OKB is the native exchange token of OKEx that provides discounts on trading fees, access to the OK Jumpstart initial exchange offering (IEO) platform, and voting rights for tokens to be listed on the exchange. In the future, it will be used to pay transaction fees on the OKChain blockchain as well as decentralized exchange OKDEX.

Bessie Liu

Blockchain gaming provider Polemos has announced a new chain-agnostic blockchain game platform it calls &#8220;The Armory.&#8221; This platform intends to offer gamers the ability to rent digital assets without collateral or deposit requirements.



Traditionally in gaming, digital asset rentals require a deposit, or the borrowers are only given copies of the original item. The Armory, on the other hand, will not ask for any collateral or deposits beyond a borrowing cost and give users the chance to use the digital assets as they like.



Players retain any rewards earned through their borrowed items, giving them an opportunity to experiment with different digital assets without the need to invest a large amount of time and money.



Lenders will be able to earn money from digital assets sitting idly in their wallets, though there is a small fee required to list each digital asset.



Halborn, a blockchain security firm, has audited the platform&#8217;s smart contract, potentially providing lenders with enhanced security. Smart contract audits are crucial for blockchain security, and multiple audit firms may review the code for some companies. This helps to ensure untampered item returns and reinforces overall platform security.



The Armory will be chain agnostic and integrated into Polemos’ <a href="https://forge.polemos.io/?">Forge</a>, meaning it will be able to operate on a variety of different blockchains. 



Initially, The Armory will support all Polygon proof-of-stake games, including Galaxy Fight Club, and in development games such as Apeiron, Deadrop and others. It plans to later integrate with other blockchains including Immutable, Solana, Avalanche and Ton.



“By providing a convenient solution for borrowers and lenders alike, we’ve opened up lending of game assets to the whole industry &#8211; with no work required by games to enable these great benefits,” Sascha Zehe, cofounder and co-CEO of Polemos, said in a statement.



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Polemos launches platform for collateral-free digital asset rental

Ben Strack

In response to increased regulatory scrutiny in the US, crypto companies have begun placing a greater emphasis on hiring legal professionals. This follows recent developments regarding the SEC&#8217;s ongoing lawsuits against Binance and Coinbase.



<a href="https://blockworks.co/news/binance-changpeng-zhao-face-sec-charges">The SEC targeted Binance on Monday</a> for allegedly engaging in the unlawful sale of securities and failing to register under the Exchange Act, among other charges.



The US securities regulator <a href="https://blockworks.co/news/sec-sues-coinbase">then sued Coinbase</a>, claiming it was operating as an unregistered exchange. Agencies from individual US states <a href="https://blockworks.co/news/us-states-are-going-after-coinbase-following-sec-lawsuit-heres-how">also went after the company’s trading and staking services</a> in separate legal actions.



Both exchanges have denied wrongdoing.&nbsp;



Ari Redbord, head of legal and government affairs at TRM Labs, noted that the heart of cases alleging unregistered securities hinges on whether certain digital assets are, in fact, securities. Redbord was named vice chair of the CFTC’s technology advisory committee in March.&nbsp;



Redbord said that he expects this issue to be initially addressed by the courts and eventually by Congress.



“In the meantime, crypto businesses can seek legal counsel from those versed in these complex issues, invest in compliance teams, use blockchain intelligence solutions, work with law enforcement to weed out bad actors and build robust corporate governance structures,” Redbord told Blockworks.



Some companies said new developments don’t impact their long-standing focus on compliance. They have acknowledged the need for additional vigilance after the latest allegations against Binance and Coinbase, however.



A representative for crypto exchange Bitstamp told Blockworks in an email Thursday that while the company has been “a compliance-first exchange” since launching in 2011, it takes new regulatory developments “very seriously.”&nbsp;



“As such, we are currently reviewing the new information that has come out this week to determine what actions to take,” the spokesperson added.&nbsp;&nbsp;&nbsp;



Marc D&#8217;Annunzio, general counsel for crypto marketplace Bakkt, said the company intentionally separated its crypto trading and custody functions, and has historically chosen to move slowly and evaluate the implications of its decisions.



He added that the actions against Binance and Coinbase continue a trend. The company is actively discussing with regulators and legislators ways to develop clear, actionable guidance — alongside enforcement — for crypto companies wanting to comply with laws.&nbsp;



“While some of the headlines are new, our approach is not,” D&#8217;Annunzio said. “While there’s arguably more developments to monitor on any given day, our process for doing that and considering impacts to our business remains unchanged.”



After closing its deal to acquire Apex Crypto last month, Bakkt delisted 25 coins to maintain its “compliance-first and consumer protection-focused approach,” D&#8217;Annunzio told Blockworks Thursday.&nbsp;



The company also acquired a broker-dealer license from Bumped Financial earlier this year. This was done “so that when there is a clearer framework for offering coins that are deemed to be securities, we are in a position to offer them,” D&#8217;Annunzio added.



<h2 class="wp-block-heading">A push to build legal teams in lead-up to latest actions</h2>



Zachary Plotkin, a managing director at recruiting firm Madison-Davis, said that crypto companies have traditionally prioritized professionals specializing in know-your-customer (KYC), onboarding, and due diligence. However, in 2023, there has been a noticeable increase in demand for legal support in specific areas.



