Maxine Waters, D-Cali., a typical vocal opponent of the crypto industry alongside Sherman, took a partisan stance, asserting that her side of the aisle is the only one looking out for constituents.&nbsp;



“My message to the crypto industry and everyone else: Democrats will always press for compliance, investor protection and market integrity,” Waters said.&nbsp;



The hearing comes a day after the House Committee on Rules moved to advance a joint <a href="https://www.congress.gov/bill/118th-congress/house-joint-resolution/109/all-actions">resolution</a> that would overturn the SEC’s Staff Accounting Bill (SAB) 121, a controversial advisory that states <a href="https://blockworks.co/news/house-committee-resolution-against-sab121">digital asset custodians should report a liability</a> and “corresponding assets” on their balance sheets for all cryptocurrencies under custody.



Committee members Mike Flood, R-Neb., and Wiley Nickel, D-N.C., introduced the resolution earlier this month alongside a similar measure in the Senate spearheaded by Cynthia Lummis, R-Wyom. The legislators cited a report from the Government Accountability Office, which stated in an October 2023 <a href="https://www.gao.gov/products/b-334540?utm_medium=social&amp;utm_source=twitter&amp;utm_campaign=usgao">report</a> that SAB 121 should have been issued as a rule under the official process.&nbsp;



“It is unfortunate that the SEC would attempt to circumvent the rulemaking process while falsely claiming that SAB 121 is simply non-binding staff-level guidance,” Flood said Monday during testimony before the Rules Committee.&nbsp;



The resolution heads to the House floor Wednesday for debate. Waters argued Tuesday that this “attempt to kill SAB 121” is unnecessary and prevents the SEC from carrying out its rightful duties.



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Democrats, Republicans clash over SEC role in House hearing 

Ryan Whitehead

Forget the halving. Don’t mention ETFs. What then is arguably the most important narrative in crypto?



Memecoins.



Yes, that often-cringeworthy menagerie of anime, animalia and animations collectively are the primary on-ramp into crypto for new users. People are always asking, “Where are the next billion users going to come from?”&nbsp;



The answer is pretty clear — the only remaining question is whether the dog will be wearing a hat or not.



Before fans of self-custody, real-world assets and DeFi (and I’m certainly among them) turn up their noses in disdain, let’s consider some of the very valid reasons for the persistent popularity of memecoins and their kissing cousin, airdrops.



First up is entertainment. People love to be entertained, and they don’t mind spending money on it. The global entertainment and media market is valued at well over $2 trillion, according to <a href="https://www.pwc.com/gx/en/industries/tmt/media/outlook/insights-and-perspectives.html">analysts from PwC</a>, on par with the overall market cap for all cryptocurrencies. What’s the utility of $DOGE, $PEPE or $BONK, compared to governance tokens or stablecoins? Entertainment in itself is a utility.



People are also attracted to risk. The global casino industry alone is worth <a href="https://www.businesswire.com/news/home/20230927456720/en/Global-Casinos-Strategic-Business-Report-2023-Market-to-Reach-224.1-Billion-by-2030-from-157.5-Billion-in-2022---Machines-Segment-to-Account-for-Almost-Half-the-Market-Value---ResearchAndMarkets.com#:~:text=The%20global%20casinos%20market%2C%20valued,period%20from%202022%20to%202030.">more than $150 billion</a> and is growing, according to a ResearchAndMarkets.com report. That doesn’t include sports betting, lotteries or all the other ways that people put down relatively small amounts of money in hopes of winning relatively large amounts of money. (In investment lingo, “asymmetric opportunities.”) Obviously, buying a memecoin carries a lot of this type of risk, but putting in time, resources and energy into a potential airdrop event — where the amount and timing of the reward is uncertain — is an experience undeniably tinged with the thrill of the gamble as well.



Read more from our opinion section: <a href="https://blockworks.co/news/memecoin-mania-learn-risk-management">Memecoin mania can teach us something</a>



Organizations and builders support memecoins and airdrops because they can bring liquidity to an ecosystem. They also help capture slices of the exceedingly precious &#8220;attention economy,&#8221; whose value economists <a href="https://deliverypdf.ssrn.com/delivery.php?ID=732088024087092092125077080120102089026050064018017000018003123126008094069005107120099022017062023057007117019122019087082089051090012016041006112073127119112008068012087073015082122027123083074026007001029122022001026119004091004109068071072100031&amp;EXT=pdf&amp;INDEX=TRUE">estimate</a> to be in the “trillions of dollars.” It can be argued that the $BONK airdrop and community campaign were the lighter and lighter fluid that reignited the Solana ecosystem. Or just look at how <a href="https://blockworks.co/news/bitcoin-halving-runes-launch">Ordinals and now Runes</a> have turned Bitcoin into a blistering hot network, as opposed to a passive digital-gold-like store of value.



In my position as head of marketing for Moonbeam (which integrates the Ethereum and Polkadot ecosystems), I’ve had a front-row seat for the recent launch of a memecoin on our network and the concomitant entertainment, risk and attention.



Based on my experience, I can attest that admittedly silly memecoins can have seriously positive effects on a network level. New users are attracted by the entertainment value and potential for airdrops. Cross-chain synergies are fostered with other ecosystems where the memecoin has also been launched. And networks that are able to secure a supply of the memecoin can direct those resources to targeted growth areas in strategic areas, in our case, DeFi, gaming, real-world assets, DePIN, AI and more.



But while memecoins are sweet and all, here&#8217;s the bitter pill: Besides memecoins, we in crypto have largely created a very bad, very difficult system from a user experience perspective.



Gambling and lotteries comprise the dark side of the traditional financial system, but at least it’s an easy way of participating in the financial system. Memecoins play a similar role in crypto and DeFi — they’re the best on-ramp we’ve got.&nbsp;



If buying $DOGE or the latest Solana microcap leads someone to exploring the broader crypto ecosystem, then it’s a win for everyone who believes in the democratizing potential of blockchain technology and governance.



But if the rest of the crypto ecosystem provides such a poor user experience — or is not perceived as useful by the new memecoin holders — then this year’s nascent bull run will turn out to be another playing-card structure, doomed again to collapse when the bubble pops or macroeconomic conditions next convulse.



Memecoins are hot again — for the moment. It’s now time for &#8220;serious&#8221; builders to demonstrate real value for new users and capitalize on the attention that dog coins have fetched, because there’s no guarantee they’ll last through the next cycle.



<hr class="wp-block-separator has-alpha-channel-opacity"/>


<div class="wp-block-post-author-biography">Ryan Whitehead is the Moonbeam Foundation’s Global Head of Marketing, where he owns branding, messaging and outreach. Moonbeam is a major EVM-compatible parachain integrating Polkadot with the Ethereum ecosystem. Prior to Moonbeam, Ryan was Director of Product Marketing &#8211; Ecosystems at Coinbase. He’s also held senior positions at Facebook and Microsoft. He’s a graduate of Stanford University.
</div>


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The most important trend in crypto? It’s always been memecoins

Katherine Ross

Securities and Exchange Commission Chairman Gary Gensler says that the agency is just a “cop on the beat” when it comes to policing the crypto industry.&nbsp;



Gensler spoke to CNBC a day after Robinhood <a href="https://blockworks.co/news/robinhood-wells-notice-sec">disclosed</a> that it received a Wells notice from the US securities regulator.&nbsp;



“We have a really important responsibility as being a cop on the beat and ensuring that people that are asking you to put your money into buy or sell securities are following the law so you get disclosures, that you get certain protections,” Gensler <a href="https://www.cnbc.com/2024/05/07/cnbc-exclusive-cnbc-transcript-sec-chair-gary-gensler-speaks-with-cnbcs-andrew-ross-sorkin-on-squawk-box-today.html">said</a> when asked about the notice.&nbsp;



The crypto industry, Gensler argued, comprises an array of digital assets that constitute securities “under the law of the land, as interpreted” by the Supreme Court. He also said that he doesn’t believe that investors are receiving all of the “information” in crypto.&nbsp;



Read more: <a href="https://blockworks.co/news/consensys-sec-lawsuit-debate">Is the SEC weighing a lawsuit against Consensys?</a>



“Everybody’s asking about what’s the earnings release and how many companies are beating earnings or falling behind and so forth. Where’s the disclosures from these crypto tokens similar to these season earnings releases?” Gensler asked, comparing tokens to publicly traded stocks.



Gensler added that he “genuinely think[s] they’re not getting that in crypto. And if they are a crypto security, it’s required and needed.”



He didn’t directly address the allegations that Consensys made against the <a href="https://blockworks.co/tag/sec">SEC</a> in a lawsuit filed last month, and also avoided addressing the alleged investigation around ether, Ethereum’s native token. 



Read more: <a href="https://blockworks.co/news/empire-newsletter-sec-issues-robinhood-wells-notice">Empire Newsletter: A busy crypto lawsuit season looms</a>



When asked Tuesday, <a href="https://blockworks.co/tag/gary-gensler">Gensler</a> just said that the “intermediaries in the center of this rather centralized market generally are conflicted and doing things we would never allow the New York Stock Exchange to do. The New York Stock Exchange is not allowed to trade against the investors.”



