Market Making Pro

Ben Strack

Casey Wagner

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Welcome to the On the Margin Newsletter, brought to you by Ben Strack and Casey Wagner. Here’s what you’ll find in today’s edition:



<ul class="wp-block-list">
<li>The Federal Reserve’s anticipated rate cut just arrived. Ben shares an initial breakdown.</li>



<li>Two US Congressmen say regulators have “misapplied” securities laws to airdrops. Casey points out legal precedent on the topic.</li>



<li>House members discussed the SEC’s “politicization” of crypto regulation. The hearing was more or less what you’d expect. </li>
</ul>



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<h2 class="wp-block-heading">The rate cut is in</h2>



After weeks (if not months) of anticipation, the Federal Reserve <a href="https://blockworks.co/news/fed-interest-rate-cut-50-bps">reduced interest rates</a> by 50 basis points Wednesday.



Bitcoin’s price rose on the news.&nbsp;&nbsp;&nbsp;



Fed Chair Jerome Powell <a href="https://blockworks.co/news/powell-confirms-september-rate-cut">had made it clear</a> the central bank intended to reduce rates, noting last month: “The time has come for policy to adjust.”



In a statement this afternoon, the Federal Open Market Committee (FOMC) said the 50bps cut came “in light of the progress on inflation and the balance of risks.”



Powell called the economy “strong overall” just moments ago, noting that the labor market has “cooled from its formerly overheated state.” Inflation, meanwhile, has “eased substantially,” he added — dropping from its 7% peak to about 2.2%, as of August. “This recalibration of our policy stance will help maintain the strength of the economy and the labor market, and will continue to enable further progress on inflation as we begin the process of moving toward a more neutral stance,” the Fed Chair said during a post-release presser.&nbsp;



Ahead of the expected rate reduction from its previous 5.25%-5.50% range, many debated whether the cut <a href="https://blockworks.co/news/btc-fluctuates-ahead-of-fed-rate-decision">would amount to 25bps or 50bps</a>.



CME Group’s FedWatch tool indicated a 55% probability of a 50bps cut a few hours before the FOMC’s statement.&nbsp;



Some industry analysts and executives had said that while investors could view a 25bps cut as a normal measure, a 50bps cut could spur fears of a recession and bring on volatility.&nbsp;



“The Fed has only cut 50bps in a non-emergency situation once in the past 40 years,” Astoria Portfolio Advisors founder John Davi wrote in a blog <a href="https://www.astoriaadvisors.com/single-post/cio-thoughts-be-careful-what-you-wish-for-a-50bps-cut-would-imply-a-recession-and-potentially-a-s">post</a> earlier this week. “In our view, the Fed would be making a mistake as it would imply the economy is much weaker than currently suggested.”



The Fed opted for the 50bps cut anyway.



Feel free to interpret the Fed’s decision how you will. The broader market will do the same.



Bitcoin’s price — at about $60,000 just before 2 pm ET — saw a bump above $60,700 in the minutes following the rate cut announcement. BTC rose to above $61,100 after Powell started speaking at 2:30 before retreating below $61,000 as we were about ready to publish this newsletter.



Jake Ostrovskis, OTC Trader at Wintermute, said earlier today that “some degree of market re-pricing is inevitable, regardless of the decision” given the differing cut expectations.



The FOMC meeting countdown clock now restarts, as segment observers expect the Fed to ultimately cut rates further during sessions slated for Nov. 7 and Dec. 18.&nbsp;&nbsp;



A number of analysts had said the market was pricing in a total of 100bps of rate reductions (including Wednesday’s cut) by the end of the year. New projections released Wednesday show committee members have a median expectation of rates falling in the 4.25%-4.5% range (down from the current 4.75%-5.0% range) by the end of the year.



“We are not on any pre-set course,” Powell said today. “We will continue to make our decisions meeting by meeting.”&nbsp;



The long-term effects of this rate cut (and potential others to come) are multifaceted.&nbsp;



Erald Ghoos, general manager of Europe at crypto exchange OKX, noted before the rate decision that an increase in USD liquidity could lead to more capital flowing into various asset classes, including crypto.



“However, it&#8217;s crucial to consider that crypto markets are influenced by a complex interplay of factors beyond just monetary policy, including whether or not we’re headed into a recession, which would be bearish for digital assets overall,” Ghoos added.



Along with the FOMC meetings, investors best keep an eye on geopolitical tensions and the US election as other potential crypto (and traditional) market movers.&nbsp;



In other words, the relatively quiet summer is over.&nbsp;



— Ben Strack



<h3 class="wp-block-heading">$1.95 million&nbsp;</h3>



The amount of money accounting firm Prager Metis agreed to pay the SEC to resolve two separate actions alleging misconduct.&nbsp;



In one action, the SEC claims Prager Metis “misrepresented its compliance with auditing standards regarding FTX” when the firm issued two audits for the now-defunct crypto exchange. Prager has neither confirmed nor denied the allegations.&nbsp;



“Because Prager’s audits of FTX were conducted without due care, for example, FTX investors lacked crucial protections when making their investment decisions,” Gurbir Grewal, director of the SEC&#8217;s Division of Enforcement, said in a statement.&nbsp;



Curiously, these allegedly faulty audits did not come up during former CEO Sam Bankman-Fried’s criminal trial last year.&nbsp;



<h2 class="wp-block-heading">Gensler’s two-week countdown begins</h2>



The deadline to pass a federal budget is looming. But Congressional leaders — at least in the House — are still making time to prioritize digital asset regulation.&nbsp;



Reps. Tom Emmer and Patrick McHenry have penned a <a href="https://emmer.house.gov/_cache/files/5/0/50176829-99c6-40ec-87dd-96421f659fd0/58E2521AD98881EC6DB7696DEC1C2A6C.congressionalletter.sec.9.17.24.pdf">letter</a> to SEC Chair Gary Gensler, expressing concern that regulators have <a href="https://blockworks.co/news/reps-ask-sec-for-clarity-securities-airdrops">“misapplied” securities laws to airdrops</a>, a technology, they say, that plays a “crucial role in the development of a decentralized blockchain system.”&nbsp;



Airdrops, which Emmer and McHenry define as digital assets distributed to early users of certain protocols, have, like many parts of the crypto industry, occupied a regulatory gray area in recent years.&nbsp;



There’s not a lot of legal precedent to rely on, but here are two cases which have dealt with the question of airdrops and their status as securities:



<ol class="wp-block-list">
<li>In 2018, the SEC sued Tomahawk Exploration over its initial coin offering. Even though the ICO tokens were distributed for “free,” like airdrops, regulators said these assets were still securities since they created a public trading market. Airdrops are normally given to early community members or others who perform menial tasks (such as downloading an app or promoting a project), the SEC added. But even so, there does not need to be a transfer of money to constitute a “sale.”  </li>



<li>In an ongoing case brought earlier this year, crypto advocacy group the DeFi Education Fund and Texas-based clothing company Beba Collective sued the SEC. It was a preemptive measure of sorts; the plaintiffs are trying to get a court to rule that Beba’s airdropped tokens are not securities even though there hasn’t yet been an enforcement action. The next deadline in the case is coming up next month when DEF and Beba will have to file their opposition to the SEC’s motion to dismiss the case. </li>
</ol>



Emmer and McHenry say airdrops are no different from airline miles or credit card points, which are often gifted to consumers. They asked the SEC to respond to their inquiry by the end of the month.



— Casey Wagner



<h2 class="wp-block-heading">SEC in the hot seat (again)</h2>



In yet another crypto-related move by the House, members of the Financial Services Digital Asset Subcommittee gathered today to discuss the SEC’s “politicization” of digital asset regulation.&nbsp;



The hearing was more or less what you’d expect.&nbsp;



To wit: Most Republicans expressed frustration with how the SEC handles digital assets and most Democrats said the industry is simply uncooperative. There were some deviations from party lines, though. New York Dem Ritchie Torres, for example, emerged as a crypto advocate on the left.&nbsp;



“Did the SEC <a href="https://blockworks.co/news/lawmakers-frustrated-with-sec-crypto-approach">invent the term out of thin air</a>?” Torres asked during the hearing, referring to the asset class of “digital asset securities,” which the SEC seems to have recently created.&nbsp;



Subcommittee Chair French Hill, R-Ark., said the SEC’s refusal to adjust current policies to better fit the digital asset ecosystem is unacceptable.&nbsp;



Robinhood Market’s CLO Dan Gallagher, a witness on Wednesday, agreed.&nbsp;



Gallagher testified that Robinhood attempted to “come in and register” for the SEC’s coveted special purpose broker-dealer license, but found the requirements to be at odds with how crypto works.&nbsp;



“We recommended modifications that would make it work, and we were submitting to full regulation by the commission,” Gallagher testified on Wednesday. “It was a fruitful process. It was very cordial with the SEC staff until about early 2023, when we got a very perfunctory note from the chairman&#8217;s office telling us that there&#8217;s no reason to talk anymore.”&nbsp;



Gallagher did not specify what changes Robinhood recommended.&nbsp;



Consider today’s mostly uneventful hearing a warm-up for the big event next week, when all five SEC Commissioners will face the House Financial Services Committee on Tuesday. Buckle up!



— Casey Wagner



<h2 class="wp-block-heading">Bulletin Board&nbsp;</h2>



<ul class="wp-block-list">
<li>Another $187 million entered US-listed spot bitcoin funds on Tuesday, Farside Investors <a href="https://farside.co.uk/bitcoin-etf-flow-all-data/">data</a> shows — marking four straight days of net inflows. Total net money moving into the ETF segment totals $17.5 billion a little over eight months since the launches. </li>



<li>BlackRock published a <a href="https://www.blackrock.com/us/financial-professionals/literature/whitepaper/bitcoin-a-unique-diversifier.pdf">report</a> called “Bitcoin: A Unique Diversifier.” Likely drivers of long-term bitcoin adoption are “the intensity of concerns over global monetary stability, geopolitical stability, US fiscal sustainability and US political stability,” according to company executives. Rather than classifying bitcoin as a risk-on or risk-off asset, BTC’s long-term return drivers are “fundamentally uncorrelated with other sources of portfolio returns,” they wrote.  </li>



<li>Non-custodial exchange TrueX — set to use stablecoin PayPal USD as the default settlement currency — exited from stealth Wednesday. Vishal Gupta, Coinbase’s former head of exchange, and Patrick McCreary, an ex-senior staff engineer at the crypto exchange, founded the new firm.</li>



<li>WisdomTree unveiled the “direct-to-business counterpart” to the <a href="https://blockworks.co/news/blockchain-wisdomtree-app">“blockchain-enabled” consumer app it launched</a> last year. The new platform is designed to unlock tokenized real-world asset access to more users, enabling them over time to interact with any WisdomTree-issued token across wallets and supported blockchains.</li>
</ul>



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Powell pitches 50 bps rate cut to support ‘strength of the economy and the labor market’

The Federal Reserve reduced interest rates by 50 basis points Wednesday — a divergence from some industry watchers who expected a more conservative initial cut.&nbsp;&nbsp;



Fed Chair Jerome Powell had <a href="https://blockworks.co/news/powell-confirms-september-rate-cut">made it clear the central bank intended to reduce rates</a>, noting last month: “The time has come for policy to adjust.”



In a statement this afternoon, the Federal Open Market Committee (FOMC) said the decision came “in light of the progress on inflation and the balance of risks.”



“The committee has gained greater confidence that inflation is moving sustainably toward [2%], and judges that the risks to achieving its employment and inflation goals are roughly in balance,” the committee noted. “The economic outlook is uncertain, and the committee is attentive to the risks to both sides of its dual mandate.”



Ahead of the expected rate reduction from its previous 5.25%-5.50% range, the question remained whether the cut would amount to 25bps or 50bps.