In terms of full-time roles, Plotkin said more crypto companies have been hiring counsel in recent weeks.&nbsp;



Crypto.com posted a job listing Thursday for legal counsel tasked with “representing the company in negotiations and interactions with regulators, policymakers and industry stakeholders on tech-related matters,” it states.&nbsp;



Kraken last week listed the opening for a senior corporate and securities counsel to join its “growing” corporate legal team of nearly a dozen.



Representatives for Kraken and Crypto.com did not return requests for comment about the job postings, or other efforts.



Crypto asset manager Grayscale Investments — in the middle of its own legal battle with the SEC — posted a job posting for regulatory counsel last week. The professional would engage with the SEC and FINRA “as Grayscale’s regulated entities grow their private placement, public quotation, ETF and ETP business lines,” the listing states.



Even eBay, which acquired NFT marketplace KnownOrigin last year, is seeking crypto counsel to offer legal advice related to NFTs, blockchain and other Web3 matters.



<a href="https://workincrypto.global/">WorkInCrypto.Global</a> founder Sam Wellalage said he recently helped various “major players” hire legal and regulatory senior professionals, noting the market for such talent has recently heated up.



In addition to full-time professionals, the demand for temporary legal consultants, as well as those focused on fraud and third-party risk, has increased in the last six months amid regulatory uncertainty in the segment, Plotkin added.



These employees are mainly being hired on a contractual basis for periods ranging from three months to two years, which Plotkin attributes to firms wanting to stay cost-efficient and nimble during what he called an “economic downturn.”&nbsp;



The SEC’s lawsuits against Binance and Coinbase, however, have caused larger crypto firms to pause hiring, Plotkin said, adding that the space has entered “a wait-and-see period.”&nbsp;



“[With] Coinbase, Binance and all these other companies … there is definitely pressure from the government on them,” Plotkin said. “Before people take action or spend money to bring on new resources, they want to see how the government is going to react.”



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Crypto firms beefing up legal support amid regulatory crackdown

Michael Bodley

On Thursday, BitGo reached a preliminary agreement to acquire the parent company of Prime Trust. This marks a significant step forward in Prime Trust&#8217;s quest for emergency funding to address its financial challenges.



BitGo’s purchase, as denominated in a “non-binding term sheet,” snapped up “100% of the equity of Prime Core Technologies, Inc., the parent company of Prime Trust,” according to a BitGo <a href="https://blog.bitgo.com/bitgo-signs-letter-of-intent-to-acquire-prime-trust-to-expand-digital-asset-and-fintech-b1868391784a">statement</a>. Terms of the deal were not disclosed.&nbsp;



Prime Trust executives this week had <a href="https://blockworks.co/news/prime-trust-said-to-be-scrambling-for-emergency-cash-package">embarked on a whirlwind attempt to raise $25 million</a> or so in financing by this weekend, two sources familiar with the matter told Blockworks.&nbsp;



For <a href="https://blockworks.co/tag/bitgo">BitGo</a>, a well-capitalized firm with a number of cryptocurrency business lines, the move looked to give the company a leg up in terms of its technology stack as mergers and acquisition interest remains rampant throughout the industry.&nbsp;



A number of distressed crypto companies in 2023, as well as strict oversight from the SEC and other regulators, has led industry participants to closely monitor the market for buying opportunities.&nbsp;



It wasn’t immediately clear on Thursday whether the tentative deal — which is presumably subject to additional internal approvals — would affect Prime Trust employees.&nbsp;



BitGo CEO Mike Belshe in the statement called the planned acquisition a “landmark transaction,” which he said would serve as the vanguard for a “greater shift in the digital asset landscape toward a more secure and sustainable future.”



The plan is for Prime Trust’s Nevada-registered trust company to be folded into BitGo’s own regulated crypto-oriented trusts. Those affiliated companies for BitGo are located in Germany, New York, South Dakota and Switzerland.



And the idea is to plug in Prime Trust API product’s to help “reinforce” core BitGo products — including custody, settlement and compliance functions.&nbsp;



In another development on Thursday, BitGo played up its pending access to Prime Trust’s “world-class network of banking partners and payment rails, crypto IRA, and additional wealth management offerings.”



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BitGo bails out Prime Trust in acquisition deal

James Cirrone

Google Cloud is offering certain customers up to $1 million in protection for costs incurred during undetected crypto mining attacks.&nbsp;



Subscribers to Google’s Security Command Center Premium, a cyber threat detector, are entitled to this hefty protection.&nbsp;



Philip Bues, a cloud security expert for market research firm IDC, said that Google Cloud is taking a step forward with this move.



“Cryptomining attacks continue to be a serious security and financial issue for organizations who do not have the right preventative controls and threat detection capabilities in their cloud environments,” Bues said in a statement.



The decision to include such coverage for these types of breaches came after Google’s Cybersecurity Action Team published a September 2022 <a href="https://services.google.com/fh/files/blogs/gcat_threathorizons_full_sept2022.pdf">report</a> showing that in 65% of cases involving compromised cloud accounts, hackers were engaging in cryptocurrency mining.



The attacks are often partially or completely automated, according to the report, making them quick and easy to carry out.