In its lawsuit, <a href="https://blockworks.co/news/consensys-files-lawsuit-against-sec">Consensys claimed that the SEC served</a> the company with subpoenas regarding ETH. The lawsuit confirmed <a href="https://fortune.com/crypto/2024/03/20/sec-gary-gensler-ethereum-security-commodity-crypto-foundation/">reports</a> that the SEC was looking into the status of ETH.



Former employees of the <a href="https://blockworks.co/news/sec-hinman-eth-not-security">SEC had previously agreed</a> that ETH wasn’t a security. The <a href="https://blockworks.co/news/cftc-chair-says-ether-is-a-commodity-hints-that-sec-disagrees">Commodities and Futures Trading Commission has labeled ETH</a> a commodity.&nbsp;



Gensler also added that the ether ETFs are sitting “in front” of the five-member commission now.&nbsp;



The Commission will take up the filings “at the appropriate time,” he said.



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SEC’s Gensler calls for more crypto disclosures for investors

The advent of bitcoin ETFs came only after a legal victory over the Securities and Exchange Commission.



A similar action could be what it takes to get US spot ether ETFs over the finish line, law professionals told Blockworks.



And let’s not forget Consensys’ lawsuit against the US securities regulator, which they added could play a role in helping sort out the ether ETF question.



<h2 class="wp-block-heading">Bitcoin ETFs born from a legal victory</h2>



In a world where the SEC and crypto companies constantly appear to be at odds, the courts have been able to offer some clarity.&nbsp;



<a href="https://blockworks.co/news/grayscale-sec-spot-bitcoin-etf">Judges in the DC Circuit Court of Appeals ruled</a> last August that the SEC’s decision to deny the conversion of the Grayscale Bitcoin Trust (GBTC) to an ETF, but allow bitcoin futures ETFs, was “arbitrary and capricious.”



SEC Chairman Gary Gensler said in a January <a href="https://www.sec.gov/news/statement/gensler-statement-spot-bitcoin-011023">statement</a> that approving bitcoin ETFs was “the most sustainable path forward” given that court decision. He added that the regulator “acts within the law and how the courts interpret the law.”



Enter: proposed funds that would directly hold ETH — the second-biggest crypto asset by market capitalization.&nbsp;



Investment firm VanEck first filed for a spot ether product in 2021. The company, <a href="https://blockworks.co/news/21shares-ark-filing-for-spot-ether-etf">along with Ark Invest and 21Shares</a>, renewed the efforts last September. BlackRock and Grayscale were among those to follow suit.&nbsp;&nbsp;



The SEC, as expected, <a href="https://www.sec.gov/files/rules/sro/cboebzx/2024/34-100065.pdf">delayed</a> its decision on Monday for a spot ether fund filed by Invesco and Galaxy Digital. A ruling on other similar planned offerings by Ark Invest, VanEck, Grayscale, BlackRock and others is expected by the end of the month. Various segment observers have said they don’t expect the US regulator to approve them. This is due to concerns over the liquidity of ETH&#8217;s spot and futures markets and the question of its status as a security or commodity.



Read more: <a href="https://blockworks.co/news/ether-etf-approval-unlikely-soon">Ether ETFs coming in May? Here’s why many are bearish</a>



The “cleanest path” for the SEC to deny the spot ether ETFs would be solely based on the correlation between the ETH futures and spot markets, Van Buren Capital general partner Scott Johnsson said in an April 25 X <a href="https://twitter.com/SGJohnsson/status/1783487721933070754">post</a>.



Bitwise, a fund group with its own ether ETF filing, submitted a data <a href="https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/rule-filings/filings/2024/SR-NYSEArca-2024-31.pdf">analysis</a> showing what it <a href="https://twitter.com/BitwiseInvest/status/1773427635919458551">called</a> a correlation between the ETH futures and spot markets that are “substantially similar” to that of bitcoin.&nbsp;



<figure class="wp-block-image size-large is-resized"><img loading="lazy" decoding="async" width="1450" height="1392" src="https://blockworks-co.imgix.net/wp-content/uploads/2024/05/Bitwise-Correlation-data.png?w=1024&amp;h=1024" alt="" class="wp-image-85468" style="width:768px;height:auto" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2024/05/Bitwise-Correlation-data.png?w=1450 1450w, https://blockworks-co.imgix.net/wp-content/uploads/2024/05/Bitwise-Correlation-data.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2024/05/Bitwise-Correlation-data.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2024/05/Bitwise-Correlation-data.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2024/05/Bitwise-Correlation-data.png?w=268 268w, https://blockworks-co.imgix.net/wp-content/uploads/2024/05/Bitwise-Correlation-data.png?w=272 272w, https://blockworks-co.imgix.net/wp-content/uploads/2024/05/Bitwise-Correlation-data.png?w=228 228w, https://blockworks-co.imgix.net/wp-content/uploads/2024/05/Bitwise-Correlation-data.png?w=80 80w" sizes="(max-width: 1450px) 100vw, 1450px" /></figure>



“They probably overextend, and push for more reasons, because correlation concerns will only result in a temporary delay (and they know this),” Johnsson added at the time.



<h2 class="wp-block-heading">Suing again could be the best route</h2>



Court intervention is of course not needed for the SEC to greenlight spot ether funds, noted Liz Boison, a partner at law firm Hogan Lovells.&nbsp;



But it appears it could come to that.



“We should expect that one of the applicants will sue the SEC if the SEC either unreasonably extends the deadline or disapproves the application,” Boison told Blockworks. “Just as the Grayscale suit succeeded in giving the SEC a court-ordered deadline, the ether spot funds will want the same.”



A Grayscale spokesperson did not immediately return a request for comment.&nbsp;



Hailey Lennon, a corporate partner in Brown Rudnick’s digital commerce unit, said she too thinks issuers will consider fighting a potential ether ETF application denial in court.&nbsp;



“The SEC has typically regulated the cryptocurrency industry through enforcement action and has not provided regulatory clarity until it’s pressured to do so by the courts,” Lennon said. “I do think a decision by the court may be the only way we see the spot <a href="https://blockworks.co/tag/ether-etfs">ether ETFs</a> approved.”



Many of the same arguments can be made for a spot ether ETF, she contended. After all, the SEC approved ether futures-based ETFs in October, and companies may argue — like in the Grayscale lawsuit — that those approvals set a precedent for spot ether products.&nbsp;



Muddying the water is additional complexities around the SEC possibly looking to treat ETH as a security, whereas the regulator had clearly labeled bitcoin a commodity.



Not all agree that issuers suing the SEC — should the regulator deny the ether funds — is a foregone conclusion.



Bloomberg Intelligence analyst Eric Balchunas questioned that assumption in an April 10 X <a href="https://twitter.com/EricBalchunas/status/1778186317165437292">post</a>, noting the disparity between the assets in ether futures ETFs compared to bitcoin futures ETFs.



The largest bitcoin futures ETF — the ProShares Bitcoin Strategy ETF (BITO) — has grown to nearly $1.9 billion in assets. ProShares’ ETH futures fund, also the largest in that category, has $70 million.



“That&#8217;s a lot of time and money for something that may only get a fraction of the [assets under management],” he added.



Read more: <a href="https://blockworks.co/news/hong-kong-crypto-etfs-usa-eth">What Hong Kong crypto ETFs may tell us about US ETH fund appetite</a>



Whether prospective ether ETF issuers choose to sue the SEC or not, another court case could help efforts to launch such products.



<h2 class="wp-block-heading">Consensys legal action could offer answers&nbsp;&nbsp;&nbsp;</h2>



MetaMask developer <a href="https://blockworks.co/news/consensys-files-lawsuit-against-sec">ConsenSys sued the SEC last month</a> in a case alleging regulatory overreach. The suit is expected to put pressure on the SEC to defend any position it might have that ETH is a security.



“The SEC has been notoriously tight-lipped about their classification of ETH,” Lennon said. “The SEC is likely trying to retain their stance that Ethereum and bitcoin are not the same, especially after the Ethereum Merge in September 2022 when Ethereum moved from proof of work to proof of stake.”



Read more: <a href="https://blockworks.co/news/sec-investigation-of-eth-as-security">SEC has been investigating ETH for over a year, new court filing shows</a>&nbsp;



The portion of the suit requesting a declaratory judgment that ETH is not a security likely will require the SEC to shed light on its stance, Boison explained.



Approval of spot ether ETFs could take place before briefing in the Consensys case is complete, she noted.



Boison added: “The SEC can theoretically approve spot ether ETFs, file charges regarding staked ether and still have a court declare that ETH, itself, is not a security.”



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Court decision could be only way US spot ether ETFs see light of day

Bessie Liu

Polygon, an Ethereum layer-2 scaling solution, has recently launched its Miden Alpha Testnet,&nbsp; a zero-knowledge rollup solution designed for private, high-throughput applications.



Miden enables its users to generate proofs for their own state transitions without revealing the state to the wider network. The network will only track commitments, meaning users can transact privately.