CME Group’s FedWatch tool indicated a 55% probability of a 50bps cut a couple hours before the FOMC’s statement.&nbsp;



Some industry watchers and executives had said that while investors could view a 25bps cut as a normal measure, a 50bps cut could spur fears of a recession and bring on volatility.&nbsp;



“The Fed has only cut 50bps in a non-emergency situation once in the past 40 years,” Astoria Portfolio Advisors founder John Davi wrote in a blog <a href="https://www.astoriaadvisors.com/single-post/cio-thoughts-be-careful-what-you-wish-for-a-50bps-cut-would-imply-a-recession-and-potentially-a-s">post</a> earlier this week. “In our view, the Fed would be making a mistake as it would imply the economy is much weaker than currently suggested.”



Still, the Fed opted for the cut of 50bps.



Jake Ostrovskis, OTC Trader at Wintermute, said in a statement earlier today that “some degree of market re-pricing is inevitable, regardless of the decision” given the differing cut expectations.



Bitcoin’s price — at about $60,000 just before 2 pm ET — initially saw a bump above $60,700 in the minutes following the rate cut announcement.&nbsp;



Many expect the Fed to cut at the FOMC’s upcoming meetings slated for Nov. 7 and Dec. 18. A number of analysts had said the market was pricing in a total of 100bps — including Wednesday’s cut — in rate reductions by the end of the year.



FOMC members’ median projection in June was 25bps of interest rate cuts by the end of 2024. Latest projections released Wednesday show committee members have a median expectation of rates falling in the 4.25%-4.5% range (down from the current 4.75%-5.0%) by the end of the year. One policy maker anticipates 75bps of additional rate cuts by the year’s end.



Powell was set to give remarks during a press conference at 2:30 pm ET.&nbsp;



“Beyond the initial headline cut … the market will focus on forward guidance and the rate path through 2024-2025,” Ostrovskis said. “Questions surrounding the strength of the labor market and reaction function will likely be asked during the Q&amp;A session.”



Casey Wagner contributed reporting.



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First Fed interest rate cut in 4 years sized at 50 bps

Jack Kubinec

Today, enjoy the Lightspeed newsletter on Blockworks.co. Tomorrow, get the news delivered directly to your inbox. <a href="https://blockworks.co/newsletter/lightspeed">Subscribe to the Lightspeed newsletter</a>. 



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No matter how crazy things get, Jupiter’s market share seems impenetrable for the time being.&nbsp;



Last week, the swap aggregator and Solana DeFi everything app had two of its programs closed by an unauthorized user who gained access to its private key used for program deployments.&nbsp;



User funds were safe, the engineer in charge of the programs <a href="https://x.com/defiracer/status/1835367370472452167">disclosed</a> on X, implying that he meant to make the program only upgradeable by multiple key signatures but didn’t get around to it in time. The programs have since been changed — they are now governed by a multisig that takes multiple keys to be opened. Having just one private key guarding programs with real users is a serious security mishap, and Jupiter is probably thanking its lucky stars that no funds were stolen.



But despite this, no one seemed to care much. One commenter chastised the Jupiter engineer for leaving the “keys in the ignition,” but otherwise, the oopsies was met with a collective shrug.&nbsp;



On one hand, you could point out how near misses happen all the time in DeFi, and the space moves far too quickly for the crypto world to take stock of seeming minutiae like this. But the non-incident also perhaps points to something that doesn’t get talked about as much: Jupiter’s seemingly-uncrossable moat in Solana DeFi.&nbsp;



Jupiter’s calling card is its swap function which algorithmically routes trades across various liquidity venues to execute swaps with the best possible prices for users. When I set up a test swap of PYUSD for JitoSOL, it first proposed to route the funds through Raydium then to Meteora and onto Orca before returning to my wallet. This product is widely-used in Solana DeFi, and it tends to outperform competitors. While writing this article, I set up a quick few different swaps on Jupiter and Phantom, and Jupiter gave me a better price every time.



Because of this product, Jupiter finds itself somewhat immune to controversy — for now. Around a month ago, Jupiter founder meow penned a mea culpa <a href="https://discord.com/channels/897540204506775583/903114583126974494/1271507281586159778">apologizing</a> for poor user experience with things like gas fee estimation, adding that the Jupiter felt “quite hurt” that their products weren’t performing as intended.



But despite it all, there seems to be little negative impact on Jupiter. Its native token has traded essentially in tandem with SOL over the past few months. The platform has risen to become the third-largest in Solana DeFi by TVL, and it’s seen the most inflows over the past week of any Solana protocol with over $50 million — despite two of its programs being compromised.



Unless a better competitor emerges, Jupiter just seems to have a pretty good thing going on at the moment (though for what it’s worth, I <a href="https://blockworks.co/news/lightspeed-newsletter-pump-dot-fun-memecoin">made a similar case for pump.fun</a>, which may finally be running out of steam). 



In the meantime, Jupiter is building out a host of other features as part of its utopian “<a href="https://blockworks.co/news/lightspeed-newsletter-jupiter-unified-markets-plan">grand unified marketplace</a>” vision. There’s a lot of benefit to having one killer product prop up other lines of business. Amazon famously used its web services to bankroll its online marketplace for many years.



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Solana’s top swap venue seems immune to criticism

Lawmakers from both sides of the aisle on Wednesday expressed frustration with the US Securities and Exchange Commission’s current approach to digital assets.&nbsp;



The House Financial Services Committee Digital Assets Subcommittee on Financial Technology and Inclusion convened Wednesday to discuss how crypto market participants are navigating the current regulatory landscape —&nbsp;and what additional clarity is needed.&nbsp;



The <a href="https://www.youtube.com/live/bXxufU9EYX4">hearing</a>, entitled “Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets,” featured legal experts and market participants as witnesses, including Robinhood Markets Chief Legal Officer Dan Gallagher and Teddy Fusaro, the president of Bitwise Asset Management.&nbsp;&nbsp;



Committee members were largely interested in discussing how the SEC defines “crypto asset securities,” a term that the agency made up, one Democratic representative claims.



“Did the SEC invent the term out of thin air?” Rep. Ritchie Torres, D-N.Y., asked, somewhat rhetorically, when questioning Gallagher.&nbsp;



Read more: <a href="https://blockworks.co/news/rep-torres-sec-reconsider-regulation-by-enforcement">Rep. Torres asks SEC to reconsider ‘crusade against crypto’ in wake of Ripple</a>



Robinhood, Gallagher said, attempted to follow SEC Chair Gary Gensler’s instructions to “come in and register,” but found that the current structure for the special purpose broker dealer license the exchange sought was incompatible with digital assets.&nbsp;



“We recommended modifications that would make it work, and we were submitting to full regulation by the Commission,” <a href="https://www.youtube.com/live/bXxufU9EYX4">Gallagher</a> testified on Wednesday. “It was a fruitful process. It was very cordial with the SEC staff until about early 2023, when we got a very perfunctory note from the Chairman&#8217;s office telling us that there&#8217;s no reason to talk anymore.”&nbsp;



The SEC’s refusal to adjust its framework is not consistent with securities laws, Subcommittee Chair French Hill, R-Ark., asserted. In federal court, the SEC continues to have “legal face plants,” when trying to defend their stance that virtually all cryptocurrencies are securities, he added.&nbsp;



Not all Committee members feel the same, though, and despite some bipartisan cooperation, Wednesday’s hearing also highlighted <a href="https://blockworks.co/news/maxine-waters-cbdc-bill-anti-innovation-republicans">party disputes</a> that have existed around digital assets for years.&nbsp;



Why would the vast majority of companies who have faced enforcement actions from the SEC since 2021 have opted to settle and pay a collective $5.5 billion in penalties if they hadn’t done anything wrong, Rep. Maxine Waters, D-Cali., asked the witnesses.&nbsp;



Read more: <a href="https://blockworks.co/news/fincen-hearing-crypto-illegal-financing">House hearing on FinCEN oversight turns into crypto debate</a>



Lee Reiners, a lecturing fellow at Duke University, responded by saying that he feels the SEC — under both former Chair Jay Clayton and current Chair Gensler — has overwhelmingly been in the right when bringing various enforcement actions against crypto players.&nbsp;



There has been “one notable partial loss,” Reiners said, when <a href="https://blockworks.co/news/judge-rules-ripple-xrp-not-security">Ripple partially won against the SEC</a> in 2023, but even this ruling has since been “repudiated by several other federal judges in that same federal district court.”&nbsp;



Rep. Sean Casten, D-IL, later expressed concern with how current legislative proposals do not sufficiently protect the investing public from fraud, as exemplified, he said, by the recently-announced World Liberty Financial project, which the Trump family has been promoting. 



The World Liberty team said they <a href="https://blockworks.co/news/on-the-margin-newsletter-trump-family-defi-venture">would retain control of 20% of the token supply</a>, which, based on the Financial Innovation and Technology for the 21st Century Act — passed in the House in May — would mean the project is “decentralized and not subject to regulation,” Casten said.



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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the On the Margin newsletter</a>.



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Rep. Torres: SEC invented ‘crypto asset security’ out of thin air

Katherine Ross

The vibes are off for Ethereum right now.&nbsp;



And it seems that <a href="https://x.com/moonpay/status/1836282139513602413">Vitalik Buterin singing</a> at Token2049 isn’t the bullish signal everyone’s looking for.



But it’s not Buterin’s fault given that Bitwise’s Matt Hougan <a href="https://experts.bitwiseinvestments.com/cio-memos/a-contrarian-bet-on-ethereum?utm_medium=email&amp;_hsenc=p2ANqtz-8myxcJG_lpfITufcPu7eyKNK2h8zNEh5ABsX2gxZ5zgvBkUrweNJDM_98m_l6kz_DXzlrob25arL9ArwoopVCKLh8AGQ&amp;_hsmi=325026337&amp;utm_content=325026337&amp;utm_source=hs_email">penned</a> a note on ethereum ahead of the network creator taking the stage. Hougan pointed out that the ETH/BTC ratio hit its lowest level in three years. ETH has struggled with upward momentum in the past few quarters, unlike both bitcoin and solana.



“The vibes in the community are tough,” Hougan wrote.&nbsp;



It’s a fair, if somewhat unfortunate statement given that some believed the momentum around ETH could pick up after ETF approval earlier this year. Bitcoin received ETF approval earlier this year and then carved out all-time highs just a few months later, and ETH tracked the momentum like a loyal dog.&nbsp;



But no such move manifested for ETH when its <a href="https://blockworks.co/news/nine-us-spot-eth-etfs-live-post-approval">own ETFs were launched</a>.&nbsp;



“A key factor is the timing of Ethereum ETFs, which launched during the summer — a typically slower period for both the crypto and ETF markets,” Federico Brokate of 21Shares told Blockworks. “This is also partly due to Ethereum having a less straightforward narrative compared to Bitcoin, which is widely regarded as ‘digital gold.’”



Read more: <a href="https://blockworks.co/news/21shares-us-crypto-etf-adoption-outlook">21Shares exec talks US crypto ETF adoption, where we go from here</a>



Hougan said that there are a few other reasons as well: the election risk, competitors and tokenomics.&nbsp;



“While Bitcoin has largely passed regulatory scrutiny — even [Securities and Exchange Commission] Chair Gary Gensler admits it&#8217;s not a security — Ethereum has not. The SEC appears to think that staked ETH is a security, and the agency has significant worries about the broader DeFi ecosystem that drives much of Ethereum’s value. If Harris wins and continues the Biden administration’s <a href="https://blockworks.co/news/kamala-harris-crypto-policy-reset-outlook">skeptical posture toward crypto</a>, Ethereum could face challenges,” he added.