In the event that a hacker manages to bypass Google&#8217;s detection capabilities and proceeds to run crypto mining software on a user&#8217;s cloud account, Google will now take responsibility for the customer&#8217;s expenses, providing coverage of up to $1 million for their bill.



It’s important to note that this protection program doesn’t have anything to do with bitcoin mining. It is available only for people using mining software. One of the most popular crypto tokens to be mined this way is monero (<a href="https://blockworks.co/price/xmr">XMR</a>).&nbsp;



Blockworks reached out to Google and didn’t receive an immediate response.



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Google now offering $1M crypto mining attack protection

Crypto custodian Prime Trust has been angling with increasing urgency to raise millions of dollars in emergency fundraising, according to two sources familiar with the matter.&nbsp;



<a href="https://blockworks.co/tag/prime-trust">Prime Trust</a> has engaged in talks with a number of potential financiers, sources said.&nbsp;



The company may need that money by the beginning of next week, if not earlier, both sources said. The firm offers a range of crypto financial services, including spot custody, as well as support for crypto on- and off-ramps to fiat. 



Wide ranging solutions to the company’s apparent steep cash flow shortage appeared to be on the table. Prime Trust executives are said to have floated $25 million as one amount that would stabilize the US firm’s balance sheet.



What caused the shortfall was not immediately clear on Thursday, though both sources pointed to Prime Trust’s shrinking customer assets.&nbsp;



Reports that <a href="https://blockworks.co/tag/bitgo">BitGo</a> may be interested in acquiring the company were unconfirmed at the time of writing.



Spokespeople for Prime Trust did not immediately return requests for comment.&nbsp;



The <a href="https://blockworks.co/tag/sec">SEC</a>’s back-to-back lawsuits against <a href="https://blockworks.co/tag/binance">Binance</a> affiliates, as well as <a href="https://blockworks.co/tag/coinbase">Coinbase</a>, have amped up retail and institutional trader anxiety around keeping crypto assets on exchanges. 



The emergency financing package has been designed to prevent Prime Trust from entering “receivership,” according to one source with direct knowledge of the matter. That could suggest the crypto company’s finances are in dire shape — and that its executives aren’t confident in Prime Trust’s ability to dig itself out of its monetary hole.&nbsp;



“We know that Prime Trust has had issues in the past,” one source said. “They’ve losses on their balance sheet…but they’re now exposed.” 



After the closure of Signature Bank, which transpired amid a wave of US bank closures earlier this year, Prime Trust became more integral to the operations of a number of top crypto companies.



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Prime Trust said to be scrambling for emergency cash package

Kraken, a centralized exchange headquartered in San Francisco, has announced that its NFT marketplace is now live. The marketplace launched with a selection of over 250 unique NFT collections.



A notable feature of the new marketplace is its gasless experience — when purchasing or selling a digital asset on the platform, a user will not be charged for the transactions. This will be the case regardless of market conditions.



Gas fees, however, will be charged for transferring digital assets on and off the platform.&nbsp;



The Kraken NFT marketplace has been <a href="https://blockworks.co/news/crypto-exchanges-look-to-cash-in-on-nft-boom">in the works for over a year</a>, launching a public beta version of its testnet in November last year.&nbsp;



During its beta phase, the marketplace supported NFT collections from Ethereum and Solana. With its public launch, the marketplace has expanded its offerings to include digital collectibles from Polygon as well. This includes popular items such as its &#8220;red-hot Reddit collectible avatars.&#8221;



The marketplace also aims to be user friendly for non-crypto-native traders.



Most NFT platforms today require their users to have a crypto wallet to purchase digital collectibles. Kraken’s platform accepts fiat and cryptocurrencies — meaning users can bid on a NFT even if they do not own any tokens.



For those who do have a wallet, the NFT marketplace currently supports MetaMask and Phantom, with plans to later connect with WalletConnect. 



Kraken’s decision to launch its NFT platform comes amid a <a href="https://blockworks.co/news/sec-sues-coinbase">US government crackdown on centralized exchanges</a>. Competition in the NFT marketplace remains fierce, with marketplace giants <a href="https://blockworks.co/tag/opensea">OpenSea</a> and <a href="https://blockworks.co/tag/blur">Blur</a> dominating the space.



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Kraken NFT marketplace launches with over 250 collections

Darren Kleine

“Once you’ve wrestled,” Mike Novogratz quotes Dan Gable, “everything else in life is easy.”



Wrestling defined the CEO of Galaxy Investment Partners at a young age, he says, building the foundation for his success. “Wrestling teaches you how to lose and come back.”



The investor admits he “got lucky” pivoting into something he was “naturally good at.”



Novogratz explains what made him successful as a macro-investor in a recent episode of the 1000X podcast (<a href="https://open.spotify.com/episode/3fLwRHCW2S5rySubiTrPaO?si=e6534a8ef43d4962">Spotify</a> / <a href="https://podcasts.apple.com/us/podcast/empire/id1554930038?i=1000616134217">Apple</a>). “It&#8217;s a combination of reading economic trends, political trends, social trends — in understanding how markets behave with those inputs.”



“There&#8217;s a lot of intuition in it,” he says.&nbsp;



<h2 class="wp-block-heading">The only silver lining</h2>



His intuition has not always hit the mark, he admits. “We thought institutions were gonna buy crypto. I&#8217;ve got 430 people in Galaxy all geared up to help institutions come in to buy crypto.”