Some features that will be unlocked with Miden include the ability to create private accounts and private notes, though it will still be possible to create public accounts and public notes. Additionally, the Miden client will enable parallel transaction <a href="https://0xpolygonmiden.github.io/miden-base/introduction.html#:~:text=Polygon%20Miden%20is%20a%20modular,execution%20and%20client%2Dside%20proving.">execution</a> and client-side proving.&nbsp;



“For builders, that means designing self-sovereign and high-throughput applications. With Miden’s zk-powered rollup, you can build what’s currently not feasible on EVM-chains,” <a href="https://blockworks.co/tag/polygon">Polygon</a> <a href="https://twitter.com/0xpolygon/status/1787533326091235785?s=46&amp;t=ar91EF_W_z2BKrQdY-hJLQ">wrote </a>in a post on X.&nbsp;



Read more: <a href="https://blockworks.co/news/ey-uses-polygon-proof-of-stake-for-business">‘Big Four’ accounting firm EY to use Polygon PoS for business contracts</a>



According to Polygon Miden <a href="https://docs.polygon.technology/miden/miden-client/">documents</a>, there are currently three different types of smart contracts available on Miden. These include a basic wallet contract for sending and receiving tokens and assets and fungible and non-fungible faucet smart contracts, which are used to mint and burn different assets.



Polygon Miden is not the only rollup solution that is hoping to innovate in the <a href="https://blockworks.co/tag/zero-knowledge-rollup">zk rollup</a> space. <a href="https://blockworks.co/news/starkware-starknet-zero-knowledge-prover">Competitors include StarkWare</a> and Matter Labs, the team behind zkSync, who are similarly hoping to bring new possibilities to blockchain scaling.



There has been little price action following the announcement of Miden. The price of Polygon’s native token (<a href="https://blockworks.co/price/matic">MATIC</a>) is <a href="https://www.coingecko.com/en/coins/polygon">trading</a> at $0.7153, <a href="https://www.coingecko.com/en/coins/polygon">down</a> by 0.9% over the past 24 hours, according to CoinGecko.



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Polygon zk-based Miden Alpha Testnet is now live 

David Canellis

Michael McSweeney

<h2 class="wp-block-heading">Another one bites the dust</h2>



And then there were three.&nbsp;



Robinhood has become the latest company to <a href="https://blockworks.co/news/robinhood-wells-notice-sec">receive</a> a crypto-related Wells notice from the Securities and Exchange Commission.



If you don’t know what a Wells notice is, you might be new to crypto. The notice is basically a heads-up given to a company that the SEC completed an investigation and may pursue an enforcement action against them.&nbsp;



The notice doesn’t always mean that legal action will play out, but this is crypto.



This time last year, for example, we were playing the waiting game after Coinbase was served with a Wells notice in March. The SEC then filed a suit against the exchange company in June.&nbsp;



As I previously reported, if that timeline holds, we could be looking at a summer legal action — similar to <a href="https://blockworks.co/news/sec-issues-uniswap-wells-notice">what we saw with Coinbase</a>.&nbsp;



So if things head to court, what happens exactly?



Robinhood, <a href="https://blockworks.co/news/robinhood-wells-notice-sec">as part of its disclosures</a>, said the SEC alleged that it violated 15(a) and 17A of the Securities Exchange Act. If that rings a bell, it’s because both Coinbase and Binance were hit with similar charges.&nbsp;



17A focuses on clearing agencies and 15(a) centers around broker-dealer registration. It’s unclear if the <a href="https://blockworks.co/tag/sec">SEC</a> will seek charges regarding tokens it believes are securities, like we’ve seen in other cases.&nbsp;



For its part, Robinhood has tried to stay out of the SEC’s spotlight by <a href="https://blockworks.co/news/robinhood-nixes-ada-matic-sol">delisting tokens that the regulatory agency has targeted</a>, such as Solana’s SOL, Polygon’s MATIC, and Cardano’s ADA. Unfortunately, it doesn’t seem like any company offering crypto services can avoid Gensler’s ire.



“​​The potential action may involve a civil injunctive action, public administrative proceeding, and/or a cease-and-desist proceeding,” <a href="https://blockworks.co/tag/robinhood">Robinhood</a> warned in its disclosure.&nbsp;



Putting aside the potential charges, let’s talk about Robinhood’s chief legal and compliance officer, Dan Gallagher.&nbsp;



Gallagher is actually no stranger to the SEC, having served as a Commissioner between 2011 to 2015. He worked in other positions within the SEC as well.&nbsp;



Gallagher said yesterday that he was “disappointed” and insisted that the “assets listed on our platform are not securities.” He called the case against Robinhood Crypto “weak.” Perhaps Gensler’s met his match?



Either way, Robinhood’s not alone in the SEC’s spotlight.



Though Consensys — another company that was <a href="https://blockworks.co/news/consensys-sec-lawsuit-debate">served with a Wells notice</a> — may face different charges in a potential lawsuit from the regulator. We know from the lawsuit Consensys filed against the SEC that its Wells notice centered on two of its product offerings: MetaMask Swaps and MetaMask Staking.&nbsp;



One aspect could look similar, however.&nbsp;



<a href="https://blockworks.co/tag/consensys">Consensys</a> said the SEC held a telephone conference between the two parties during which SEC staffers said they believed the Brooklyn-based company was operating as an unregistered broker-dealer because of the MetaMask Swaps software.&nbsp;



The SEC also took issue with the staking program — which would <a href="https://blockworks.co/news/consensys-sec-lawsuit-debate">echo what we’ve seen in the Coinbase and Binance cases</a>. Consensys violated the Securities Act, the SEC allegedly said, because it offered and sold unregistered securities.



The third company in our roundup, Uniswap, represents the most unknowns so far. While Uniswap disclosed its Wells notice, it didn’t disclose any specifics. Uniswap didn’t respond to a request for comment on the details, either.&nbsp;



As our own Casey Wagner <a href="https://blockworks.co/news/empire-newsletter-sec-goes-after-uniswap-defi">pointed out in this newsletter</a> a few weeks ago, Uniswap chief legal officer Marvin Ammori said securities regulators could — as they did with Binance and Coinbase — charge the firm with operating as an unregistered exchange and broker.&nbsp;



It seems likely that Uniswap could also face securities charges as well, based on what we’ve seen with pending lawsuits and the other Wells notices.&nbsp;



So the summer of fun, with the bull market looking like it’s just getting started, might be interrupted by a few more lawsuits. Yay.



— Katherine Ross



<h2 class="wp-block-heading">Data Center</h2>



<ul>
<li>Robinhood’s stock was <a href="https://www.marketwatch.com/investing/stock/hood?mod=search_symbol">down</a> nearly a percent at the close yesterday, but it’s still up 95% over the past year.</li>



<li>Bitcoin, trying to regain $65,000, <a href="https://www.coinbase.com/price/bitcoin">dropped</a> back to $64,000 after Robinhood disclosed its Wells notice.</li>



<li>Grayscale’s bitcoin ETF posted another day of <a href="https://twitter.com/JSeyff/status/1787607380479390175">inflows</a>, a record for the fund, on Monday. The firm saw positive flows of nearly $4 million.</li>



<li>Ethereum notched $30 million of inflows, finally breaking a seven-week streak of outflows, per CoinShares <a href="https://blog.coinshares.com/volume-181-digital-asset-fund-flows-weekly-report-47a9659e08ae">data</a>.</li>



<li>Hong Kong’s new ETH and bitcoin ETFs recorded $307 million in inflows last week, according to the data.</li>
</ul>



Bubbles are mathematically impossible



If crypto were the ‘98 Chicago Bulls, Paradigm and a16z would be Michael Jordan and Scottie Pippen.



A few editions ago, we <a href="https://empire-31ed59.beehiiv.com/p/irancrypto-affair?_gl=1*1ee6888*_ga*NDA0ODY3MTU3LjE3MTIwNjAxMjE.*_ga_E6Y4WLQ2EC*MTcxNDU4ODMxMi4xMjYuMS4xNzE0NTg4Mzc0LjYwLjAuMTYwMDUwODQ.*_gcl_au*NTk1OTIzNTkxLjE3MTE0ODAwNjA.">looked</a> at the companies listed in a16z Crypto’s portfolio for a temperature check on how those bets are playing out this bull market cycle.&nbsp;



Time to compare that to <a href="https://blockworks.co/tag/paradigm">Paradigm</a>.



Paradigm has fewer investments <a href="https://www.paradigm.xyz/portfolio">listed</a> than a16z — 57 to 95. A similar percentage of startups have issued their own tokens, around 40%.&nbsp;



a16z Crypto <a href="https://a16zcrypto.com/about/">says</a> it has $7.6 billion in assets under management in its four crypto funds. Paradigm, meanwhile, reportedly had $8.7 billion toward the end of 2022 — when crypto markets were bottoming out.&nbsp;



Considering how wild these assets can be, let’s just call it even.



Complete details of either firm’s investments in the crypto space aren’t public knowledge, so we’re in the dark on size, mixture of equity and tokens, vesting schedules and cost basis.&nbsp;



That means we can’t know exactly how well the funds are doing. We can still figure out what their star performers might be, at least out of the portfolio companies with native tokens.