ETH has, in a legal sense, notched a few wins. The SEC <a href="https://blockworks.co/news/sec-has-it-in-for-consensys">dismissed its investigation</a> into ethereum over the summer. And, more recently, the eToro settlement gave some indication into the SEC’s current thought process.



It seems as if the SEC is dismissing any potential action against ETH by allowing the US-based trading platform to continue offering ether to customers. Keep in mind that the <a href="https://blockworks.co/news/etoro-sec-settlement">settlement cut quite a few of its offerings</a>.



Neither <a href="https://blockworks.co/tag/matt-hougan">Hougan</a> nor Brokate are too concerned about the potential death of Ethereum. They’re both cautiously optimistic that it’ll bounce back and that the “price of ether will ultimately reflect the growing adoption of its various use cases,” Brokate said.



“There are several positive catalysts for <a href="https://blockworks.co/tag/ethereum">Ethereum</a>. Investor education will be key to driving further adoption. As Ethereum’s narrative around real-world assets, tokenization and decentralized finance becomes better understood by both retail and institutional investors, demand is expected to grow. Ethereum’s role as a technological innovator is also gaining traction, particularly among those with a deeper understanding of blockchain technology,” he continued.&nbsp;



Read more: <a href="https://blockworks.co/news/eth-fundamentals-bearish-bullish">ETH’s fundamentals remain ‘strong:’ Analyst</a>



Hougan pointed to Polymarket’s dependence on ETH — even though Polymarket <a href="https://polygon.technology/blog/project-spotlight-polymarket-the-biggest-decentralized-prediction-market-in-blockchain">runs on</a> Polygon, it “ultimately settles on Ethereum.” There’s also the fact that over half of all stablecoins are issued on Ethereum, according to <a href="https://app.rwa.xyz/stablecoins">data</a> from rwa.xyz.



To Hougan, Ethereum is the “Microsoft of blockchains.” It is perhaps an apt comparison given that Microsoft is one of the largest tech giants, and yet isn’t seen as particularly sexy. Remember all of the hype around the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) a few years ago? Microsoft was notably left out. Though that never meant it was not competitive in its industry.&nbsp;



“Ethereum remains a foundational technology platform with immense potential. Although it may lag behind Bitcoin in terms of brand recognition, its role in decentralized finance, tokenization and as a programmable blockchain makes it a crucial part of the future digital economy,” Brokate explained.&nbsp;



“Ethereum represents a bet on blockchain innovation, which will only grow in importance as tokenized assets and decentralized financial applications continue to expand. While short-term bearishness may persist, the long-term outlook for Ethereum remains highly positive.”



Perhaps, like Microsoft, Ethereum just needs some time to fully blossom in the eyes of adopters and investors. With FAANG’s fall from grace, Microsoft finally got a seat at the table in the new grouping of the <a href="https://www.wsj.com/buyside/personal-finance/investing/magnificent-7-stocks">Magnificent 7</a>.



“Despite these short-term headwinds, Ethereum’s fundamentals remain strong. The number of developers joining the Ethereum ecosystem is higher than ever, with more projects launching on the network and an expanding range of use cases. These developments should provide solid support for ETH in the long term,” Brokate said.



A modified version of this article first appeared in the daily Empire newsletter. Subscribe <a href="https://blockworks.co/newsletter/empire">here</a> so you don’t miss tomorrow’s edition.



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The ETH vibes are ‘tough,’ Bitwise CIO says

Just hours away from the Federal Reserve’s expected rate reduction from its current 5.25%-5.50% range, the question remains whether the cut will amount to 25 basis points or 50bps.



The Federal Open Market Committee (<a href="https://blockworks.co/tag/fomc">FOMC</a>) is set to release a statement at 2 pm ET before Fed Chair Jerome Powell’s press conference at 2:30 pm ET.&nbsp;&nbsp;



One of the final data points to look at before the central bank’s decision was US retail sales for August.&nbsp;



The Census Bureau’s report Tuesday morning showed these sales slightly rose last month — amounting to a month-over-month increase of 0.1%. The increase was a bit unexpected, as economists polled by <a href="https://www.reuters.com/markets/us/us-retail-sales-unexpectedly-rise-august-2024-09-17/">Reuters</a> had estimated a 0.2% decline.



21Shares research analyst Leena ElDeeb noted the retail sales “beating expectations” were well-received by the market, “alleviating recession fears for now.”



Bitcoin’s price rose toward $61,000 by Tuesday afternoon — a level nearly 5% higher than 24 hours prior. BTC dropped closer to the $59,000 level early Wednesday before again increasing to about $59,800 at 9:30 am ET.



Off The Chain Capital CEO Brian Dixon told Blockworks the better-than-expected retail sales numbers could pressure the <a href="https://blockworks.co/tag/federal-reserve">Fed</a> to cut rates by only 25bps, “as the economy is still somewhat strong but clearly showing signs of slowing.”&nbsp;



Read more: <a href="https://blockworks.co/news/market-expectations-ahead-of-rate-decision">What to watch for heading into the next Fed rate decision</a>



The probability of the Fed cutting rates by 50bps stood at 59% at 9:30 am ET Wednesday, according to CME Group’s FedWatch tool.



This chance of a 50bps cut has fluctuated in recent days after <a href="https://blockworks.co/news/on-the-margin-newsletter-rate-decision-countdown">jumping markedly higher</a> late last week. Before that, the markets viewed a 25bps cut as more likely.



A 50bps cut could spark investor fears of a recession and potentially increase volatility, some <a href="https://blockworks.co/news/september-events-that-could-move-markets">industry analysts and executives have noted</a>.



“I think the overall data picture shows that the Fed is probably thinking that it might be better to gradually taper down rates rather than initiate cuts in a big way,” Dixon added.



Such a gradual drop would go against the wishes of three Democratic senators who urged the Fed (in a Monday <a href="https://www.warren.senate.gov/imo/media/doc/warren_hickenlooper_whitehouse_letter_to_fed_re_september_rate_cut.pdf">letter</a> to Powell) to cut rates by 0.75% at the September meeting.&nbsp;



Front-loading rate cuts could help the US economy “avoid sliding towards a potential crisis,” Sens. Elizabeth Warren, Sheldon Whitehouse and John Hickenlooper wrote.



A number of analysts have said the market is pricing in 100bps in rate reductions by the end of the year.



“Obviously, even as inflation has eased, there’s certainly concern that it could return if overall monetary loosening takes place in a fashion that is too big and too fast,” Dixon said.



A modified version of this article first appeared in yesterday’s On the Margin newsletter. Subscribe <a href="https://blockworks.co/newsletter/onthemargin">here</a> so you don’t miss tomorrow’s edition.



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BTC price fluctuates ahead of expected Fed rate cut

David Canellis

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<h2 class="wp-block-heading">The vibes are off&nbsp;</h2>



Ethereum’s got a lot of haters right now. Perhaps <a href="https://x.com/moonpay/status/1836282139513602413">Vitalik Buterin singing</a> isn’t the bullish signal everyone’s looking for.



As Bitwise’s Matt Hougan <a href="https://experts.bitwiseinvestments.com/cio-memos/a-contrarian-bet-on-ethereum?utm_medium=email&amp;_hsenc=p2ANqtz-8myxcJG_lpfITufcPu7eyKNK2h8zNEh5ABsX2gxZ5zgvBkUrweNJDM_98m_l6kz_DXzlrob25arL9ArwoopVCKLh8AGQ&amp;_hsmi=325026337&amp;utm_content=325026337&amp;utm_source=hs_email">pointed out in a note</a> yesterday, the ETH/BTC ratio hit its lowest level in three years. ETH has struggled with upward momentum in the past few quarters, unlike both bitcoin and solana.



“The vibes in the community are tough,” Hougan wrote.&nbsp;



It’s a fair assessment, given that the expectation for ETH to follow in bitcoin’s footsteps may be a fair one. Bitcoin received ETF approval earlier this year and then carved out all-time highs just a few months later, and ETH tracked the momentum like a loyal dog.&nbsp;



And yet… it failed to see a huge boost when its own ETFs were approved earlier this year.



“A key factor is the timing of Ethereum ETFs, which launched during the summer — a typically slower period for both the crypto and ETF markets,” Federico Brokate of 21Shares told me. 



“This is also partly due to Ethereum having a less straightforward narrative compared to Bitcoin, which is widely regarded as ‘digital gold.’”



Hougan, in his note, said that there are a few other reasons: the election risk, competitors and tokenomics.&nbsp;



“While Bitcoin has largely passed regulatory scrutiny — even SEC Chair Gary Gensler admits it&#8217;s not a security — Ethereum has not. The SEC appears to think that staked ETH is a security, and the agency has significant worries about the broader DeFi ecosystem that drives much of Ethereum’s value. If Harris wins and continues the Biden administration’s skeptical posture toward crypto, Ethereum could face challenges,” Hougan added.



From the legal standpoint, Hougan is right. It’s worth noting that ETH could be seen as notching a few wins of its own.&nbsp;



Looking closely at the eToro settlement, it seems as if the SEC is dismissing any potential action against ETH by allowing the US-based trading platform to continue offering ether to customers.&nbsp;



Mind you, eToro’s <a href="https://blockworks.co/news/etoro-sec-settlement">settlement cut quite a few of its offerings</a>, so this could be worth reading into.



Either way, neither Hougan nor Brokate are too concerned about the potential death of Ethereum. They’re both cautiously optimistic that it’ll bounce back and that the “price of ether will ultimately reflect the growing adoption of its various use cases,” Brokate said.



“There are several positive catalysts for Ethereum. Investor education will be key to driving further adoption. As Ethereum’s narrative around real-world assets, tokenization and decentralized finance becomes better understood by both retail and institutional investors, demand is expected to grow. Ethereum’s role as a technological innovator is also gaining traction, particularly among those with a deeper understanding of blockchain technology,” he continued.&nbsp;



Hougan pointed to Polymarket’s dependence on ETH, and the fact that over half of all stablecoins are issued on Ethereum according to <a href="https://app.rwa.xyz/stablecoins">data</a> from rwa.xyz.



To be clear, Polymarket <a href="https://polygon.technology/blog/project-spotlight-polymarket-the-biggest-decentralized-prediction-market-in-blockchain">runs on</a> Polygon, but Hougan noted that it “ultimately settles on Ethereum.”&nbsp;



To Hougan, Ethereum is the “Microsoft of blockchains,” perhaps an apt comparison given that Microsoft is one of the largest tech giants, and yet isn’t seen as particularly sexy. Those of you who remember all of the hype around the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) will remember how Microsoft was left out. But that doesn’t mean it’s not competitive in its industry.&nbsp;



“Ethereum remains a foundational technology platform with immense potential. Although it may lag behind Bitcoin in terms of brand recognition, its role in decentralized finance, tokenization and as a programmable blockchain makes it a crucial part of the future digital economy,” Brokate explained.&nbsp;



“Ethereum represents a bet on blockchain innovation, which will only grow in importance as tokenized assets and decentralized financial applications continue to expand. While short-term bearishness may persist, the long-term outlook for Ethereum remains highly positive.”



Perhaps, like Microsoft, Ethereum just needs some time to fully blossom in the eyes of adopters and investors. With FAANG’s fall from grace, Microsoft finally got a seat at the table in the new must-watch grouping of the <a href="https://www.wsj.com/buyside/personal-finance/investing/magnificent-7-stocks">Magnificent 7</a>.



After all, Ethereum secured itself as essential to crypto, even if the price doesn’t always reflect it. Let it cook.