A combination of <a href="https://blockworks.co/news/brady-dale-sam-bankman-fried">bad behavior</a> in the crypto industry, <a href="https://blockworks.co/news/regulation-by-enforcement-unsustainable">tough regulation in the US</a>, no regulation outside the US and high interest rates caused institutional enthusiasm to wane, he says.



“Now,” he says, “the only silver lining is, retail&#8217;s still buying. It was always the people’s revolution, and they’re still out there.”



Novogratz says he certainly hasn’t given up faith in <a href="https://blockworks.co/tag/bitcoin">Bitcoin</a>. The “big decentralized revolution” that is building a “whole new world” on networks like <a href="https://blockworks.co/tag/ethereum">Ethereum</a> is still moving forward, he says, “but the market now seems to want to see shit that works.”



“Unless you&#8217;re an early adopter, you&#8217;re not using <a href="https://blockworks.co/tag/web3">Web3</a> in your normal life,” he says.



Novogratz says that to “suck people in,” the crypto industry will need apps that people can “sink their teeth into.”



One strong prospect for crypto’s appeal as a utility is <a href="https://blockworks.co/news/what-is-decentralized-identity">authentication</a>, he says. “With all these deep fakes,” he says, “how do I validate that this is actually my work?”



“But now I want to see people actually show me the app that does it — and even if it doesn&#8217;t get complete adoption — then we&#8217;re telling stories that people can sink their teeth into again.”



<h2 class="wp-block-heading">No better inflation hedge in the world</h2>



It could take some time for a return to a crypto bull market, Novogratz says. “We&#8217;re not going to get a sustained bitcoin rally until the Fed says we&#8217;re done and we&#8217;re cutting,” he says. “And that, in my mind, is probably [the] end of summer” but could take longer if stagflation settles in, he warns.



Pointing to America’s debt-to-GDP ratio exceeding <a href="https://www.ceicdata.com/en/indicator/united-states/government-debt--of-nominal-gdp#:~:text=United%20States%20Government%20Debt%3A%20%25%20of%20GDP,-1969%20%2D%202022%20%7C%20Quarterly&amp;text=United%20States%20Government%20debt%20accounted,123.6%20%25%20in%20the%20previous%20quarter.">120%</a>,&nbsp; Novogratz argues the “only way out” of the predicament is inflation. Last year, Novogratz says, the Federal Reserve did a “pretty good job” of inflating their way out of debt.&nbsp;



“We had seven percent inflation. We&#8217;re paying three percent for our debt, two and a half percent. That was the blended average. So you just inflated four percent of the debt away.”



“Of course, you can&#8217;t say that as a central banker, and you can&#8217;t say that as a treasury official,” says Novogratz, “but you&#8217;ll want to have higher inflation to get out of the debt trap.”



<iframe loading="lazy" frameborder="0" height="200" scrolling="no" src="https://playlist.megaphone.fm/?e=BWG8431937823" width="100%"></iframe>







“If it gets too high, you&#8217;re screwed. And so it&#8217;s a really, really challenging dance for the stewards of your economy to pull off.”



Bitcoin and crypto in general were the best inflation hedges in the world during the Covid-19 pandemic, he says, when everyone was panicking about a rise in costs. But when the anticipated higher prices finally showed up, Powell “took a sledgehammer to the gonads of inflation.”



“That was painful. Crypto would&#8217;ve kept going higher.”



Still, Novogratz sees promise amid market tumult and “regulatory assault.” He notes that retail “continues to accumulate” despite the noise.



“It&#8217;s surprising to me,” he says, “how much buying happens every day, in small amounts, that adds up to big amounts.”



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Novogratz says crypto retail is the market’s ‘silver lining’

Macauley Peterson

A year and 7 months after it was filed, the case of Joseph Kent v. PoolTogether and its backers has been tossed by a Brooklyn federal court judge.



The central question at issue — whether the PoolTogether protocol constitutes an illegal lottery under New York law — was not addressed, because the judge ruled that the plaintiff, Kent, lacked standing to sue.



PoolTogether was started in 2019 by Leighton Cusack, Brendan Asselstine and Chuck Bergeron. Cusack was named as a defendant in the suit. He <a href="https://twitter.com/lay2000lbs/status/1666470640604311552?s=20">tweeted</a> that he was “extremely happy” with the hearing, though his legal challenges are likely not over.



“There is still a good chance they are going to try and refile this case (or an amended complaint) in state court,” Cusack told Blockworks.



Just over a year ago, PoolTogether’s Cusack <a href="https://twitter.com/PoolyNFT/status/1533515933179953152?s=20">raised $1.5 million for a legal defense fund using NFTs</a> purchased by over 4,200 unique wallets.&nbsp;



Kent, who led a technology team for Sen. Elizabeth Warren’s 2020 presidential bid, filed the complaint in October 2021, with clear political overtones. The original suit noted that he was “gravely concerned that the cryptocurrency ecosystem — which requires the use of enormous amounts of electricity — is accelerating climate change and allowing people to evade financial regulations and scam consumers.”



District Judge Frederic Block noted in his 16-page decision that Kent’s lawsuit was based “on an entirely different premise,” but one which could not be adjudicated on the merits, in the absence of any harm in fact.