<figure class="wp-block-image"><img decoding="async" src="https://lh7-us.googleusercontent.com/nKRLJWGn5cqPs-lgzYn3XDXiKGf7d9sBkixHavgbQN2HLlMPk7VKLq_oSRaunYd8UPkyb-5MbIF3ElXfCIPaZsNFop-7vYQvlHUpEeo2CcjWSp706Ju8LV6-KULCQXY8K7sevPXWtQhs43A5BU4X2yA" alt=""/></figure>



Let’s say our current bull market began in mid-November 2022, when bitcoin bottomed out around $16,500. 



In Paradigm’s case, it discloses unspecified holdings in bitcoin, ether, Coinbase stock, 23 crypto entities with their own tokens, and 33 without.



Most cryptocurrencies have underperformed the top two cryptocurrencies, with only four beating bitcoin up until the end of April, and another three came out ahead of ether.



Just like in a16z’s case, Sky Mavis’ RON token, the native asset for gaming-centric layer-1 Ronin, is the standout by far, having multiplied 11 times in price.&nbsp;



Next were governance tokens for DeFi structured products protocol Ribbon Finance, trader-focused NFT marketplace Blur and DAI issuer MakerDAO’s, which have more than tripled.



Worst were also governance tokens. JET, for Solana-native lending app Jet Protocol, and FLX, for non-pegged stablecoin protocol Reflexer, which manages RAI. JET has fallen 97% this bull market, FLX has shed 60%.



When we looked at tokens issued by a16z’s portfolio companies, the median return was about 130%, largely thanks to RON and Solana, with about 15% of tokens losing value in the current cycle.



<figure class="wp-block-image"><img decoding="async" src="https://lh7-us.googleusercontent.com/BIy81OmmlDV9U3sJOL2sCbY0OxCJyMFUoLLCZdh6DXpVhKzmnqHXVhRM2Z1465kgwuDrlMiw94I0W1cSp3ao1zOwzyr6lXuVBkcQ8FPc4D7SBbWoMYM5c9tZgEwaxrO2Fs_o3m-_TKnFGXwLCf8PHqE" alt=""/></figure>



In Paradigm’s portfolio, including bitcoin, ether and Coinbase stock, the median is 58%, with about one-third posting negative returns.



Granted, all this says very little about the potential gains, both unrealized and unrealized, of both funds’ crypto ventures. It also doesn’t at all reflect the health of the companies tied to each token, only market sentiment.



It does, however, show how few VC-backed tokens have outperformed bitcoin in this bull market so far.&nbsp;



Food for thought for those playing along at home.



— David Canellis



<h2 class="wp-block-heading">The Works</h2>



<ul>
<li>Australia’s tax office is <a href="https://www.afr.com/markets/currencies/ato-targets-crypto-traders-tax-affairs-bank-details-20240501-p5fo5n">probing</a> crypto traders in the country, according to AFR.</li>



<li>Fintech firm Revolut is launching a crypto exchange for traders in the UK.&nbsp;</li>



<li>The SEC <a href="https://www.sec.gov/files/rules/sro/cboebzx/2024/34-100065.pdf">delayed</a> another spot ether ETF late Monday.&nbsp;</li>



<li>Block said Monday that it’s planning to <a href="https://investors.block.xyz/investor-news/news-details/2024/Block-Inc.-Announces-1.5-Billion-Offering-of-Senior-Notes/default.aspx">offer</a> $1.5 billion worth of senior notes.</li>



<li>Apple is <a href="https://www.wsj.com/tech/ai/apple-is-developing-ai-chips-for-data-centers-seeking-edge-in-arms-race-0bedd2b2">developing</a> its own data center chip for artificial intelligence, the WSJ reports.</li>
</ul>



<h2 class="wp-block-heading">The Morning Riff</h2>



Another day, another series of “Satoshi-era coins on the move” headlines.&nbsp;



Yesterday, a clutch of bitcoins worth some $44 million “awoke” according to <a href="https://whale-alert.io/transaction/bitcoin/605c67609ba71c3e707fc73af52a94a982cbd039315ea7beb85e99de59be7402">transaction data</a>.&nbsp;



It’s long been the case that crypto media jumps to report on anything related to old coins —&nbsp;that is, any holdings that haven’t budged in a decade or more.&nbsp;



But this has seemed especially true in recent months, with <a href="https://blockworks.co/news/bitcoin-all-time-high">bitcoin’s recent all-time highs </a>prompting long-time holders to blow the dust off their wallets. A recent <a href="https://finance.yahoo.com/news/old-bitcoin-wallets-keep-waking-131642155.html">survey</a> from Fortune and Chainalysis posits that old coin movements have become routine as of late.



Should people pay so much attention to these Lazarus-style hodlers? Maybe, if you’re the sort who cares a great deal about how many coins are effectively out of circulation because they were previously thought to be “lost.”



Me? I think people are looking for entertainment; if the number isn’t going up, at least somewhere, a number is doing something.&nbsp;



— Michael McSweeney



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Empire Newsletter: A busy crypto lawsuit season looms

On Monday, the experimental currency Ore won $50,000 from a Solana Foundation-supported hackathon focused on identifying Solana’s “next wave of high-impact projects.”



“High-impact” presumably refers to Ore’s potential for making a positive change to Solana’s adoption figures. But so far, Ore’s impact has been more like a gut punch: The project <a href="https://blockworks.co/news/solana-price-falls-ore-mining">halted mining in mid-April</a> after the avalanche of network usage from mining the currency <a href="https://blockworks.co/news/solana-network-congestion-transaction-volume">made it difficult</a> for Solana users to get their transactions included in blocks.



Ore is an experiment in using the proof-of-work security mechanism on the Solana blockchain. PoW systems essentially pay miners native currency rewards in exchange for computing power that makes blockchains difficult to attack. Bitcoin is secured in this fashion, in contrast to <a href="https://blockworks.co/tag/solana">Solana</a>, which combines a system called proof-of-history with proof-of-stake, Ethereum’s chosen consensus mechanism.&nbsp;



Read more: <a href="https://blockworks.co/news/solana-price-falls-ore-mining">Solana price falls further as Ore suspends mining on the network</a>



Ore rewrote a more egalitarian version of the Bitcoin protocol as a Solana smart contract, the project’s pseudonymous creator Hardhat Chad explained in a demo <a href="https://blog.colosseum.org/announcing-the-winners-of-the-solana-renaissance-hackathon/">video</a>. Unlike Bitcoin, which gives 3.125 bitcoin to the fastest miner to return a certain cryptographic hash every ten minutes, Ore is <a href="https://github.com/hardhatchad/ore?tab=readme-ov-file#how-it-works">set</a> up where multiple miners can win a sliver of the network’s block rewards. An average of one ORE is created every minute, split between successful miners.



For many in Solana’s speculation-loving ecosystem, the idea of “Bitcoin on Solana” was simply too juicy to pass up, and Ore mining transactions drove up activity and soon clogged the network. One miner <a href="https://x.com/shoucccc/status/1779323261278666991">posted</a> about “blindly sending millions” of transactions every second in hopes that some would land.



Amid the flurry of usage, Solana users saw more and more of their transactions being dropped rather than included in blocks, and Solana developers <a href="https://x.com/Austin_Federa/status/1777995577696874850">rushed</a> to patch the overloaded network. Perhaps mercifully, Ore temporarily ceased mining on April 16. Soon after, Solana <a href="https://x.com/SolanaStatus/status/1779727821834686592">released</a> a network upgrade to help ease the congestion.



Read more: <a href="https://blockworks.co/news/empire-newsletter-no-12">Empire Newsletter: Solana patch targets congestion woes</a>



In an X post announcing the mining pause, Hardhat Chad said Ore had become Solana’s most-used program by transaction count within two weeks of launching. Solana could thank Ore for the stress test, but the project would be redeploying a better-constructed v2, the developer <a href="https://x.com/HardhatChad/status/1780249833510510964">intimated</a>.



Ore mostly disappeared from view before winning the “Solana Renaissance” hackathon, which was <a href="https://www.colosseum.org/renaissance">judged</a> by key figures in Solana’s ecosystem, including the chain’s co-founders Anatoly Yakovenko and Raj Gokal. Colosseum, which runs Solana hackathons including this one and makes venture investments in some of the winners, has <a href="https://x.com/solana/status/1787476156238921912">said</a> the contest drew over 1,000 entries. The Solana Foundation, a non-profit supporting Solana’s ecosystem, is a limited <a href="https://www.colosseum.org/accelerator/">partner</a> in Colosseum’s venture fund.



Solana’s thought leadership seems to believe a second iteration of Ore can be less chaotic than the first go-round.&nbsp;



“The network should handle anything like this,” Jon Wong, ecosystem engineering lead at the Solana Foundation, told Blockworks. “It’s not about Ore in particular, it’s about continuous stress testing the network in order to get better.”



Hardhat Chad is optimistic as well.



“Ore exists for one reason: to provide the world with a fast, cheap, private, inflation-proof digital currency everyone can mine,” Hardhat Chad <a href="https://x.com/HardhatChad/status/1787487182317367514">wrote</a> on X in celebration of the hackathon win.



Ore v2 is “[f]eature complete” and currently running simulations while awaiting audits, Hardhat Chad <a href="https://x.com/HardhatChad/status/1787507236492775539">said</a> Monday. 