— Katherine Ross



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



<ul class="wp-block-list">
<li>Ether has outperformed Microsoft stock in the past year — 42% to 32% — although it’s lagging behind slightly over the year-to-date.</li>



<li>ETH is flat in the past day while bitcoin is ahead 1.2%. (BTC: $59,800; ETH: $2,300.)</li>



<li>Tron lending protocol JustLend has added the most <a href="https://defillama.com/">TVL</a> in the past week, out of apps with $1 billion or more, gaining 4.9% to $5.85 billion.</li>



<li>DEX trading bots are actioning about 250,000 <a href="https://dune.com/whale_hunter/dex-trading-bot-wars">trades</a> per day right now, down from over a million in March.</li>



<li>Solana has flipped Ethereum for weekly derivatives <a href="https://defillama.com/derivatives/chains">volume</a>: $2.666 billion to $2.624 billion.</li>
</ul>



<h2 class="wp-block-heading">The flip that flopped</h2>



Something about crypto breeds bombastic calls — but ether flipping bitcoin has long been one of the most lofty.



The ETH/BTC ratio focuses on relative cost. “The flippening” is instead about market caps — whether one asset is valued higher than the other in broad strokes.



Market caps can grow quicker than prices can appreciate, and can even trend in opposite directions.



Take solana: It’s still 50% below its all-time high from November 2021, but its market cap is less than 20% below where it was at its peak — and even set a new capitalization record earlier this year.&nbsp;



Inflation is the culprit. SOL’s circulating supply has swelled by 60% in the past three years, the equivalent of 178 million SOL ($22.6 billion at current prices), or 37% of its market cap right now.



As for ether, it was much closer to flipping bitcoin in the leadup to the 2017 bull run, before the Cambrian explosion of rival layer-1s began pulling market attention away from Ethereum.



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXc3yafYW7p3_RHCUhhLm1JElgf9cK2yUSDJTrnr-AVCX9coGKnvbVWJW3KFSmHXwYkrNBL864UH4asaGJ49-H5jiYxIe4w1Vf1fvVxKIGhs46n5GWPCF79oXxihZ8tPDUDaNH7VDCn6qNgOVx1xj1TfaKQa?key=MObAuVMr6ep4cIMiv4j2yQ" alt=""/></figure>



The Ethereum flippening was over 83% complete in June 2017 (when BTC traded for under $2,500 and ETH under $350). Now it’s at less than 25%.



There are loads of other rivalries in crypto, both explicit and implicit.&nbsp;



Shiba inu briefly flipped dogecoin in late 2021 but is now back down to about half its value.&nbsp;



Sui and aptos both debuted around the same time (between late 2022 and mid-2023) with similar market positionings — resulting in similar valuations. SUI flipped APT for the first time earlier this week.



And perhaps the market doesn’t realize it now, but it could be that BNB and TON are more alike in vibes, development styles and user adoption than Solana is to Ethereum.&nbsp;



TON is about 20% of the way to eclipsing BNB right now, mostly on account of stalled growth for BNB.



Still, with ETH flipping BTC looking less likely these days, solana flipping ether should be the go-to call for think-posters moving forward.



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXfaqPqa-LS71aAvGbUJ9CfPKc-mu7yUtb2RCZSUk0Sz4SyHdwhl9EfP_wKU5cJmmR7IuBhS9fway4hjSBJBilozt2l2AJav86LItUH9t4e5lFG5ZYskf59RtarDUh1X0MVEvvtN-URQmmgdie8saX1kzvFR?key=MObAuVMr6ep4cIMiv4j2yQ" alt=""/></figure>



SOL actually recorded its highest ever progress at the end of last month: $68.46 billion to $295.64 billion — 23% flipped.



A complete flipping from here would require SOL to rally by over 330% while ETH trades flat.&nbsp;



Seems unlikely without an explosive catalyst, but watch for the gap to close between this cycle and the next.



— David Canellis



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



<ul class="wp-block-list">
<li>Revolut could be looking into creating its own stablecoin, CoinDesk <a href="https://www.coindesk.com/business/2024/09/18/fintech-giant-revolut-said-to-be-planning-stablecoin/">reported</a>.&nbsp;</li>



<li>Jamie Dimon <a href="https://www.theblock.co/post/316956/jamie-dimon-says-jpmorgan-chase-is-probably-one-of-the-bigger-users-of-blockchain?utm_source=rss&amp;utm_medium=rss">said</a> that his company, JPMorgan Chase, is one of the larger users of blockchain.&nbsp;</li>



<li>Prager Metis, FTX’s former accounting firm, <a href="https://www.sec.gov/newsroom/press-releases/2024-133">settled</a> with the SEC for $1.95 million over audit negligence.</li>



<li>SkyBridge’s Anthony Scaramucci expressed optimism for pro-crypto regulation in an interview with <a href="https://www.bloomberg.com/news/articles/2024-09-18/scaramucci-expects-bitcoin-btc-record-on-rate-cuts-clearer-us-rules">Bloomberg</a>.</li>



<li>Republicans have some <a href="https://blockworks.co/news/reps-ask-sec-for-clarity-securities-airdrops">questions</a> for SEC chair Gary Gensler over airdrop regulations.</li>
</ul>



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



Q: Will crypto become more like traditional markets, or will traditional markets become just like crypto?



A line in the Bitcoin maxi handbook says that there’s “bitcoin” and there’s “crypto.”



It goes that Bitcoin is the immaculately conceived cryptocurrency — pure, unable to be gentrified, cypherpunk to the core.



Crypto by comparison is the product of an “industry” of corporate executives. Salaries. Press departments. HR. Not so rock and roll.



One would’ve thought, in that case, that “crypto” would gravitate further toward traditional finance than bitcoin.&nbsp;



From a pure markets perspective, bitcoin is becoming a lot more like TradFi in terms of how and when it’s traded — Kaiko found that weekend BTC trading <a href="https://research.kaiko.com/insights/btc-etfs-impact-on-spot-market-structure">volume</a> had hit an all-time low of 16% this year, down from 28% in 2019, with the very Wall Street bitcoin ETFs accelerating that trend.



“Crypto,” meanwhile, is fighting to ensure that decentralization and permissionless-ness are lines in the sand that can never be crossed. Ripple, Uniswap, Coinbase and Kraken and others aren’t going quietly into the regulated night.



That could result in the two worlds bumping off each other, rather than completely merge.



— David Canellis



I think there’ll be compromises on both sides, but I wouldn’t be surprised if crypto ends up making more compromises than traditional markets.&nbsp;



And that’s okay.&nbsp;



Look at it this way, traditional markets have been around for a lot longer. Sure, some of the pieces making up the larger puzzle are outdated and crypto fixes that but the foundations of finance are still incredibly strong, especially in the US.&nbsp;



We’re already seeing the correlation between bitcoin and parts of the wider market, as well as the impact that macro events like potential rate cuts have on crypto.&nbsp;



I mean, have you had many conversations lately that haven’t gone back to the relationship between the Fed and crypto? I sure haven’t.&nbsp;



And, despite the SEC’s attempt to weaponize TradFi cornerstones — like Howey — to put down the industry, we’ve seen <a href="https://blockworks.co/news/judge-rules-ripple-xrp-not-security">courts use the same test</a> to push back against the SEC’s claims.&nbsp;



— Katherine Ross



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Ethereum is looking more like the “Microsoft of blockchains” every day

Macauley Peterson

Hemi Labs, the brainchild of former Bitcoin core developer Jeff Garzik, has secured $15 million in a funding round led by Binance Labs, Breyer Capital and Big Brain Holdings to develop its new blockchain network, Hemi.



The network is designed to integrate Bitcoin and Ethereum into a single, modular system. The investment will support Hemi’s development ahead of its planned mainnet launch in late 2024. The project’s incentivized testnet is already live.



Garzik is skeptical of most of the projects calling themselves layer-2’s whether on Ethereum or Bitcoin. He prefers an approach that tries to “unify the experience across both chains.”



“What comes next after Bitcoin L2s? A next generation network marrying the king and queen of crypto, Bitcoin and Ethereum,” Garzik told Blockworks.



A central feature of the network is the Hemi Virtual Machine (hVM), which embeds a Bitcoin node within the Ethereum environment, specifically a custom version of the Geth execution client.



Hemi’s consensus mechanism, <a href="https://docs.hemi.xyz/foundational-topics/the-architecture/proof-of-proof">Proof-of-Proof (PoP)</a>, is also novel, arising out of field tests by Veriblock, prior to Hemi Labs’ acquisition of the company in 2023. Veriblock co-founder Max Sanchez came aboard as Hemi’s CTO.



“We have myself, Max and other Bitcoin core dev-level developers building deep in the Geth and Bitcoin core engine,” Garzik said.



This integration allows developers to create dapps that operate across both networks using familiar Ethereum tools.



Both Bitcoin and Ethereum are evolving into settlement layers, with transaction activity migrating to connected networks.



“Where we think our special sauce is on the Ethereum side, where there is very little strong marriage to Bitcoin,” Garzik said, in contrast to the “ton of L2s” on Bitcoin. “They’re all staple gunning [Ethereum Virtual machine (<a href="https://blockworks.co/tag/evm">EVM</a>)] on some sort of Bitcoin anchoring, but it&#8217;s a very poor integration.”



The hVM incorporates new byte codes into the EVM that talk directly to Bitcoin, Garzik explained.



“In <a href="https://app.blockworksresearch.com/glossary/#solidity-programming-language-ethereum">Solidity</a>, we can trigger Bitcoin transactions sent out on the Bitcoin main chain. We can parse incoming Bitcoin <a href="https://app.blockworksresearch.com/glossary/#unspent-transaction-output-utxo">UTXOs</a> that are inbound payments from Solidity from the EVM,” Garzik said.



The Hemi Bitcoin Kit (hBK) enables developers to work with Bitcoin more effectively, unlocking features such as trustless smart contracts and decentralized financial products that were difficult to implement directly on Bitcoin.



“This is the Bitcoin [developer] experience that I&#8217;ve wanted for almost 14 years of my being in Bitcoin,” Garzik said, pointing to the difficulty in working with Bitcoin’s limited scripting.



“Only recently have you had technologies like the BitVM vault and some of these more advanced technologies and Bitcoin anchoring,” he said.



Read more: <a href="https://blockworks.co/news/bitcoin-rollups-closer-than-expected">Bitcoin rollups may be closer than we think</a>



The PoP consensus mechanism predates <a href="https://blockworks.co/newsletter/research/issue/post_f52d90f1-b169-4430-a3cb-f54e5c37ee66">BitVM</a> but enables what Garzik calls &#8220;superfinality,&#8221; securing transactions with minimal delay — 2 hours or 12 Bitcoin blocks for “full finality” — in contrast to other optimistic fraud proof systems.



By using normal Bitcoin transactions, “it&#8217;s maximally censorship resistant [and] maximally compatible,” Garzik said.



Hemi does plan to support BitVM vaults as a primary Bitcoin bridging solution&nbsp;—&nbsp;Garzik prefers the term “tunneling” as one on-ramp, in addition to an Ethereum bridge. In 2025, he expects to add bridging capability to Solana, Avalanche, and “other ones that have staying power in the market.”



The team also plans to implement the <a href="https://blockworks.co/tag/lightning-network">Lightning Network</a> for instant payments.



Garzik described the Hemi project as a practical step toward greater interoperability between leading blockchain platforms. He emphasized that the network is designed to offer developers a modular approach that can adapt to changes in the ecosystem while maintaining strong security guarantees.



“I like to call Ethereum the Grand Central Station of crypto, and Bitcoin the root of the crypto tree.”