“By his own admission, he can withdraw his contributions at any time and the fees that those transactions would incur are not imposed by the defendants,” the judge ruled.



Quoting established precedent, Judge Block wrote that federal courts have “the power to redress harms that defendants cause plaintiffs, not a freewheeling power to hold defendants accountable for legal infractions.”



Kent deliberately used the protocol in an irrational manner by depositing a total of just $12 in GUSD and USDC stablecoins to PoolTogether’s pool on Ethereum mainnet. It’s well known that Ethereum has sometimes required high transaction fees, and these were readily apparent to Kent — in fact, they formed part of the basis of his claim for harm.



But PoolTogether also operates on Polygon and Avalanche — and more recently Optimism —&nbsp;where deposit fees are much lower. In all cases, transaction fees are the result of using the third-party networks where PoolTogether’s decentralized app (dapp) is deployed and not paid to the protocol.&nbsp;



As a no-loss lottery — effectively a prize-linked savings account — PoolTogether always offers participants a positive expected value. The protocol earns interest from other DeFi protocols such as <a href="https://blockworks.co/tag/compound">Compound</a> and conducts random prize drawings to pay out the pooled interest to lucky winners. Depositors can always withdraw 100% of their principal, however.



Blockworks has reached out to Kent’s attorneys.



Judge Block concluded that the defendants, which include venture capital funds Dragonfly, Nascent and Galaxy Digital, did not cause Kent any injury. He was not entitled to any interest from his deposits to PoolTogether, even though he could have received interest for deposits made to Compound directly.



“Crucially, the decision to deposit funds with PoolTogether or to send them directly to Compound (or, for that matter, to leave them in his digital wallet) belonged to Kent and Kent alone,” Judge Block wrote.



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PoolTogether class action case dismissed, for now

Casey Wagner

SEC Chair Gary Gensler defended his agency’s recent enforcement actions against Binance and Coinbase and issued a stark warning to any other businesses operating in the space: Comply, or you can expect a lawsuit, too.&nbsp;



<a href="https://blockworks.co/tag/gary-gensler">Gensler</a> did not mince his words during a virtual appearance at the 2023 Global Exchange and Fintech Conference Thursday, demanding that crypto firms follow existing laws. There is <a href="https://blockworks.co/news/coinbase-responds-sec-lawsuit">no need for further congressional action</a>, as many in the space have called for, he said. 



“It’s the law of the land,” he said, defending the <a href="https://blockworks.co/tag/sec">SEC</a>’s ability to oversee crypto markets. 



Crypto companies have no excuse to not be operating within the rules, Gensler added, dismissing any claims that companies are unable to comply under existing laws.&nbsp;



“We&#8217;ve issued a reopening release that reiterated the applicability of existing rules to platforms that trade crypto assets securities, including so-called DeFi systems, that&#8217;s already the law. That&#8217;s already the rules,” Gensler said. “Not liking the law, not liking the rules is different than not hearing it or not getting it.”&nbsp;



There is <a href="https://blockworks.co/news/sec-crypto-clarity-securities-gensler">no ‘regulatory clarity’ needed</a>, Gensler added, arguing that issuers and broker-dealers and exchanges should know exactly how to comply. 



Read more: <a href="https://blockworks.co/news/gary-gensler-national-disgrace">Gary Gensler Is a National Disgrace: It’s Time to Rein Him In</a>



The SEC head also doubled-down on his long-time stance that crypto markets are ripe for manipulation and fraud.&nbsp;&nbsp;



“We&#8217;ve also seen numerous companies before and after FTX blow themselves up, hurting countless investors in their way, hundreds of thousands, and sometimes millions around the globe,” Gensler said. “The crypto securities markets should not be allowed to undermine the well-earned trust of public capital markets.”&nbsp;



Days after his agency announced aggressive charges against exchanges <a href="https://blockworks.co/news/sec-allegations-against-binance">Binance</a> and <a href="https://blockworks.co/news/sec-sues-coinbase-allegations">Coinbase</a>, Gensler firmly stood by the lawsuits, alleging the exchanges explicitly and knowingly <a href="https://blockworks.co/news/sec-10-tokens-securities">violated securities laws</a>. 



“Working alongside <a href="https://blockworks.co/news/us-states-are-going-after-coinbase-following-sec-lawsuit-heres-how">law enforcement partners in 10 states</a>, we charge Coinbase for never properly registering the offer and sale of its staking program,” Gensler said. 



Binance faces similar registration and securities offering violations, but the SEC also alleges <a href="https://blockworks.co/news/binance-pushes-back-sec-lawsuit">the exchange commingled client assets</a> and manipulated markets, Gensler added, citing complaints released Monday. 



Companies are “seeking a bunch of meetings with the SEC during which you&#8217;re unwilling to make the changes needed to comply with the securities laws,” Gensler said, possibly referring to recent statements from Coinbase and Robinhood stating they have attempted to engage with the SEC but have been unable to register.&nbsp;



On the day Coinbase’s charges were announced, the exchange’s chief legal officer, Paul Grewal, <a href="https://blockworks.co/news/coinbase-in-house-hot-seat">appeared before the House Agriculture Committee</a> to face questions on crypto market regulation.  