Those who got their hands on the Ore that was mined before the halt are growing richer in the meantime. The token’s price rose more than 90% Monday after the announcement, according to CoinGecko, <a href="https://www.coingecko.com/en/coins/ore">trading</a> hands at around $228 at press time.



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Solana congestion culprit Ore wins $50K from hackathon

A crypto bull market, coupled with the still-uncertain regulatory environment is going to create the perfect storm for increased enforcement actions, US Commodity Futures Trading Commission Chairman Rostin Behnam said.&nbsp;



“We find ourselves with a growing market, growing capital [and] investments, growing market capitalization, and I think a renewed interest by a lot of the entrepreneurs,” Behnam said Monday during a discussion at the Milken Institute’s Global Conference in Los Angeles.&nbsp;



“From my standpoint, as a regulator, we&#8217;re going to probably see in the next six to 18 months or six to 24 months another cycle of enforcement actions.”&nbsp;



Without action from Congress and increased regulatory transparency, Behnam added, agencies are going to lean more heavily on lawsuits.&nbsp;



Read more: <a href="https://blockworks.co/news/bank-secrecy-act-doj-kucoin">Bank Secrecy Act vs crypto: A new DOJ lawsuit revives old tactic</a>



“If you actually count the number of [Congressional] working days between now and the election…it’s really not that much time,” Behnam said when asked about the odds of any of the crypto-related bills making it to the floor for a vote in the House and Senate.&nbsp;



“Getting legislation done these days is difficult,” he added, but noted that there is “momentum” and “desire” from lawmakers to close some of the regulatory gaps around crypto, particularly with regards to <a href="https://blockworks.co/tag/stablecoins">stablecoin</a> legislation.&nbsp;



Behnam’s comments come days after retail trading platform Robinhood announced it <a href="https://blockworks.co/news/robinhood-wells-notice-sec">received a Wells notice</a> from the US Securities and Exchange Commission. Securities regulators plan to proceed with an enforcement action relating to cryptocurrencies traded on the exchange, Robinhood said in a <a href="https://www.sec.gov/Archives/edgar/data/1783879/000178387924000138/hood-20240504.htm">filing</a> Saturday.&nbsp;



“After years of good faith attempts to work with the SEC for regulatory clarity including our well-known attempt to ‘come in and register,’ we are disappointed that the agency has decided to issue a Wells Notice related to our US crypto business,” Dan Gallagher, Robinhood’s chief legal and compliance officer, said in a statement.&nbsp;



Last week, Consensys revealed it was also served a Wells notice from the SEC, in addition to a <a href="https://blockworks.co/news/empire-newsletter-consensys-legal-salvo-sec">number of subpoenas relating</a> to Ethereum. The SEC has not yet brought an enforcement action against Consensys, but the crypto firm is suing the exchange preemptively.&nbsp;



Behnam did not comment Monday on his agency’s relationship with the <a href="https://blockworks.co/tag/sec">SEC</a> with regards to crypto industry regulation, but Congressional leaders have been debating about how to address the so-called “turf war” between the agencies for over a year.



&#8220;When we have two agencies <a href="https://blockworks.co/news/cftc-ether-security-commodity-conflict">contradicting each other</a> about whether one of the most utilized stablecoins in the market is a security or a commodity, we end up with uncertainty,” Rep. French Hill, R-Ark., who chairs the House Subcommittee on Digital Assets, said during an April 2023 hearing.



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CFTC’s Behnam warns crypto industry that more enforcement actions are coming 

Hong Kong’s newly launched spot crypto ETFs might help us predict what ether ETF demand could look like in the US.&nbsp;



Or not.&nbsp;



Either way, the new funds offer a jumping-off point, so to speak, for considering the current differing investor appetites for ETH and BTC and how that could evolve.



The Securities and Exchange Commission approving spot bitcoin ETFs in January offered exhilaration during a month often marred by the holiday hangover.&nbsp;



Many wondered what the demand for these long-awaited products would amount to out of the gate, and long-term. Another common question after the industry’s regulatory victory: When will we see spot ether ETFs?&nbsp;



After all, ether is the second-biggest crypto asset by market capitalization, with its $370 billion market cap nearly a third of bitcoin’s $1.25 trillion. US issuers started trying to launch spot ETH products as far back as 2021.



Not to mention ether has a regulated futures market, and (whaddya know) the SEC already approved ETFs that hold ETH futures contracts. <a href="https://blockworks.co/news/ether-futures-etfs-vaneck-proshares-bitwise-offerings">Those launched last October</a>.



Though the regulator is set to rule on spot ether products sometime this month, it remains unclear when the SEC could ultimately allow those to trade.&nbsp;



Read more: <a href="https://blockworks.co/news/ether-etf-approval-unlikely-soon">Ether ETFs coming in May? Here’s why many are bearish</a>



But aside from the launch timeline, the other question is what demand will be if and when they do debut.&nbsp;



Between ether futures ETF asset bases, US spot bitcoin fund flow data and the seed capital for Hong Kong bitcoin and ether offerings, perhaps we start to paint a picture.&nbsp;



Or maybe crypto-related fortune telling — even with data inputs&nbsp;— is a fool’s game.



<h2 class="wp-block-heading">Trying to make sense of the numbers anyway&nbsp;</h2>



Hong Kong’s six new spot crypto ETFs — three bitcoin funds and three ether funds — opened $292 million worth of seed capital, according to Farside Investors <a href="https://farside.co.uk/?p=1508">data</a>.&nbsp;&nbsp;&nbsp;



The bitcoin funds attracted significantly more of the initial capital, with ether ETF day one assets amounting to 15% of that total, analyst Eric Balchunas <a href="https://twitter.com/EricBalchunas/status/1786035915040674061">noted</a>.&nbsp;&nbsp;&nbsp;



He and others pointed to the seed capital for the offerings — used to fund the ETF’s creation units — as one indicator to compare demand for BTC and ETH. Subsequent flows into the six funds have been trivial at about $23 million over the last three trading days, making the seed capital perhaps the better barometer.&nbsp;



<figure class="wp-block-image size-large is-resized"><img loading="lazy" decoding="async" width="1172" height="1004" src="https://blockworks-co.imgix.net/wp-content/uploads/2024/05/Farside-Hong-Kong-Crypto-ETF-Chart.png?w=1024&amp;h=1024" alt="" class="wp-image-85395" style="width:683px;height:auto" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2024/05/Farside-Hong-Kong-Crypto-ETF-Chart.png?w=1172 1172w, https://blockworks-co.imgix.net/wp-content/uploads/2024/05/Farside-Hong-Kong-Crypto-ETF-Chart.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2024/05/Farside-Hong-Kong-Crypto-ETF-Chart.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2024/05/Farside-Hong-Kong-Crypto-ETF-Chart.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2024/05/Farside-Hong-Kong-Crypto-ETF-Chart.png?w=305 305w, https://blockworks-co.imgix.net/wp-content/uploads/2024/05/Farside-Hong-Kong-Crypto-ETF-Chart.png?w=256 256w, https://blockworks-co.imgix.net/wp-content/uploads/2024/05/Farside-Hong-Kong-Crypto-ETF-Chart.png?w=80 80w" sizes="(max-width: 1172px) 100vw, 1172px" /></figure>



The US and Hong Kong differ of course, and the <a href="https://blockworks.co/tag/hong-kong">Hong Kong</a> ETFs just launched. But at least we have some numbers to work with.&nbsp;



Sumit Roy, a senior analyst at ETF.com, said the initial 15% asset share for ether ETFs in Hong Kong sounds about right to him.&nbsp;



“It&#8217;s not peanuts,” he told Blockworks. “But with ether having much less name recognition that bitcoin, it&#8217;s natural that it would attract fewer investment dollars than bitcoin from ETF investors.”



Matthew Sigel, VanEck’s head of digital assets research, noted that the Hong Kong ETH funds accept in-kind subscriptions and redemptions — a feature the <a href="https://blockworks.co/tag/sec">SEC</a> is unlikely to allow for the proposed US <a href="https://blockworks.co/tag/ether-etfs">ether ETFs</a>.



Such a transaction model lets investors buy and sell ETF shares using the ETF’s underlying asset — in this case ETH — rather than cash.



Given that expected difference, the Hong Kong BTC-to-ETH ratio “may not be the best proxy” to predicting US demand, he argued — adding that they could collect less than 15% of the inflows that bitcoin funds have seen.&nbsp;



The 11 US spot bitcoin ETFs have combined for nearly $11.6 billion since most of them launched on Jan. 11.&nbsp;



<h2 class="wp-block-heading">‘Ethereum story’ has room to grow</h2>



While it would make sense for spot ether ETFs to initially see a similar percentage of bitcoin ETF assets in the US as they did in Hong Kong, Roy said, that might be short-lived.



“As the <a href="https://blockworks.co/tag/ethereum">Ethereum</a> story becomes more well known and people come to appreciate the yield — if it&#8217;s available to ETF investors — that comes from staking ether, they might even prefer the cryptocurrency over bitcoin,” he noted.