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Hemi Labs focused on ‘marrying the king and queen of crypto’

Two Republican Congressional Representatives are demanding clarity from the Securities and Exchange Commission about how regulators view airdrops.&nbsp;



Reps. Tom Emmer and Patrick McHenry penned a <a href="https://emmer.house.gov/_cache/files/5/0/50176829-99c6-40ec-87dd-96421f659fd0/58E2521AD98881EC6DB7696DEC1C2A6C.congressionalletter.sec.9.17.24.pdf">letter</a> to SEC Chair Gary Gensler Tuesday, expressing concern that regulators have “misapplied” securities laws to airdrops, a technology, they say, that plays a “crucial role in the development of a decentralized blockchain system.”&nbsp;



Airdrops, which Emmer and McHenry define as digital assets that are distributed to early users of certain protocols, have, like many parts of the crypto industry, been in a regulatory gray area in recent years.&nbsp;



In a 2018 <a href="https://www.huntonak.com/blockchain-legal-resource/assets/htmldocuments/uploads/sites/31/2018/08/33-10530-1.pdf">enforcement action</a> against Tomahawk Exploration’s initial coin offering (ICO), the SEC claimed even tokens distributed for “free,” like airdrops, are <a href="https://blockworks.co/tag/securities">securities</a> because they create a public trading market. <a href="https://blockworks.co/tag/airdrop">Airdrops</a> are normally given to early community members or others who perform menial tasks (such as downloading an app or promoting a project), the SEC added, but even so, there does not need to be a transfer of money to constitute a “sale.”&nbsp;&nbsp;



Read more: <a href="https://blockworks.co/news/defi-hearing-lawmakers-clash">House lawmakers clash at first-ever DeFi hearing&nbsp;</a>



It’s a similar argument to the ones securities regulators made in the 1990s during the dot-com craze with “free stock” enforcement actions, attorneys at Hunton Andrews Kurth wrote in a blog <a href="https://www.huntonak.com/blockchain-legal-resource/sec-brings-enforcement-case-involving-airdrop-securities">post</a>.&nbsp;



“In what have become known as the ‘free stock’ cases, investors were typically required to sign up with issuers&#8217; websites and disclose personal information in order to obtain the ‘free’ shares,” the post reads. “The <a href="https://blockworks.co/tag/sec">SEC</a> likewise took the position that the issuers received value (and did not make a gift) by creating a public market for their shares, increasing their business prospects, creating publicity, increasing traffic to their websites and generating possible interest in future public offerings.



Crypto advocacy group the DeFi Education Fund sued the SEC earlier this year alongside Texas-based clothing company Beba Collective in an effort to get a court ruling confirming Beba’s airdropped token was not a security. Plaintiffs in July filed an amended complaint, which the SEC is seeking to dismiss, and are awaiting ruling.



Read more: <a href="https://blockworks.co/news/defi-education-fund-sec-foia">DeFi Education Fund seeks FOIA amid SEC inaction on securities dispute</a>



In their Tuesday letter, <a href="https://blockworks.co/tag/tom-emmer">Emmer</a> and <a href="https://blockworks.co/tag/patrick-mchenry">McHenry</a> ask securities regulators to explain if airdrops constitute securities under the Howey test. They also ask why airdrops should be treated any differently from other rewards programs companies routinely engage in, like airline miles or credit card points, which are often gifted.&nbsp;



The Reps. ask that Gensler respond to their inquiries by Sept. 30.&nbsp;



The letter comes a week before the House Financial Services Committee is set to hear from SEC Commissioners during an oversight hearing scheduled for Sept. 24. McHenry, who is not running for re-election this November, chairs the committee, of which Emmer is a member.



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Republican Reps. ask Gensler for clarity on how securities laws apply to airdrops 

We&#8217;re nearing the conclusion of several crypto bankruptcies, including those of BlockFi and FTX.



FTX will have a hearing early next month that could see its reorganization plan confirmed by the court.&nbsp;



Earlier this summer, the estate said that the plan received support from creditors, though it’s a bit controversial. Pending the outcome of the confirmation hearing, the bankruptcy could be wrapped up as soon as the end of this year.



And it’s not the only bankrupt firm that’s nearing the finish line. BlockFi is also getting closer to bringing its proceedings to a close.&nbsp;



Read more: <a href="https://blockworks.co/news/empire-newsletter-ftx-bankruptcy-shortfalls">FTX’s bankruptcy isn’t the success you think it is</a>



Haynes and Boone partners Richard Kanowitz and Alexander Grishman told Blockworks that their client, BlockFi, is in the “final stages” after the plan was confirmed “<a href="https://blockworks.co/news/blockfi-bankruptcy-chapter-11-greenlight">a while ago</a>.”



The timing is still a bit in the air, but the estate is making “interim distributions and looking forward to making a final distribution,” Kanowitz added. The firm’s international arm is still undergoing proceedings with Bermuda courts before it can fully wrap the proceedings.&nbsp;



One of the biggest issues with <a href="https://blockworks.co/tag/ftx">FTX</a>’s bankruptcy proceedings is the court&#8217;s ruling that distributions will be made in cash instead of in-kind.



<a href="https://blockworks.co/tag/blockfi">BlockFi</a>’s creditors also pushed for the distributions to be made “in-kind,” which essentially means their crypto is handed back to them rather than receiving a sum of cash.&nbsp;



But, while BlockFi hadn’t misplaced crypto <a href="https://blockworks.co/news/ftx-lost-up-to-2b-in-user-funds-10b-sent-to-alameda-report">like FTX did</a>, the problem remained that there wouldn’t have been enough crypto to repay the creditors, both Grishman and Kanowitz said. The two lawyers said their client was able to provide reports detailing its holdings.



“That [puts the] cart before the horse, right? If they had all those assets to be able to return to customers, [they wouldn’t have needed] to file bankruptcy,” Kanowitz explained.&nbsp;



“If they had enough crypto, they would never have needed to file the bankruptcy, because customers wouldn&#8217;t be pulling out their money. They would have just continued to trade. But because, again, going back to why BlockFi failed…Alameda owed BlockFi Lending and BlockFi International over $600 million of crypto lent to it but didn&#8217;t give it back,” he added.



However, unlike FTX, the two lawyers said they were able to access reports and see where assets were. It’s no secret that the teams working for the bankruptcy estate at Sam Bankman-Fried’s former company <a href="https://blockworks.co/news/new-ftx-ceo-says-exchange-commingled-assets">didn’t have such an easy time</a>.&nbsp;



Kanowitz called BlockFi the “golden standard” when it comes to crypto <a href="https://blockworks.co/tag/bankruptcy">bankruptcies</a> due to the organization of the team, which was also partially thanks to Grishman. Prior to the bankruptcies, Grishman worked with BlockFi before moving to help with the bankruptcy once the firm filed after the <a href="https://blockworks.co/news/ftx-meltdown-timeline">collapse of FTX</a>.&nbsp;



But there’s long been one question lingering in the back of my mind: Is our current bankruptcy code sufficient enough to tackle crypto?



Kanowitz essentially said yes, that the crypto bankruptcies didn’t have anything “out of the ordinary that the bankruptcy code couldn’t handle.”



Grishman, who worked with BlockFi prior to the bankruptcy, agreed with Kanowitz.&nbsp;



“There was nothing that was so novel” about the case, Grishman said. “It’s just that the underlying asset is novel, and that it is cryptocurrency, but it&#8217;s nothing that the bankruptcy courts are not able to deal with.”



Read more: <a href="https://blockworks.co/news/ftx-comparison-crypto-bankruptcies">Why FTX is different from other crypto bankruptcies</a>



When I posed the question to Bill Hughes, senior counsel and director of global regulatory matters at Consensys, he had a bit of a different take.&nbsp;



“This is the very reason that the industry is calling for rules that are tailored to how crypto works. You can’t just say that the rules that cover TradFi should just be applied when the mechanism through which the blockchain works and users use it is different. To ignore that is to whitewash differences that make the rules in some sense inapplicable. If you apply them then you can’t use the blockchain,” Hughes said. He continued: “What has to happen is, where necessary, you come up with new approaches that seek to serve similar ends, and deal with the reality in which people use a peer-to-peer network. That requires changes to accounting rules […] and adding to parts of the bankruptcy code. Perhaps the tax code needs some tweaks. There&#8217;s a way to do it that serves the purposes of the law, but does so in a way that serves the system.”



But there’s a silver lining in all of this, according to Grishman.&nbsp;



“I think, in the long run…it is helping us craft and develop these products, and helping the market see exactly what they want, how they want their counterparties to treat their assets…hold them in custody, off-balance sheet, so you know, they&#8217;re not part of their bankruptcy’s estate to the extent that happens in the future.”



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BlockFi’s bankruptcy proceedings ‘golden standard’ compared to FTX: Lawyers

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Welcome to the On the Margin Newsletter, brought to you by Ben Strack and Casey Wagner. Here’s what you’ll find in today’s edition:



<ul class="wp-block-list">
<li>Casey breaks down the latest on Donald Trump’s family DeFi venture.</li>



<li>Another market check-in after this morning’s retail sales data and before the Fed’s looming rate decision.</li>



<li>Why a club set to open in downtown Manhattan must pay the SEC $750,000.   </li>
</ul>



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



<h2 class="wp-block-heading">Trump family debuts new crypto business&nbsp;</h2>



After weeks of ominous teasing and vague promises, we finally have a few details about World Liberty Financial, Donald Trump’s family DeFi venture.&nbsp;



If you didn’t spend two and a half hours on the <a href="https://x.com/farokh/status/1835829888743608468">livestream</a> from Mar-a-Lago last night, here are the highlights:&nbsp;



<ul class="wp-block-list">
<li>The team behind the project includes some of Trump’s children (Donald Jr., Eric and Barron), plus two serial-founders: Chase Herro and Zachary Folkman. You may know Herro by his self-proclaimed alter ego: the “dirtbag of the internet.” The duo has sold everything from weed to courses on how to get rich quick and pick up women. </li>



<li>There’s going to be a token. Of course, we could have surmised as much, and there have been <a href="https://www.coindesk.com/tech/2024/09/16/trumps-crypto-gambit-what-we-know-about-todays-launch-of-world-liberty-financial/">reports</a> confirming these rumors. But for the first time last night the team behind World Liberty Financial acknowledged that WLFI will be coming to market. (When, exactly, remains a mystery). </li>



<li>WLFI’s distribution will be 20% to the founding team/Trump family, 17% toward “user rewards,” and 63% for public purchase. (A leaked draft of World Liberty’s plans previously stated that 70% of tokens would be reserved for project leaders). </li>
</ul>



Around 90 minutes in, the host (Farokh Sarmad of Rug Radio) addressed Barron, or tried to, at least. The NYU freshman had apparently left the room.&nbsp;



“He talks about his wallet; he’s got four wallets or something,” Trump said of his youngest son. “It’s almost like younger people know it a lot better than older people.”&nbsp;



No one said anything about how a sitting president’s involvement with a crypto venture would be perceived by the public and regulators, should Trump win in November. The leaked white paper (originally reported by CoinDesk) includes a disclaimer that Trump and his family do not own or manage World Liberty Financial, but could receive compensation.&nbsp;



Trump did mention the SEC “has been very hostile and really going after people” in the crypto space. He also claimed the agency has recently backed off the industry, which Trump credits to his candidacy for president.&nbsp;



“People that were under serious investigation for having done nothing wrong are all of a sudden allowed to go free,” he said.&nbsp;



“If for some reason bad things happen and we don&#8217;t win the election, those people that were under investigation and that are free as a bird right now, and people that weren&#8217;t being looked at in the crypto world, they will be living in hell,” Trump added. “Because it&#8217;ll start the day after the election if they win.”