“I am still digesting the complaint that was served today,” Grewal said during the hearing.&nbsp;



“What I can speak to, in much greater detail, are the many, many interactions we’ve had with the SEC, going back not just months, but several years,” Grewal said, adding that the exchange has spoken with SEC staffers dozens of times.&nbsp;&nbsp;



It’s not an issue of inadequate guidelines, Gensler countered on Thursday, the exchanges simply do not want to do what they are told.



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Gensler: Crypto firms know exactly how to register, they just don’t want to

Sen. Tommy Tuberville, R-Ala., introduced a bill Wednesday alongside Sen. Kirsten Gillibrand, D-N.Y., that will ban companies established in China from acquiring a stake in American digital asset firms. 



The <a href="https://www.congress.gov/bill/118th-congress/senate-bill/1870?s=1&amp;r=1">bill</a> is an attempt to rid the influence of the Chinese Communist Party on American crypto companies, according to Tuberville.



“This bipartisan bill will help to wall off the burgeoning American digital commodity industry from CCP interference and preserve our data privacy and investor protection rights,” Tuberville wrote in a <a href="https://www.tuberville.senate.gov/newsroom/press-releases/tuberville-leads-bipartisan-bill-to-block-ccp-ownership-of-american-crypto-companies/">statement</a>.&nbsp;



Serving as an amendment to the Commodity Exchange Act, the bill would prohibit the CFTC from greenlighting any American-based crypto firm that is “owned in whole or in part by an entity organized or established in the [People’s Republic of China].”&nbsp;



Tuberville first made his intentions to introduce this bill known in a Wednesday Wall Street Journal opinion <a href="https://www.wsj.com/articles/crypto-communism-has-a-new-meaning-prometheum-custody-data-commodities-china-d655bb88?st=pvmccr81tw8iwyx&amp;reflink=article_copyURL_share">piece</a>, where he added that under the bill, the CFTC would have the power to block sales of crypto firms to Chinese-based companies.&nbsp;



In it, Tuberville hinted that his crypto bill could be slipped into the US Farm Bill, a massive piece of legislation that expires in September 2023.&nbsp;



Prometheum Ember Capital is what spurred Tuberville’s interest to keep China out of American crypto. Prometheum was <a href="https://www.businesswire.com/news/home/20230523005313/en/Prometheum-Ember-Capital-is-the-First-SEC-Qualified-Custodian-for-Digital-Assets-Securities">granted</a> a license by FINRA on May 23 to operate as a custodian for digital assets. Tuberville cited SEC <a href="https://www.sec.gov/Archives/edgar/data/1718271/000101905619000222/offeringcircular.htm">filings</a> showing that Prometheum is strategic partners with Shanghai Wanxiang Blockchain Inc., which is a spinoff of Wanxiang Group.



Tuberville’s smoking gun is that Lu Guanqiu, the founder of Wanxiang Group, was posthumously praised by the CCP in 2021 and named a &#8220;National Excellent Communist Party Member.&#8221; The CCP went on to say in a press <a href="http://www.wanxiang.com.cn/en/index.php/news/info/2132">release</a> that “Comrade Lu Guanqiu had always listened to the Party and followed the Party.”



So far, China hasn’t been a <a href="https://blockworks.co/news/crypto-bills-make-hill-debut">huge focus in lawmakers’ crypto bills</a>, but Tuberville has shifted that dynamic. Gillibrand hasn’t been on the record about her joint effort with Tuberville on this bill, but has teamed up with Republicans before.&nbsp;



Gillibrand and Sen. Cynthia Lummis, R-Wyo., tried to pass the Responsible Financial Innovation Act last year, a bill focused on regulating digital assets. It hasn’t been reintroduced in the new congress yet.



Congress is also beginning to take notice of Web3 and blockchain technology, applications of crypto beyond money and currency.



The House Energy and Commerce Committee Subcommittee on Innovation, Data and Commerce gathered Wednesday to discuss possible use cases for distributed ledger tech.&nbsp;



One professor talked about blockchain’s potential to advance contact tracing systems for Covid-19 and other diseases. Another expert testified on the topic of smart contracts, saying they could help improve regulatory compliance and supply chain management.



Rep. Rick Allen, R-Ga., said his colleagues are making a mistake talking only about the security versus commodity debate.



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Tuberville bill would block Chinese ownership of US crypto companies

Katherine Ross

The US government is opposing a motion to allow bankrupt crypto exchange Bittrex US to return customer funds.&nbsp;



The government’s response comes after Bittrex US filed a motion “authorizing the debtors to honor withdrawals of cryptocurrency assets by customers.”



A hearing will be held on June 14.&nbsp;



Essentially, the US government is saying that the motion is “premature” and “it improperly attempts to subordinate creditors outside of a plan.”



The latter is due, in part, to the fact that Bittrex US owes the Financial Crimes Enforcement Network (<a href="https://blockworks.co/tag/fincen">FinCEN</a>) $5 million.



“Fairness and equity demand that if the [Office of Foreign Assets Control] and FinCEN Debts cannot be paid in full by confirmation, the United States should have a chance to prove that the cryptocurrency assets belong to the Debtors and can be clawed back from the customers as prepetition preferences and pre-confirmation sub rosa distributions,” the <a href="https://casedocs.omniagentsolutions.com/cmsvol2/pub_47475/56183223-b612-48b6-b981-1e5f4660cb37_109.pdf">filing</a> states.