Whether ether ETFs are able to stake could be the key to wider adoption.&nbsp;



The Hong Kong funds do not offer that perk. Prospective spot ether ETF issuers in the US added language to their applications in recent months about staking the assets they hold.&nbsp;



<a href="https://ethereum.org/en/staking/">Staking</a> ether is the process of depositing ETH to help secure the Ethereum blockchain — and earning yield on that ETH for doing so.



Christopher Jensen, who leads crypto research at traditional finance giant Franklin Templeton, <a href="https://blockworks.co/news/franklin-templeton-institutional-bitcoin-etf-allocation">told Blockworks in an April interview</a> that the simple “store-of-value” characteristics of bitcoin can be a “hang-up” for certain institutional investors.&nbsp;



ETH resonates with some of them better.&nbsp;



“A lot of times, [an investor will say] ‘with Ethereum, I understand that it generates revenues and has a yield and it looks more like a [traditional finance] asset,’” Jensen noted.&nbsp;&nbsp;



Roy said he expects ether ETFs to attract the same types of investors as bitcoin ETFs at first — albeit in lesser numbers. These include those that want to speculate on price or invest in an alternative store of value.&nbsp;&nbsp;



Sigel agreed that a non-staking ether ETF would likely be appealing to more speculators than long-term investors.&nbsp;



“But over time,” Roy added, “ether ETFs may attract a wider spectrum of investors compared to bitcoin ETFs when people come to appreciate that ether is much more than just a store of value.”



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What Hong Kong crypto ETFs may tell us about US ETH fund appetite

The Grayscale Bitcoin Trust (GBTC) converted to an ETF nearly four months ago.&nbsp;



It took that long for the fund to see its first day of net inflows.&nbsp;



That unprecedented event occurred on Friday, when GBTC saw $63 million in net money enter the ETF, according to Farside Investors data.&nbsp;



Read more: <a href="https://blockworks.co/news/why-etf-flows-do-dont-matter">Why tracking bitcoin ETF flows matters. And why it doesn’t.</a>



GBTC had suffered net outflows for 78 days before that — piling up to equal $17.4 billion.



Just don’t expect the GBTC inflows to become a regular thing, one segment observer says.



“It’s difficult to discern what might be behind the flows into GBTC,” said Nate Geraci, president of The ETF Store. “ETF buyers are an extremely diverse group with varying motivations. That said, I would be surprised if the inflows become a trend.”



Part of the reason it will have a hard time consistently attracting new money? Its cost, Geraci noted.



Industry watchers have attributed <a href="https://blockworks.co/tag/gbtc">GBTC</a>’s constant asset spillage to the fund’s fee of 1.5% — a much higher level than its 10 competitors in the US.&nbsp;



Beyond the fee, bankrupt lender Genesis was among those <a href="https://blockworks.co/news/bankrupt-genesis-offloading-gbtc-shares">offloading its GBTC holdings</a>, contributing to the asset exodus from the fund.&nbsp;&nbsp;&nbsp;



And still, <a href="https://blockworks.co/tag/grayscale">Grayscale</a> holds the assets under management lead in the category. GBTC manages roughly $18.1 billion in assets, while BlackRock’s iShares Bitcoin Trust (IBIT) is close behind with about $16.9 billion.



<a href="https://blockworks.co/news/grayscale-fee-higher-bitcoin-etf">Grayscale has defended its higher fee</a>, previously pointing out GBTC’s “market-leading liquidity, tight spreads, high trading volumes and a decade-long track record of operational success.”



“While GBTC can still hang its hat on ample liquidity and tight spreads, there are now competing products which can boast the same,” Geraci told Blockworks.&nbsp;



The crypto asset manager also filed to set up the Grayscale Bitcoin Mini Trust (BTC), which would cost a fraction of GBTC’s price. The company has not yet revealed a final proposed expense ratio.



Read more: <a href="https://blockworks.co/news/grayscale-takes-page-from-blackrock-playbook">Grayscale’s planned GBTC sibling is a page from BlackRock’s playbook</a>&nbsp;



GBTC would seed the new fund as part of a “spin off” mechanism unique to commodity ETFs, <a href="https://www.grayscale.com/blog/general-updates/what-is-grayscale-bitcoin-mini-trust">according</a> to Grayscale. In addition, a portion of GBTC’s bitcoin holdings would be allocated to the proposed Mini Trust.



Beyond Grayscale’s inflows on Friday, it was a day of net inflows for most of the 11-fund US spot <a href="https://blockworks.co/tag/bitcoin-etf">bitcoin ETF</a> category — amounting to $378 million collectively.&nbsp;



<a href="https://blockworks.co/news/unprecedented-us-spot-bitcoin-etf-outflows">The asset gains were an anomaly of late</a>, snapping a record seven-day net outflow streak for the segment.&nbsp;&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">First time ever 1D flows all green, no red for the Bitcoin Bunch. Not going to spike the football like some did during the outflow period but will point out that over 95% of the ETF investors HOLD-ed during what was a pretty nasty and persistent downturn. Will same happen next… <a href="https://t.co/3l3uwwmqGy">pic.twitter.com/3l3uwwmqGy</a>&mdash; Eric Balchunas (@EricBalchunas) <a href="https://twitter.com/EricBalchunas/status/1787468690583081214?ref_src=twsrc%5Etfw">May 6, 2024</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Analysts and executives have pointed to expectations of the Federal Reserve keeping interest rates higher for longer as one reason demand for bitcoin ETFs have stalled.&nbsp;



The asset’s price also trended downward in April. 



Bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) was trading at about $64,000 at about 10:30 am ET Monday — up about 1.4% from a week ago but down nearly 6% in the last 30 days.



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Bitcoin ETF snapshot: GBTC surprise helps end sector’s seven-day outflow run

<h2 class="wp-block-heading">Take it to court!</h2>



Crypto’s long been regarded as the “Wild West” and one of the biggest reasons that the comparison still sticks — despite how far the market has come since Satoshi’s days — is because of the regulation via enforcement approach that some government bodies have taken (looking at you, Gary Gensler).



But now it looks like the Department of Justice is trying to join the Securities and Exchange Commission’s ranks, at least when it comes to unlicensed money transmission.&nbsp;



The DOJ is alleging, in two separate cases, that wallet developers should be charged with the violation.&nbsp;



As CoinCenter’s Peter Van Valkenburgh <a href="https://www.coincenter.org/dojs-new-stance-on-crypto-wallets-is-a-threat-to-liberty-and-the-rule-of-law/">pointed out</a> last week, this approach marks a change for the DOJ. Since roughly 2013, the stance from other arms of the government had been that developers and users of non-custodial wallets weren’t transmitters.&nbsp;



But it looks like the <a href="https://blockworks.co/tag/doj">DOJ</a> has changed its mind, at least in the Tornado Cash and Samourai Wallet cases.



Read more from our opinion section: <a href="https://blockworks.co/news/samourai-wallet-matters-memecoins-privacy">Samourai Wallet matters more than your memecoins</a>



CoinCenter broke down the historical context, highlighting that FinCEN — the Treasury’s financial enforcement bureau — said in 2013 that crypto could be a value “that substitutes for currency” but that it’s not inherently a currency or “funds.”



FinCEN’s 2019 guidance also backed this up.&nbsp;



“The person participating in the transaction to provide additional validation at the request of the owner does not have total independent control over the value,” the agency wrote at the time.



Van Valkenburgh said the Tornado Cash developers —&nbsp;the DOJ is taking aim at Roman Storm and Roman Semenov in this case — and the Samourai Wallet founders didn’t have “any actual control over the cryptocurrency that users of the tool owned.”



Read more: <a href="https://blockworks.co/news/tornado-cash-privacy-debate">Tornado Cash arrests spur privacy debate</a>



“Under clear and long established FinCEN guidance and under any common sense reading of the underlying law, these developers are not money transmitters. Nonetheless the prosecution persists unjustly,” he continued.



CoinCenter noted that Samourai Wallet, in particular, didn’t have “total independent control” over funds, which wouldn’t make them money transmitters.



Senator Cynthia Lummis, notoriously pro-crypto, echoed Van Valkenburgh’s concerns.



“This stance contradicts existing Treasury finance, common sense and violates the rule of law,” she <a href="https://twitter.com/SenLummis/status/1785695683514630367">said</a> last week.



Here’s the thing: Crypto is dealing with the repercussions of the lack of regulation already.&nbsp;



Take a look at the <a href="https://blockworks.co/news/sec-investigation-of-eth-as-security">Consensys suit against the SEC</a>. I know we’ve talked about this extensively, but the SEC investigating ETH as a security would mark a huge change in how it approaches regulation (though all of this is just alleged at this time).&nbsp;



The SEC’s public stance has been that ETH — like bitcoin — isn’t a security. Changing its stance would not only pit two agencies against each other (the CFTC has <a href="https://blockworks.co/news/cftc-alleges-eth-as-commodity-kucoin-lawsuit">previously claimed</a> it’s a commodity), but it shows just how far we have to go when it comes to regulation in this industry.



The DOJ’s wallet transmitter arguments could set up something similar.&nbsp;



Read more from our opinion section: <a href="https://blockworks.co/news/ether-commodity-or-not">Ether is the Schrödinger’s cat of crypto</a>



The Justice Department’s filings further muddy the water, not to mention the public disagreement with the previous policies. For their part, CoinCenter said they’ll continue to watch and “defend both the wrongly accused developers” and previous policies



So grab your popcorn and take a seat. It’s just another day in the land of crypto, I guess.