He did not mention any specific projects or individuals who have been able to “walk free” from SEC scrutiny. (I will add that the livestream did occur hours after the SEC dropped its <a href="https://blockworks.co/news/flyfish-settlement-sec-nfts">latest enforcement action on Flyfish Club</a> for an alleged unregistered securities offering. More on that later).&nbsp;



Speaking of an unregistered securities offering…&nbsp;



Even though we don’t have all the details about WLFI yet, I’d imagine the SEC’s interest is significantly piqued. Commissioners are going to be looking for evidence that project leaders gave buyers a reasonable expectation of profit (which I wouldn’t say we got last night) and signs the token was promoted (which I’d say we certainly got last night), among other things.&nbsp;



Let’s hope the World Liberty team is reading up on Howey.&nbsp;



— Casey Wagner



<h3 class="wp-block-heading">63%</h3>



The probability (as of 2 pm ET Tuesday) of the Federal Reserve cutting rates by 50 basis points tomorrow, according to CME Group’s FedWatch <a href="https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html">tool</a>.



This chance of a 50bps cut has fluctuated in recent days after <a href="https://blockworks.co/news/on-the-margin-newsletter-rate-decision-countdown">jumping higher late last week</a>. Before that, the markets viewed a 25bps cut as more likely.



Fed Chair Jerome Powell’s press conference starts at 2:30 pm ET tomorrow. To read Blockworks’ FOMC rate decision preview, click <a href="https://blockworks.co/news/market-expectations-ahead-of-rate-decision">here</a>.



<h2 class="wp-block-heading">Is a 25bps rate cut more likely now?</h2>



<a href="https://blockworks.co/news/on-the-margin-newsletter-fed-week">We wrote yesterday</a> about the Fed’s highly anticipated rate reduction from its current 5.25%-5.50% range. We’re now a day out from the decision.&nbsp;



As noted above, the question remains whether we will see a cut amounting to 25bps or 50bps. One of the remaining data points to take a look at before the Fed’s decision was US retail sales for August.&nbsp;



The Census Bureau’s report this morning showed these sales slightly rose (unexpectedly) last month — amounting to a month-over-month increase of 0.1%. Economists polled by <a href="https://www.reuters.com/markets/us/us-retail-sales-unexpectedly-rise-august-2024-09-17/">Reuters</a> had estimated a 0.2% decline.



21Shares research analyst Leena ElDeeb noted the retail sales “beating expectations” were well-received by the market, “alleviating recession fears for now.”



Bitcoin’s price was nearly $61,000 at 2 pm ET Tuesday — about 4.7% higher than 24 hours prior.&nbsp;



Off The Chain Capital CEO Brian Dixon told Blockworks the better-than-expected retail sales numbers could pressure the Fed to cut rates by only 25bps tomorrow, “as the economy is still somewhat strong but clearly showing signs of slowing.”&nbsp;



He added: “I think the overall data picture shows that the Fed is probably thinking that it might be better to gradually taper down rates rather than initiate cuts in a big way.”



As mentioned yesterday, such a gradual drop would go against the wishes of three Democratic senators who urged the Fed (in a Monday <a href="https://www.warren.senate.gov/imo/media/doc/warren_hickenlooper_whitehouse_letter_to_fed_re_september_rate_cut.pdf">letter</a> to Powell) to cut rates by 0.75% at the September meeting.&nbsp;



Front-loading rate cuts could help the US economy “avoid sliding towards a potential crisis,” Sens. Elizabeth Warren, Sheldon Whitehouse and John Hickenlooper wrote.



A number of analysts have said the market is pricing in 100bps of rate reductions by the end of the year.



“Obviously, even as inflation has eased, there’s certainly concern that it could return if overall monetary loosening takes place in a fashion that is too big and too fast,” Dixon said.



— Ben Strack&nbsp;



<h2 class="wp-block-heading">Edgy new feature for latest NYC social club: An SEC fine&nbsp;</h2>



Flyfish Club LLC, the company behind the members-only social club slated to open in downtown Manhattan this month, was hit with a $750,000 fine from the SEC yesterday afternoon.&nbsp;



In 2021 and 2022, Flyfish sold memberships to its yet-to-be-built private club through NFTs priced between 2.5 ETH and 4.25 ETH. Roughly 1,600 NFTs were sold, generating around $14.8 million in gross proceeds. The funds were used to finance the construction of the “Flyfish Club,” a private restaurant in downtown Manhattan, according to the SEC.



It’s the latest action that securities regulators have taken against an NFT issuer for <a href="https://blockworks.co/news/sec-nft-prosection-precedent">allegedly offering unregistered securities</a>. This time, though, we got a rather clever dissenting opinion from Commissioners Hester Peirce and Mark Uyeda.



“For curmudgeonly commissioners like us, crypto enforcement feels a bit like a trip to a restaurant for a meal, Omakase style,” Peirce and Uyeda wrote, referencing the Japanese dining experience Flyfish Club plans to offer.&nbsp;



“Omakase translates to, ‘I’ll leave it up to you,’” they added. “This directive is wonderful in the hands of a renowned chef, but disastrous in the hands of a crypto-obsessed commission.”



The club is still advertising a Sept. 20 opening date, which isn’t terribly surprising. They’ve already signed a 10-year lease, and the team obviously knew the enforcement action was coming before the SEC announced the settlement yesterday. They’ve had time to get their ducks in a row. Plus, no press is bad press, as they say.&nbsp;



Those with FOMO can still purchase a membership NFT on <a href="https://opensea.io/collection/flyfish-club?search[toggles][0]=IS_LISTED">OpenSea</a> (the SEC didn’t block secondary sales, but they did give Flyfish 10 days to stop earning royalties) for as low as 1.425 ETH. At time of writing, that is less than the cost of a standard membership bought directly from Flyfish.&nbsp;



If any of our NYC readers have a membership, let us know. I’m curious to hear about your experience with the club, and if the omakase is any good.&nbsp;



— Casey Wagner



<h2 class="wp-block-heading">Bulletin Board&nbsp;</h2>



<ul class="wp-block-list">
<li>There’s been a lot of talk about the anticipated Fed rate cut. You’ll be able to check out the FOMC’s statement at 2 pm ET on this <a href="https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm">page</a> before watching Powell’s press conference via the central bank’s YouTube <a href="https://www.youtube.com/user/FedReserveBoard">channel</a> at 2:30 pm. And, of course, check back for more coverage on the Fed decision in tomorrow’s On the Margin newsletter.</li>



<li>Bitcoin miner CleanSpark has acquired two more sites in Mississippi for nearly $5.8 million. The facilities are expected to boost the company’s operating hash rate by about 1 exahash per second. The deal comes after the Las Vegas-based company agreed last week to buy seven more facilities in Tennessee for cash payments totaling $27.5 million.</li>



<li>Figure Markets has launched its Cayman Islands-licensed crypto exchange, the company said Tuesday. Figure had <a href="https://blockworks.co/news/figure-raises-60m-launches-dex">secured $60 million earlier this year</a> (in a round led by Jump Crypto, Pantera Capital and Lightspeed Faction) to build a decentralized competitor to the largest centralized crypto exchanges. Figure CEO Mike Cagney told Blockworks at the time that the exchange sought to use the Provenance blockchain to be a marketplace for equities, fixed income, alternatives and crypto assets.</li>
</ul>



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The details behind Donald Trump’s family DeFi venture

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The Solana-based gaming company MagicBlock has raised $3 million in pre-seed funding that includes an investment from venture capital giant Andreessen Horowitz following MagicBlock’s participation in a16z’s crypto startup accelerator earlier this year.



MagicBlock is developing a gaming engine that lets video games run fully onchain, a task that would typically be difficult due to the relatively low speed involved with using blockchains. The company solves this with a novel piece of technology it calls ephemeral rollups, which temporarily move Solana’s state to a higher-throughput rollup before settling back to the layer-1.



MagicBlock drew the online Solana world’s attention after posting a <a href="https://x.com/magicblock/status/1802717656102978040">video</a> of its game engine that drew 429,000 views on X.&nbsp;



With the fresh funding, the six-person startup will aim to grow its team as well as develop its tech, which would include bringing its game engine to Solana mainnet and partnering with onchain games.&nbsp;



MagicBlock was founded in September 2023 by Andrea Fortugno and Gabriele Picco. The duo decided to create the company while building a fully onchain game and realizing how poor the user experience was, Fortugno told me in a soon-to-be-released <a href="https://blockworks.co/podcast/lightspeed">Lightspeed podcast episode</a>.&nbsp;



MagicBlock believes games running fully onchain benefit from being composable (meaning other developers can build on top of a game’s smart contracts) and not relying quite so much on third parties, but it’s hard to make a decentralized computer program run at the speed that gamers demand.&nbsp;



“Players get pissed off if they have 100ms latency, so forget half a second,” Fortugno said.&nbsp;



So MagicBlock is developing ephemeral rollups, which make a slightly different bet than many competitors in the blockchain gaming space. Axie Infinity-linked Ronin created an Ethereum-compatible blockchain. Immutable and Sonic both operate layer-2s. Instead, MagicBlock is trying to build technology that extends Solana’s base layer. This could avoid fragmenting liquidity or leeching fees away from the layer-1, which are common criticisms made of the layer-2 ecosystem on Ethereum.



Ephemeral rollups <a href="https://arxiv.org/pdf/2311.02650">make</a> use of a specialized version of Solana’s software which temporarily lets a sequencer modify accounts before settling back to Solana. The rollups initially use optimistic verification, the method favored by EVM giants Arbitrum and Optimism, for speed before verifying transactions with zero-knowledge proofs.&nbsp;



As an idea, ephemeral rollups are made possible by the fact that Solana separates its state and logic, or accounts and programs, so the logic can stay put while the state moves to an ephemeral rollup.



It’s an innovative approach to game development, particularly in a crypto gaming space that so far has drawn lots of investment while <a href="https://blockworks.co/news/lightspeed-newsletter-solana-gaming-lacking">delivering minimal payoff</a>.&nbsp;



But Fortugno thinks gaming is often at the frontier of technological development. He offered GPUs as an example: Before they were powering the AI boom, the circuits were used to speed up the graphics in video games.



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A16z is placing a bet on Solana gaming

Janus Henderson is the latest traditional money manager interested in getting involved in the tokenized fund space.



Nearly two-thirds of the investment firm’s roughly $360 billion of client assets under manager (as of June 30) reside in Janus Henderson equity strategies. The company also has fixed income, multi-asset and alternatives products.&nbsp;



Now, Janus Henderson is set to run Anemoy Limited’s Liquid Treasury Fund — a tokenized fund on Centrifuge’s public blockchain that gives exposure to short-term US Treasury bills. It will manage the fund’s portfolio via subsidiary Tabula.



Tabula CEO Michael John Lytle noted in a Monday statement “a natural overlap between the rapid expansion of ETF solutions and the need to underpin digital investments with stable, liquid stores of value, like US <a href="https://blockworks.co/tag/us-treasurys">Treasury bills</a>.”



Read more: <a href="https://blockworks.co/news/on-the-margin-newsletter-inevitable-institutional-digital-assets-involvement">Digital assets involvement becoming “inevitable” for more institutions</a>



Janus Henderson’s corporate strategy operates on many time horizons, the firm’s innovation head Nick Cherney told Blockworks. Its dedicated innovation effort specifically targets long-term initiatives the firm is betting will shape the financial industry’s future.



“Our decision to partner on a tokenized Treasury fund is the direct result of our focus on preparing for a future in which blockchain technology potentially transforms the way in which we deliver investment insights to our clients,” he said.



Cherney added this represents the firm’s first step into the broader nascent movement to bring “robust, transparent, institutional asset management of real-world assets” onto the blockchain.