In the original <a href="https://blockworks.co/tag/bittrex">Bittrex</a> US motion, it sought to categorize creditors in order of importance to repay.



The government denies that categorization is necessary, stating that Bittrex US “demonstrated why the issues of ownership of cryptocurrency assets need to be determined prior to the confirmation of the Plan. Finally, siloing creditors into subordinated classes outside of the confirmation hearing is improper. For these reasons, which are discussed more fully below, the Motion must be denied.”



Instead, the government wants these issues discussed once a plan is established and confirmed.&nbsp;



The lawyers continued, “similarly, whether the customers hold in rem interests or claims against the Debtors is not an issue that needs to be determined now. Customers can, presently, be allowed to withdraw the cryptocurrency assets in accounts now, but should be subject to potential avoidance actions at confirmation should all creditors not be paid in full.”



Bittrex US filed for <a href="https://blockworks.co/news/bittrex-bankruptcy-sec">bankruptcy after it was charged by the SEC</a> with running an unregistered securities exchange.



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Bittrex US request to return customer funds ‘premature,’ government argues

As one analyst lowered his price target for Coinbase by nearly 30%, another described recent sell-offs of the crypto exchange’s shares as “overdone.”



Mark Palmer, an analyst at Berenberg Capital Markets, decreased his price target for Coinbase stock from $55 to $39.&nbsp;&nbsp;



The stock’s price stood at roughly $54 on Thursday at 10:30 am ET, up about 1.5% on the day. The crypto exchange’s shares are down about 17% in the last five days, dropping below $47 on Tuesday after <a href="https://blockworks.co/news/sec-sues-coinbase">the SEC sued Coinbase</a> for alleged securities violations.&nbsp;



“The reduction in our price target reflects our view that COIN, which we had expected to report weak [second quarter] trading volumes before the SEC filed a lawsuit against it on Tuesday, could see that weakness persist and intensify due to the overhang that the lawsuit has created,” Palmer said.



He added: “The upshot is that we view COIN shares as uninvestable in the near term.”



The company’s trading volumes during this year’s first quarter were $145 billion — flat quarter over quarter, but significantly down from $309 billion during the first quarter of 2022.



The SEC’s allegations against the crypto exchange include operating as an unregistered exchange, broker and clearing agency, as well as listing tokens that the commission claims are securities.



<a href="https://blockworks.co/tag/coinbase">Coinbase</a> has denied that it lists securities. Chief Legal Officer Paul Grewal said in a Tuesday statement the company has “demonstrated commitment to compliance.”



“The SEC&#8217;s desired remedy would require the complete wind-down of COIN&#8217;s core businesses in the US,” Palmer wrote in a research note. “We believe the prospect of such a wind-down is likely to exacerbate the overhang on the company&#8217;s shares.”



Owen Lau, an executive director at Oppenheimer &amp; Co., said in a Tuesday note that while the lawsuit wasn’t unexpected — after the <a href="https://blockworks.co/news/sec-serves-coinbase-in-latest-alleged-crypto-securities-violation">SEC served Coinbase with a Wells notice</a> in March — the price reaction was &#8220;a bit surprising.&#8221;



While half, or more, of Coinbase&#8217;s revenue could be at risk, he added, the Coinbase stock sell-offs on Monday — the day <a href="https://blockworks.co/news/binance-changpeng-zhao-face-sec-charges">the SEC sued rival exchange Binance</a> — and Tuesday appear to be “overdone.”&nbsp;



“In our view, Coinbase will fight this lawsuit in court, which will likely be a long battle,” Lau wrote. “The uncertainty of long-term revenue has increased, but near-term revenue impact could be immaterial.”&nbsp;



In a note on Tuesday, Morningstar Analyst Michael Miller wrote that he would not change his $80 fair value estimate for Coinbase in response to the <a href="https://blockworks.co/tag/sec">SEC</a> lawsuit news. However, he assigned a &#8220;very high uncertainty&#8221; rating to the company, pointing out that Coinbase is expected to remain in a state of &#8220;regulatory limbo for the foreseeable future.&#8221;



“While the SEC’s complaint was expected, this is still a material negative event for Coinbase, particularly given the breadth of the charges,” he said.



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Coinbase shares ‘uninvestable in the near term,’ analyst says

The SEC continues to pursue a temporary restraining order which seeks to freeze the assets of BAM Trading and BAM Management — the entities operating Binance.US.



“At present BAM Trading states that it holds $2.2 billion in crypto assets (as well as hundreds of millions more in fiat currency) belonging to investors who have entrusted BAM Trading to custody those assets on the Binance.US platform,“ the SEC said in its latest <a href="https://cms.blockworks.co/wp-content/uploads/2023/06/Memorandum-68.pdf">filing</a>. 



The <a href="https://blockworks.co/news/binance-us-sec-assets-freeze">original temporary restraining order</a>, which was filed on Tuesday, June 6 has not been granted by the court yet.&nbsp;



Outside of freezing the assets of Binance.US, the commission wants to ensure that “relevant documents” are not destroyed or tampered with and ensure that BAM Trading complies “with specified relief concerning the custody and control of customer assets, and refrain from transferring them other than in the ordinary course of business, provided such ordinary course transfers are not made to any entity or person affiliated with Binance or Zhao.”