— Katherine Ross



<h2 class="wp-block-heading">Data Center</h2>



<ul>
<li>Crypto VCs invested $2.49 billion in Q1 of this year, according to Galaxy Digital.&nbsp;</li>



<li>That figure represents a 68% quarter-over-quarter increase.</li>



<li>One more point from <a href="https://www.galaxy.com/insights/research/crypto-and-blockchain-venture-capital-q1-2024/">Galaxy’s May 3 report</a>: A whopping 80% of that amount went to early-stage firms, meaning VCs spent the period betting on new teams and projects.&nbsp;</li>



<li>BTC cracked above $65,000 this morning, though it has slid slightly to about $64,400 as of the time of writing.&nbsp;</li>



<li>A new dashboard co-developed by Visa posits that less than 10% of stablecoin transactions <a href="https://www.bloomberg.com/news/articles/2024-05-05/more-than-90-of-stablecoin-transactions-aren-t-real-study-finds?utm_source=telegram&amp;utm_content=crypto&amp;utm_medium=social&amp;sref=3REHEaVI&amp;embedded-checkout=true">represent</a> “organic payments activity.”&nbsp;</li>
</ul>



<h2 class="wp-block-heading">Ghosts of crypto past</h2>



And in other DOJ news…



Even as the crypto industry plows ahead with new trends and tech —&nbsp;looking at you, memecoins and staking —&nbsp;some of the issues of yesteryear keep popping back up.



The DOJ rolled out indictments against a trio of former execs from crypto lender Cred late Friday.&nbsp;



If you don’t remember Cred, you can perhaps be forgiven. The lender declared bankruptcy in 2020, a move that kicked off a multi-year legal process that saw Cred accuse exchange platform Uphold of essentially <a href="https://www.coindesk.com/layer2/2022/07/22/failed-crypto-lender-cred-blames-uphold-exchange-for-its-demise-in-suit/">orchestrating</a> its downfall. Uphold, as expected, denied the accusation. The bankruptcy process remains ongoing, though a reorganization plan was approved in 2021.



That era saw a raft of crypto lenders go belly-up in the wake of the downfall of crypto hedge fund Three Arrows Capital. Cred wasn’t among them, but some of that story’s components — a problematic retail-focused lending product, bankruptcy, and court drama —&nbsp;presaged the era of financial turbulence that culminated with FTX’s downfall.



Read more: <a href="https://blockworks.co/news/sam-bankman-fried-found-guilty">Sam Bankman-Fried found guilty in landmark crypto trial</a>



Which brings us to the Cred indictments. James Alexander, Joseph Podulka and Daniel Schatt were hit with wire fraud and money laundering charges, with the group accused of “making false and fraudulent statements to customers and investors about Cred’s lending and investing practices” per a DOJ press statement.&nbsp;



Before the collapse, Cred’s execs presented two realities, the DOJ alleged. Publicly, Cred said everything was fine. But in the background, market volatility, culminating with 2020’s <a href="https://www.cnbc.com/2020/03/13/bitcoin-loses-half-of-its-value-in-two-day-plunge.html">crazy crypto flash crash</a>, pushed the lender into dangerous waters.&nbsp;



Cred kept driving forward, the DOJ alleged: “Nevertheless, rather than disclose to Cred’s customers and investors the reality of Cred’s finances, defendants allegedly attempted to keep the business afloat by bringing in new customer funds and by discouraging existing customers from seeking and obtaining redemptions from their investments.”



The damage: hundreds of millions of dollars in lost value for customers’ crypto assets.&nbsp;



The Cred trio face decades in prison. But will their day in court be as flashy or, in a word, historic as the FTX trial? I wouldn’t bet on it.



Still, the move is another highlight in the DOJ’s slow march across the crypto ecosystem. The Binance settlement and <a href="https://blockworks.co/news/changpeng-zhao-sentencing-verdict">four-month jailing of Changpeng Zhao</a>, as well as <a href="https://blockworks.co/news/doj-alleged-kucoin-violation-aml-laws">lawsuits against KuCoin</a> and longtime bitcoin investor Roger Ver, signal that US prosecutors continue to return to crypto’s past in an effort to shape its future.&nbsp;



Read more: <a href="https://blockworks.co/news/roger-ver-tax-fraud-charges">DOJ charges Roger Ver with tax fraud</a>



While the press might not flock to see the US government grill Cred, it’s worth paying attention —&nbsp;what plays out in those hearings and court docs may set important precedent. Stay tuned.&nbsp;



— Michael McSweeney



<h2 class="wp-block-heading">The Works</h2>



<ul>
<li>A16z’s Chris Dixon says there’s a “void” of crypto representatives following the sentencings of CZ and SBF, Bloomberg <a href="https://www.bloomberg.com/news/features/2024-05-06/silicon-valley-crypto-investor-chris-dixon-wants-to-overhaul-the-industry?srnd=homepage-americas">reports</a>.</li>



<li>Grayscale notched its <a href="https://www.reuters.com/business/finance/grayscale-bitcoin-trusts-shares-jump-after-first-inflow-since-january-2024-05-06/">first inflows</a> since January on Friday after it saw over $17 billion in withdrawals.&nbsp;</li>



<li>Bitcoin surpassed one billion transactions over the weekend, The Block <a href="https://www.theblock.co/post/292579/bitcoin-surpasses-one-billion-transactions-processed-eight-hundred-weeks-after-launch">reports</a>.</li>



<li>Jack Dorsey left the board of decentralized social media platform Bluesky, according to a <a href="https://bsky.app/profile/bsky.app/post/3krrebumv3k2h">post</a> from the company.</li>



<li>Bernstein analysts <a href="https://www.theblock.co/post/292594/bernstein-bitcoin-price-150k-usd?utm_source=rss&amp;utm_medium=rss">think</a> bitcoin could still hit $150,000 this cycle.</li>
</ul>



<h2 class="wp-block-heading">The Morning Riff</h2>



Has bitcoin bottomed out?



It doesn’t matter if you’re on Wall Street, in your mom’s basement, or just checking on your wallet, everyone always has the same question after a price dip: Is this the bottom?



Let’s look at bitcoin, which dipped below $60,000 last week and is down roughly 3.7% over the last month. It’s been one hell of a ride for bitcoin so far this year between <a href="https://blockworks.co/news/bitcoin-all-time-high">all-time highs</a>, the <a href="https://blockworks.co/tag/bitcoin-halving">halving</a> and, of course, <a href="https://blockworks.co/news/sec-approves-bitcoin-etf">bitcoin ETFs</a>.&nbsp;



Unfortunately, macro events persist and bitcoin’s shown weakness during previous macro conditions.



But it may not be the overall environment either, because — as we’ve previously reported — analysts expected weakness after the halving. <a href="https://blockworks.co/news/jpmorgan-bitcoin-looking-overbought">JPMorgan predicted that</a> bitcoin could go as low as $42,000 post-halving, while others are eyeing $50,000.&nbsp;



Given that bitcoin’s up nearly 3% over the past week, I think it’s fair to say that, even if it has further to fall and I’m gonna leave that analysis to the experts, it looks like there’s still a lot of room for bitcoin to regain its footing.



— Katherine Ross



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Empire Newsletter: The DOJ’s about-face on money transmitters

Graeme Moore

Many interpret BlackRock pouring $100 million into Ethereum as a sign that institutional tokenization will finally take off on public, permissionless networks.&nbsp;



It will — but <a href="https://blockworks.co/news/blackrock-ethereum-memecoins-tornado-cash-dusting">BlackRock’s tokenized fund</a> is only melting the tip of a Titanic-sized iceberg.



The crypto industry has cried wolf about institutions coming many times. By this point, we definitely know they’re interested in tokenization. The big players —&nbsp;BNP Paribas, JPMorgan, Goldman Sachs, the Hong Kong government, Franklin Templeton, Hamilton Lane and now BlackRock — have already been exploring blockchain technology for a while.



It’s certainly a watershed moment when the world’s largest asset manager opts for a public chain over a private platform like JPMorgan’s Onyx or Goldman Sach’s solution. BlackRock’s tokenized fund on Ethereum signals institutional trust in a public, permissionless network, bringing much-needed legitimacy to the nascent public ecosystem. The move will also encourage other traditional institutional players to transition to on-chain funds.&nbsp;



But while BlackRock’s tokenization on Ethereum was a bold move worthy of the headlines it made, the reality is tokenization is predominantly taking place on private, permissioned blockchains.



To date, the majority of institutional efforts have involved private networks. The Hong Kong government’s $100 million tokenized green bond used GS DAP, deployed on the privacy-enabled blockchain Canton.&nbsp;



Goldman Sachs, BNY Mellon, Cboe Global Markets and other firms recently wrapped up a series of pilots on the same network. HSBC has used its platform, the Orion digital assets platform, to tokenize gold for everyday investors in Hong Kong. And BlackRock has <a href="https://blockworks.co/news/blackrock-barclays-jpmorgan-chase-dapp-tcn">used</a> the private Tokenized Collateral Network on JPMorgan’s Ethereum-based Onyx to tokenize shares in one of its money market funds.