The company joins some bigger fish in this space — namely <a href="https://blockworks.co/news/blackrock-tokenized-fund-trading-circle-usdc">BlackRock</a> and <a href="https://blockworks.co/news/stablecoin-with-yield-franklin-templeton">Franklin Templeton</a> — which have attracted hundreds of millions of dollars in assets to their <a href="https://blockworks.co/news/empire-newsletter-blackrock-buidl-milestone">tokenized money market funds</a>.&nbsp;



Read more: <a href="https://blockworks.co/news/blackrock-tokenization-investment">BlackRock doubles down on tokenization via investment in Securitize</a>



State Street said last month it plans to add <a href="https://blockworks.co/tag/tokenization">tokenization</a> and digital custody services via a partnership with crypto infrastructure provider Taurus, and others continue to test <a href="https://blockworks.co/news/tradfi-blockchain-trials-mass-adoption">blockchain tech use cases</a>.



An August OKX <a href="https://www.okx.com/learn/okx-economist-impact-report">report</a> recently spotlighted a 2023 survey showing that about a third of hedge funds labeled tokenization as the most significant future market opportunity.&nbsp;



“What’s clear is that institutions see digital assets as inevitable, as…securities, bonds and central bank digital currencies are tokenized on the blockchain,” OKX Chief Commercial Officer Lennix Lai previously told Blockworks.&nbsp;



Archax, a UK-based digital securities exchange, broker and custodian, said Tuesday it would add Anemoy’s Liquid Treasury Fund to its primary platform.



“This initial fund could have broad applicability for a wide range of crypto native protocols, from stablecoin collateral to DAO treasury management,” Cherney said. “We will continue to explore how we can deepen this effort in jurisdictions globally where we feel there is robust infrastructure to do so.”



A modified version of this article first appeared in yesterday’s On the Margin newsletter. Subscribe <a href="https://blockworks.co/newsletter/onthemargin" target="_blank" rel="noreferrer noopener">here</a> so you don’t miss tomorrow’s edition.



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Janus Henderson follows TradFi rivals into tokenized fund space

While both traditional and crypto markets are expected to react to the Federal Reserve’s anticipated rate cut Wednesday, the impact is likely to hinge on the size of the reduction.



Though a rate cut is all but guaranteed, markets will be tuning in to Fed Chair Jerome Powell’s Wednesday afternoon press conference to get details about the decision.



As of 11 am ET Tuesday, CME Group’s FedWatch <a href="https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html">tool</a> showed a 62% probability of a 50 basis point rate cut and a 38% probability of a 25bps reduction.



Read more: <a href="https://blockworks.co/news/powell-confirms-september-rate-cut">Powell confirms September rate cut, stocks and cryptos rally</a>



Some <a href="https://blockworks.co/news/september-events-that-could-move-markets">industry analysts and executives have noted</a> that while the market would likely view a 25bps cut as a normal measure — and potentially react positively — a 50bps cut could spark investor fears of a recession and potentially increase volatility.



This concern about a larger rate cut weighing heavily on risk assets is contrary to history showing that more rate cuts fare well for such assets, LMAX Group market strategist Joel Kruger told Blockworks.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;



“However, we believe there is a strong chance that in the event we do see 50 basis points, investors will have had more time to feel better about things and will once again welcome the accommodation,” he added.



Matt Lason, chief investment officer of crypto hedge fund Globe 3 Capital, said he’s expecting the Fed to cut by 50bps on Wednesday. Many Fed inflation metrics have been met, he told Blockworks, adding that jobs and other macro data have “softened.”&nbsp;



“This will be very good for crypto and the markets overall,” he argued. “If the <a href="https://blockworks.co/tag/federal-reserve">Fed</a> only lowers 25bps, it might disappoint some temporarily. But in either scenario we are still very bullish on crypto in the long term.”



Then there were Democratic Sens. Elizabeth Warren, Sheldon Whitehouse and John Hickenlooper, who made the request for a more aggressive 75bps cut in a Monday <a href="https://www.warren.senate.gov/imo/media/doc/warren_hickenlooper_whitehouse_letter_to_fed_re_september_rate_cut.pdf">letter</a> to <a href="https://blockworks.co/tag/jerome-powell">Powell</a>.&nbsp;



The trio cited the Fed’s confidence in inflation moving toward its 2% target and data indicating slower job growth.&nbsp;



They noted the Fed should “front-load rate cuts to avoid sliding towards a potential crisis,” adding that high interest rates might even be making worse remaining drivers of inflation, such as housing costs.



Once we learn which route the Fed chooses to take Wednesday, Lawant noted “the more critical question” becomes how large and how long the rate-cutting cycle will be.&nbsp;



Susannah Streeter, head of money and markets at financial services firm Hargreaves Lansdown, said in a statement she’s expecting “a quick succession of cuts.”&nbsp;&nbsp;



She added: “Even if a smaller rate cut is delivered, it’ll raise expectations for a more aggressive loosening of policy in November and December, with 100bps of rate reductions by the end of the year priced in by markets.”&nbsp;



This expected cut is happening as bitcoin’s link to traditional assets has recently increased, FalconX research head David Lawant pointed out in an X post last week.&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">BTC correlation with the main broad equity indices (S&amp;P 500 &amp; Nasdaq) is hitting its highest level since Mar &#39;23. The crypto-equity link is strengthening ahead of the macro regime transition and a critical presidential election in the US. <a href="https://t.co/N6TG2c1OfE">pic.twitter.com/N6TG2c1OfE</a>&mdash; David Lawant (@dlawant) <a href="https://twitter.com/dlawant/status/1833553385880187318?ref_src=twsrc%5Etfw">September 10, 2024</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Bitcoin rose above $60,000 this weekend before dipping following a Sunday report of a second apparent assassination attempt on Donald Trump. BTC’s price hovered around $60,350 at 11 am ET on Tuesday — 3.7% higher than 24 hours prior.&nbsp;



Kruger called the early-week price setback “somewhat perplexing” given the seeming lack of “material fundamental catalysts within crypto or traditional financial markets to reconcile the activity.”



Bitcoin’s price has remained in somewhat of a consolidation phase in recent weeks. While traders brace for the potential positive or negative impact these rate changes have on traditional and crypto markets in the short-term, various segment observers have continued to float lofty year-end price forecasts for BTC — particularly if certain things fall into place.



Read more: <a href="https://blockworks.co/news/on-the-margin-newsletter-price-predictions">Price predictions proliferate after volatile week</a>



The wait-and-see game goes beyond Fed rate decisions, as <a href="https://blockworks.co/news/mike-novogratz-crypto-us-election">markets appear to be awaiting</a> whether <a href="https://blockworks.co/news/2024-elections-crypto-policy-outlook">Kamala Harris or Trump</a> (a more vocal crypto supporter so far) will win the November election.&nbsp;



Despite the unknowns, Lason said the fundamental longer-term catalysts for bitcoin remain intact, noting the ongoing institutional demand for the asset, and the bitcoin ETFs.&nbsp;&nbsp;



“With the US national debt crossing $35 trillion and the debasement of fiat currencies across the globe, we expect bitcoin’s upward trajectory to continue,” he added.



Still, the market remains “well aware of seasonality trends that are keeping traders cautious” for at least another couple weeks, Kruger noted. September is a <a href="https://x.com/intangiblecoins/status/1830969167757091002">historically bad month for bitcoin</a> and the stock market.&nbsp;&nbsp;&nbsp;&nbsp;



The LMAX market strategist added: “The silver lining here, especially for crypto, is that October and November are the strongest months of the year.”



A modified version of this article first appeared in yesterday’s On the Margin newsletter. Subscribe <a href="https://blockworks.co/newsletter/onthemargin">here</a> so you don’t miss tomorrow’s edition.



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What to watch for heading into the next Fed rate decision

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<h2 class="wp-block-heading">Same but different</h2>



AI is the source of many great ironies in crypto right now. But that might not always be the case.



Perhaps AI makes the crypto space safer, say, through integrations with wallets and web apps to catch phishing and other types of fraud ahead of time.



AI may also boost the power of trading bots so that gains are easier to come by, or even design and code memecoins that make us all stinking rich.



All those use cases utilize AI as a tool — augmenting infrastructure that mostly already exists to simplify the lives of crypto users.



What connects the Bitcoin, crypto and Web3 narratives with AI is, for now, somewhat tangential.&nbsp;



Even to the point that some industrial bitcoin miners are increasingly looking to convert their existing farms into AI-compatible data centers, because the latter <a href="https://blockworks.co/newsletter/daily/issue/post_760f9a83-9b48-4efe-bb77-f6e77ab1f9eb">makes more money</a> at the moment.



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXcJQnuhEFQ5ay5NBss5elhGZhV8TdJVK_YNLb2QmYqfa2yFNBvVJui0XhqMZosiLW9Xjxfa80sHI_7f4uslDxMI0BxDtKa-8yXib6xK58OofpfRxVGKnn7DsGdWcuzqzFHD7_vLk7o3B-7BqBD5sFEiviA?key=drb30ojJ25SlHPt7iMeV_Q" alt=""/><figcaption class="wp-element-caption">NVDA and crypto have mirrored each other’s growth over the past seven years — with NVDA eclipsing the digital asset market a few months back</figcaption></figure>



It’s a slow process that isn’t easily reversed — as the only similarity between running a bitcoin mining farm and an AI data center is that both require bucketloads of power.



There hasn’t yet been a publicly disclosed instance of a bitcoin miner fully switching over to service AI initiatives, although some are easing into it slowly.&nbsp;



But that trend, if it continues to crystalize, reflects where the mainstream is at right now. 



Google Search trends show interest in AI is at an all-time high right now, having shot up considerably at the end of 2022 — just as interest in bitcoin and crypto reached near-two-year lows.&nbsp;



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXfuXzjhD1OF6O5_APb_tMrcuphMpw_-preg2wz8A0uu3_mFy3cnzu0BqRnCpdDmpvX3RPQRz0-MOzZCoJ-_-iwvCXQF4MuQ335v4r1muwUWYqgW55SRqoPjKkjdWN_5orQrQ4QSCpAyX2gBQWngMyvKRQE?key=drb30ojJ25SlHPt7iMeV_Q" alt=""/><figcaption class="wp-element-caption">AI search interest, shown by the purple line, has tracked NVDA’s share price</figcaption></figure>



It’s unlikely that bitcoin miners will undergo a mass exodus toward AI, and even if they did, the Bitcoin network would almost certainly still be impervious to 51% attacks.&nbsp;



And besides, the network’s difficulty would eventually drop to the point that mining bitcoin could end up just as lucrative as AI computing all over again.



It’s apt, then, that decentralized GPU marketplaces persist as the one crypto-AI intersection with reasonable product market fit, as highlighted by Casey Caruso, managing partner at Topology Ventures, on <a href="https://blockworks.co/podcast/empire/520defa8-747a-11ef-8d43-a7370e106aca">today’s episode of Empire</a>.



Just like how the promise of fresh BTC incentivizes miners, blockchains act as a coordination layer for all different kinds of computational resources — from data storage to CPU and GPU services for AI — so that regular crypto users can rent out their machines in return for tokens.



So, while AI coins might appear relatively small on the first chart above, shown by the purple area in the bottom right-hand corner, their total market caps only tell one part of the story.



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXevOOSm1YkwLfaPlLFCTlowE2Pg4aShO2qvxW_Yus6iT7r36ETfZGUsZ9IsHbJbWhv4pd8zFyoIOp3c0SCvCPQ81uMlEDeGLXZvvf0qIFZuyTAZkx4O-g51apOhP5djrnSJmubhdpdLDm2RZD3BxVkzr07S?key=drb30ojJ25SlHPt7iMeV_Q" alt=""/><figcaption class="wp-element-caption">AKT price action and daily fee spend on Akash have recently decoupled</figcaption></figure>



GPU marketplace Akash allows users to pay for compute with two different cryptocurrencies: its native AKT and USDC.&nbsp;



In total, the platform has generated over $811,000 for lease providers, and weekly fees reached over $30,000 at the end of August, a new all-time high, and more than double what was recorded around the start of the year.



The overarching quest for Bitcoin, crypto and AI proponents is finding the killer app that makes them make sense for the world’s population.&nbsp;



We’re not exactly sold that chatbots are AI’s killer use case. But for crypto specifically, whatever the killer app is, it’s increasingly apparent it should be decoupled from the price of bitcoin — operating as its own thing, with its own value proposition and market dynamics, something that hasn’t been totally achieved just yet.&nbsp;



Maybe an AI use case will make the difference.



— David Canellis



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



<ul class="wp-block-list">
<li>Crypto markets are mostly flat, with BTC ahead 0.7% on the day and ETH exactly even. (BTC: $59,200; ETH: $2,310.)</li>



<li>SUI has extended its recovery after reaching nine-month lows in early August — rallying almost 120% since to $1.17. It’s still down 45% from its record high in March.</li>



<li>AI coins altogether set a new market cap record in March alongside bitcoin’s own high: $56.3 billion, about 36% above its prior peak in November 2021.</li>



<li>Base is closing in on Solana in terms of stablecoin <a href="https://defillama.com/stablecoins/chains">supplies</a>: now $3.488 billion to $3.849 billion, after gaining 3.43% in the past week.</li>



<li>$231.95 million net has flowed out of Arbitrum <a href="https://defillama.com/bridges/chains">bridges</a> across the same period, with $89.2 million and $36.06 million flowing into Ethereum and Optimism, respectively.</li>
</ul>



<h2 class="wp-block-heading">Wrap it up</h2>



There are still a few crypto bankruptcies looming over our heads, including BlockFi and FTX.&nbsp;



We’re going to hear more about FTX early next month, at a reorganization hearing that’ll seek to confirm the plan shared by the FTX estate earlier this summer.&nbsp;



The plan, the estate <a href="https://www.prnewswire.com/news-releases/ftx-announces-overwhelming-support-from-creditors-for-plan-of-reorganization-302227961.html">said</a>, has received support from creditors, <a href="https://blockworks.co/news/empire-newsletter-ftx-bankruptcy-shortfalls">though it’s a bit controversial</a>. If the confirmation hearing goes well, then we could be one step closer to wrapping up the bankruptcy.&nbsp;



BlockFi is also getting close to the finish line. Haynes and Boone partners Richard Kanowitz and Alexander Grishman told me that their client, BlockFi, is in the “final stages” after the plan was confirmed “<a href="https://blockworks.co/news/blockfi-bankruptcy-chapter-11-greenlight">a while ago</a>,” Kanowitz said.



The timing is still a bit in the air, but the estate is making “interim distributions and looking forward to making a final distribution,” he added. BlockFi’s international arm is still undergoing proceedings with Bermuda courts to get everything tucked away in a neat little bow.&nbsp;



Similarly to FTX, creditors wanted BlockFi’s distributions to be “in-kind,” which essentially means that their crypto is handed back to them rather than receiving a sum of cash. And, unlike FTX, the two lawyers said they were able to access reports and see where assets were. It’s no secret that the teams working for the bankruptcy estate at Sam Bankman-Fried’s former company <a href="https://blockworks.co/news/new-ftx-ceo-says-exchange-commingled-assets">didn’t have such an easy time</a>.&nbsp;



A bankruptcy is still a bankruptcy, even if Kanowitz called BlockFi the “golden standard.” And, given the legal action we’ve seen against the leadership at both FTX and other bankrupt lenders, like Celsius, perhaps the standard is a tad low.



BlockFi, despite being able to access assets, didn’t have enough crypto to distribute in-kind to creditors.&nbsp;



“That [puts the] cart before the horse, right? If they had all those assets to be able to return to customers, [they wouldn’t have needed] to file bankruptcy,” Kanowitz explained.&nbsp;



But there’s long been one question lingering in the back of my mind: Is our current bankruptcy code sufficient enough to tackle crypto?



Kanowitz essentially said yes, that the crypto bankruptcies didn’t have anything “out of the ordinary that the bankruptcy code couldn’t handle.”



Grishman, who worked with BlockFi prior to the bankruptcy, agreed with Kanowitz.&nbsp;



“There was nothing that was so novel” about the case, Grishman said. “It’s just that the underlying asset is novel, and that it is cryptocurrency, but it&#8217;s nothing that the bankruptcy courts are not able to deal with.”



When I posed the question to Bill Hughes, senior counsel and director of global regulatory matters at Consensys, he had a bit of a different take. “What has to happen is, where necessary, you come up with new approaches that seek to serve similar ends, and deal with the reality in which people use a peer-to-peer network. That requires changes to accounting rules … and adding to parts of the bankruptcy code. Perhaps the tax code needs some tweaks,” Hughes told me. “There&#8217;s a way to do it that serves the purposes of the law, but does so in a way that serves the system.”



Though this is perhaps easier said than done given the speed at which legal and regulatory changes are implemented.&nbsp;



— Katherine Ross



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



<ul class="wp-block-list">
<li>Former Binance CEO Changpeng ‘CZ’ Zhao will be <a href="https://www.coindesk.com/policy/2024/09/16/cz-set-to-be-released-from-prison-on-september-29/?utm_medium=referral&amp;utm_source=rss&amp;utm_campaign=headlines">released</a> from prison toward the end of the month.</li>



<li>dYdX will list perpetual futures on prediction markets, CEO Charles d’Haussy told <a href="https://www.coindesk.com/business/2024/09/17/dydx-to-debut-perpetual-futures-on-prediction-markets-as-dex-seeks-to-raise-profile/?utm_medium=referral&amp;utm_source=rss&amp;utm_campaign=headlines">CoinDesk</a>.&nbsp;</li>



<li>Bhutan holds 13,011 bitcoin worth $780 million, according to Arkham Intelligence <a href="https://x.com/ArkhamIntel/status/1835712533854118072">data</a>.</li>



<li>MicroStrategy, once again, <a href="https://www.theblock.co/post/316705/microstrategy-is-selling-700-million-more-in-convertible-senior-notes-to-buy-back-debt-and-more-bitcoin?utm_source=rss&amp;utm_medium=rss">announced</a> a convertible debt offering of $700 million to buy more bitcoin.</li>



<li>Former President Donald Trump unveiled World Liberty Financial, the <a href="https://www.axios.com/2024/09/17/trump-crypto-platform-world-liberty-financial">new crypto venture</a>, in a Spaces on X last night.&nbsp;</li>
</ul>



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



Q: Is Trump launching a token really bullish?



Literally anyone can launch a token. And so many have, whether we’re talking about earlier in this cycle with Caitlyn Jenner or if we’re going back to last cycle. A token launch isn’t novel on its own.&nbsp;



The project behind the token is what really matters. I haven’t yet seen the full white paper for the World Liberty Financial project, so I won’t pass judgment.&nbsp;



What I will say is that one could argue that the token launch is bullish because it could spur on other token launches. Last week, <a href="https://blockworks.co/news/crypto-funding-recovery-signs">PitchBook’s Robert Le told us</a> that there are a lot of projects in the wings waiting for the perfect time to do their own token launches, and this could be the catalyst they need.&nbsp;



Ah, yes, I can just imagine the look on Gary Gensler’s face while being debriefed about the Trump-backed token. What a fun cycle.



— Katherine Ross



I’m with Katherine. If there were any stigma left attached to launching tokens — including governance coins — then Trump may have just severed it altogether, for good.



NFTs did a lot for that cause. Internet inventor Tim Bernes-Lee <a href="https://arstechnica.com/tech-policy/2021/07/video-of-berners-lees-5-4m-nft-hints-another-exists-with-an-error/">sold</a> an NFT of his original web source code in June 2021 — six months later, Jimmy Kimmel and Paris Hilton were gabbing about their Bored Apes on camera.



Understandably, more crypto-native folk might be cringing at Trump’s team hawking its own non-transferrable governance token to accredited US investors while marketing it as DeFi.



It’s not outside the realm of possibility that Kimmel and Hilton may have seen someone like Bernes-Lee dabble in NFTs and figure: “Why not me?”&nbsp;



World Liberty Financial could have the same effect on someone on the fence about whether they should jump into crypto. After all, they could probably <a href="https://x.com/nic__carter/status/1831145983847137451">do better</a>.



— David Canellis



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The case for AI finding a killer app for crypto

Flyfish Club, the company behind the members-only club scheduled to open in Manhattan this month, has settled with the Securities and Exchange Commission over alleged violations.&nbsp;



Per the settlement agreement, Flyfish has until Sept. 26 to “destroy all Flyfish NFTs in its possession,” cease accepting royalty payments from secondary market trading platforms on Flyfish NFT sales and pay a civil penalty of $750,000.&nbsp;



In 2021 and 2022, Flyfish sold memberships to its yet-to-be-built private club through non-fungible tokens (<a href="https://blockworks.co/tag/nfts">NFTs</a>) priced between 2.5 ETH and 4.25 ETH. Approximately 1,600 NFTs were sold, generating around $14.8 million in gross proceeds. These funds were used to finance the construction of the &#8220;Flyfish Club,&#8221; a private restaurant in downtown Manhattan, according to the <a href="https://blockworks.co/tag/sec">SEC</a>.



“Flyfish led investors to expect profits from the entrepreneurial and managerial expertise of Flyfish and its principals in building and running the restaurant,” the SEC wrote in the <a href="https://www.sec.gov/files/litigation/admin/2024/33-11305.pdf?utm_medium=email&amp;utm_source=govdelivery">settlement agreement</a>. “Flyfish told investors they could potentially profit from reselling their NFTs at appreciated prices in the secondary market.”&nbsp;



Read more: <a href="https://blockworks.co/news/nft-artists-sue-sec-regulatory-uncertainty">The SEC continues to engage in ‘strategic ambiguity,’ lawyer says</a>



Flyfish also told investors that “leasing” out its tokens to non-members was a way to make a profit.&nbsp;



The club is scheduled to open this week on Sept. 20, according to social media <a href="https://www.instagram.com/flyfishclub/?hl=en">posts</a>. While the club’s <a href="https://www.flyfishclub.com/blockchain-registration">website</a> acknowledges that the venture originally “launched with blockchain-based memberships,” interested members may now only apply for “standard memberships.” Current NFT holders are still allowed to lease their tokens to others to gain access to the club, the website adds.&nbsp;



SEC Commissioners <a href="https://blockworks.co/tag/hester-peirce">Hester Peirce</a> and Mark Uyeda, who have <a href="https://blockworks.co/news/sec-commissioners-disagree-with-coinbase-decision">frequently differed from their colleagues</a> on blockchain-related enforcement actions, issued a dissenting opinion.&nbsp;



“For curmudgeonly commissioners like us, crypto enforcement feels a bit like a trip to a restaurant for a meal, Omakase style,” Peirce and Uyeda wrote, referencing the Japanese dining experience Flyfish Club plans to offer.&nbsp;



“Omakase translates to, ‘I’ll leave it up to you.’ This directive is wonderful in the hands of a renowned chef, but disastrous in the hands of a crypto-obsessed Commission,” they added.&nbsp;



The NFTs in question, Peirce and Uyeda argue, are not <a href="https://blockworks.co/tag/securities">securities</a> as their colleagues claim, but rather utility tokens. This is true even if the restaurant’s success caused the NFT prices to increase, the commissioners say.&nbsp;



Flyfish NFT purchasers did not have a “reasonable expectation of profit,” Peirce and Uyeda say, but rather a reasonable expectation of “wonderful culinary experiences and other exclusive membership experiences.”&nbsp;



“The securities laws are not needed here, and their application is harmful both in the present case and as future precedent,” they added. “The Flyfish NFTs were simply a different way to sell memberships. Why shouldn’t a chef be able to sell memberships to eat at her kitchen table and to collect royalties on resales of those memberships?”&nbsp;



Flyfish did not immediately return Blockworks’ request for comment.



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