Read more from our opinion section: <a href="https://blockworks.co/news/fintech-blockchain-breakthrough">Fintech has hit a wall. Blockchain will break through it.</a>



Bitcoin proved that a multi-billion dollar market can essentially come out of thin air. The industry believed that everything could be tokenized and traded via blockchain and enjoy increased liquidity. However, the glittering promise of liquidity for real-world assets has (so far) proven a mirage.&nbsp;



The initial token boom of 2018 hyped trillions of dollars in tokenized assets on public networks. Almost seven years later, there are only a few billions of dollars in total assets under management on public networks — a tiny piece of what’s theoretically possible. Meanwhile, private networks are moving billions of dollars in daily transactions.&nbsp;



The crypto industry loves to float the $16 trillion in illiquid assets Boston Consulting Group <a href="https://web-assets.bcg.com/1e/a2/5b5f2b7e42dfad2cb3113a291222/on-chain-asset-tokenization.pdf">projects</a> to be tokenized by 2030. Even the more conservative estimate —&nbsp;McKinsey &amp; Company’s <a href="https://www.mckinsey.com/industries/financial-services/our-insights/tokenization-a-digital-asset-deja-vu">$5 trillion</a> in tokenized real-world assets —&nbsp;is huge.&nbsp;



If we look at the trends and what’s happening, though, it’s clear that a majority of these assets will first be tokenized on private networks.&nbsp;



Unlike crypto — which is an entirely new asset class existing within open ecosystems — real-world assets inherit the legacy of traditional finance. This legacy favors control over assets and customers, closed ecosystems and compatibility with traditional markets — a direct contrast with the ethos of public, permissionless networks.&nbsp;



This explains why financial institutions favor private networks. Private networks operate closer to the existing financial infrastructure and can facilitate easier compliance. These networks are more capable of meeting business needs, as they provide flexibility in governance and customization, like modifications to the blockchain’s consensus protocol, transaction validation rules and permissions. These networks can also handle higher transaction volumes, which is essential for scalability.&nbsp;



There’s also the issue of regulation. It’s only in the past couple of years that regulators have begun to pass and enact comprehensive frameworks guiding involvement in crypto assets. As a result, public blockchain technology has felt untouchable until recently to these institutions, for whom compliance is paramount.



For securities, there is at least some clarity. Tokenized securities are still securities and must operate within the existing regulatory framework. However, some assets — like real estate — which are not necessarily securities off chain will be considered securities once tokenized. The industry is still figuring out what it would take for these assets to meet existing requirements.



Today, nobody doubts the benefits of blockchain technology. The issue for traditional finance is mostly one of integration and technology costs, infrastructure compatibility and regulatory concerns. While public networks offer more transparency, immutability and decentralization, private networks are more practical and familiar for financial institutions.&nbsp;



There are also a few technology issues to sort out. Let’s use BlackRock’s chosen Ethereum as an example. While Ethereum has made progress with initiatives like layer-2 solutions and the Merge to Ethereum 2.0, the network faces challenges meeting the demand for speed, privacy and compliance necessary for transactions involving regulated institutions.



As the technology matures and regulatory frameworks evolve, we can expect to see more tokenization migrating to public blockchains and a new wave of innovation. However, at least for the near future, the majority of institutional tokenization will take place on closed, permissioned networks.&nbsp;



<hr class="wp-block-separator has-alpha-channel-opacity"/>


<div class="wp-block-post-author-biography">Graeme Moore is the Head of Tokenization at the Polymesh Association, a not-for-profit dedicated to the growth of the Polymesh blockchain ecosystem. He is also the author of B is for Bitcoin, the first ever ABC book about Bitcoin. Prior to Polymesh, Graeme was the first employee at Polymath; the creative director at Spartan Race; and an associate at Canada’s largest independent investment advisory firm.</div>


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The future of tokenization? Permissioned blockchains

Robinhood Crypto has received a Wells notice from the SEC, according to a Monday disclosure. 



Robinhood, according to an 8K disclosure, said that the US securities regulator had probed “among other topics, RHC’s cryptocurrency listings, custody of cryptocurrencies, and platform operations.”



The company received the notice Friday. The SEC uses Wells notices to inform investigation subjects about pending enforcement actions.&nbsp;



According to Robinhood, the stock and crypto trading app company faces an enforcement action stemming from alleged violations of the Securities Exchange Act.&nbsp;



“The potential action may involve a civil injunctive action, public administrative proceeding, and/or a cease-and-desist proceeding and may seek remedies that include an injunction, a cease-and-desist order, disgorgement, pre-judgment interest, civil money penalties, and censure, revocation, and limitations on activities,” Robinhood <a href="https://www.sec.gov/Archives/edgar/data/1783879/000178387924000138/hood-20240504.htm">said</a>.&nbsp;



The company said it had cooperated with the <a href="https://blockworks.co/tag/sec">SEC</a>’s investigation so far.&nbsp;



“After years of good faith attempts to work with the SEC for regulatory clarity including our well-known attempt to ‘come in and register,’ we are disappointed that the agency has decided to issue a Wells Notice related to our U.S. crypto business,” Dan Gallagher, Robinhood’s chief legal and compliance officer said in a statement.&nbsp;



“We firmly believe that the assets listed on our platform are not securities and we look forward to engaging with the SEC to make clear just how weak any case against Robinhood Crypto would be on both the facts and the law,” Gallagher continued. 



A spokesperson for the SEC told Blockworks that the regulatory doesn’t comment “on the existence of nonexistence of a possible investigation.”



The firm is set to announce earnings on Wednesday.



Read more: <a href="https://blockworks.co/news/robinhood-q4-earnings-2024">Robinhood reports crypto revenue of $43M in Q4</a>



<a href="https://blockworks.co/tag/robinhood">Robinhood</a>’s reveal represents the latest Wells notice issued by the SEC to a firm that does business in crypto. Last month, <a href="https://blockworks.co/news/sec-issues-uniswap-wells-notice">Uniswap said it was served</a> a Wells notice.



The company has previously disclosed subpoenas probing its crypto products, according to a 2022 filing with the SEC.&nbsp;



“In connection with the Early 2021 Trading Restrictions, we and our employees, including our co-founder and CEO, Vladimir Tenev, have received requests for information, and in some cases, subpoenas and requests for testimony” from various government agencies, including the SEC, the filing <a href="https://d18rn0p25nwr6d.cloudfront.net/CIK-0001783879/a9a57907-3e1a-4c89-aa64-06a27e537dbc.pdf">said</a>.



The firm was also charged with “repeated misstatements” about revenue sources, which resulted in Robinhood paying $65 million to settle with the SEC.&nbsp; In 2022, the company’s crypto segment was <a href="https://www.dfs.ny.gov/reports_and_publications/press_releases/pr202208021">accused</a> of anti-money laundering and consumer protections violations by the New York Department of Financial Services. It ended up paying a $30 million penalty.



Consensys was also allegedly served with a Wells notice, according to <a href="https://blockworks.co/news/consensys-files-lawsuit-against-sec%5C">a suit it filed against the SEC</a> in a Texas court.&nbsp;



Read more: <a href="https://blockworks.co/news/consensys-sec-lawsuit-debate">Is the SEC weighing a lawsuit against Consensys?</a>



Both Uniswap and Consensys have come out against the SEC, with the latter saying that its notice represented the “latest example of aggressive SEC regulatory overreach.”



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Robinhood discloses Wells notice over its crypto business

Antonio Villaraigosa, the former mayor of Los Angeles, has been hired as a policy adviser for Coinbase.



Villaraigosa, who served as the mayor of LA between 2005 and 2013, will join the cryptocurrency exchange’s global advisory council.



Faryar Shirzad, the chief policy officer at Coinbase, <a href="https://twitter.com/faryarshirzad/status/1785680450410750328">wrote in a post on X </a>that Villaraigosa will advise the leadership team at Coinbase to advance “economic freedom around the world.”&nbsp;



“When 18% of America is underbanked, including 25% of Black &amp; Hispanic households, it means the traditional financial system doesn&#8217;t work for everyone. It&#8217;s time to update the system,” Shirzad wrote.



According to the LA Times, Villaraigosa will not lobby on behalf of the global exchange but will only advise the company on developing a fair and robust regulatory framework so that it can provide services for US-based customers, noting that crypto participants “need regulatory protection.”



<h2 class="wp-block-heading">Paradigm special counsel leaves&nbsp;</h2>



Rodrigo Seira, the special counsel of the crypto-focused venture capital firm Paradigm, has resigned and returned to Cooley LLP, a law firm where he previously worked.



Seira served at Paradigm for two and a half years and helped spearhead the company’s policy lab. He was also a founding member of blockchain and crypto-focused law firm DLX Law.



<h2 class="wp-block-heading">Former Citibank executive joins BitGo</h2>



Brett Reeves, a former Citibank executive who has been in the banking industry for over two decades, will join BitGo, a scalable wallet solution, to expand EMEA Sales.



Reeves most recently held the position of head of business development at Bequant, a digital asset prime broker. He previously held roles at Citibank, Nomura and Standard Chartered Bank in Singapore.



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