The SEC goes on to say, “<a href="https://blockworks.co/news/binance-changpeng-zhao-face-sec-charges">Zhao has deliberately engaged in concerted efforts</a> to provide a crypto asset platform for U.S. investors while shunning the applicability of U.S. law to protect securities investors.”



The SEC believes that the temporary restraining order is necessary because the listed defendants “knew that their conduct with respect to <a href="https://blockworks.co/news/binance-execs-unlicensed-securities-exchange">U.S. investors was illegal </a>and risked U.S. government enforcement actions. Instead of ceasing such illegal activity, Zhao and Binance doubled down.”



Since the SEC asked for the order, it’s <a href="https://blockworks.co/news/cz-ceo-bam-trading">filed transcripts of conversations with ex-Binance.US</a> CEOs and previous auditing — <a href="https://blockworks.co/news/binance-mixed-company-client-funds">backing up the SEC’s claim</a> that Binance commingled company and customer funds.&nbsp;



Binance has <a href="https://blockworks.co/news/binance-pushes-back-sec-lawsuit">denied that it commingled funds</a>.&nbsp;



The commission is also looking to serve Binance CEO Changpeng “CZ” Zhao and Binance via alternative means due to previous comments and the lack of a known Binance headquarters.



In the filing, the SEC quotes Zhao as “dismissing such ‘traditional mentalities’ [of a known headquarters] by saying ‘what kind of horse is a car? So you have to have an office. Wherever I sit is going to be the Binance office. Wherever, wherever I meet somebody is going to be the Binance office. ‘You have to have an entity. You have to have a headquarters. You have to have a bank account.’ All those things [don’t] have to exist for blockchain companies.”



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SEC says Binance, CZ ‘doubled down’ on illegal activity

Evan Miyazono

American television and video heritage are at risk.&nbsp;



There’s no reason to believe that your favorite shows or your favorite team’s games will be preserved for future generations; in fact, there’s reason to be concerned.&nbsp;



Some of our most valuable cultural records have disappeared or are in danger of being lost. TV, now arguably the best cultural barometer of any medium, has determined what we know, how we think, believe, and perceive ourselves and the world around us.&nbsp;



Web3 tools and protocols could play a critical role in preventing a digital dark age by providing decentralized and resilient solutions for storing and distributing digital content.&nbsp;



<h2 class="wp-block-heading">Let’s rewind</h2>



TV has always been a highly ephemeral medium.



TV preservationists have long been at a technological disadvantage — just look at how many early live television recordings have been wiped. It’s telling that one of the best records of television comes from activist and archivist Marion Stokes, who planned her diary around the TV schedule, successfully archiving over 71,000 tapes worth of TV over 35 years.&nbsp;



We now live in the golden age of television where viewers are spoiled for choice and ease. But in today&#8217;s streaming era, fan-favorite programs are also subject to the whims of corporate mergers, content removals and the ever-expanding detritus left behind from earlier generations of the web.



Last year, HBO Max (now just Max) quietly removed a cache of films and series following the Warner Bros. and Discovery merger, with animated projects and family shows taking the brunt of these changes. Even Sesame Street, a beloved pillar of American pop and education culture, was unsafe from corporate cuts. Last year, about <a href="https://variety.com/2022/digital/news/hbo-max-removes-sesame-street-episodes-1235345685/">200 episodes</a> of the series — mostly older ones — were removed from the record.



We are subject to the increasingly precarious nature of our digital media. We can’t easily distinguish between content leaving a platform and content vanishing from existence.&nbsp;



A generation of art risks extinction if the companies that own streaming services can’t financially justify preserving their vast libraries.&nbsp;



<h2 class="wp-block-heading">The real killer app</h2>



Streamed information is, by definition, ephemeral.&nbsp;



The Internet is hemorrhaging valuable content; today, only 7% of the world&#8217;s generated data actually gets stored, and that ratio is decreasing over time — that number will be down to 5% in the next five years. <a href="https://www.seagate.com/gb/en/our-story/data-age-2025/">IDC estimates</a> that the datasphere will grow to 175 zettabytes by 2025. At this rate, the current cloud storage infrastructure can&#8217;t keep up.&nbsp;



But there are currently some efforts underway to save more of our content.



The Internet Archive and their <a href="https://web.archive.org/">Wayback Machine</a> is a heroic nonprofit effort that has backed up 800 billion web pages, <a href="https://www.youtube.com/watch?v=-StPz14N034">filling a few hundreds of petabytes</a> (note, there are over a million petabytes in a zettabyte), on top of its other projects like a free digital ebook library and a historical software library.



The Internet Archive also hosts the <a href="http://blog.archive.org/tag/filecoin/">Filecoin Archives</a>, a community-led project to curate, disseminate and preserve important open access to information often at risk of being lost. The project would allow anyone to upload and access books, music, films, and other cultural artifacts without fear of them being lost or destroyed.



But the harder tasks of digital preservation and rescue still lay ahead.&nbsp;&nbsp;



We, the public domain, are about to experience a massive influx of new works, as copyright laws for many iconic films, books and songs begin to expire, and the potential benefits of preserving these works for future generations cannot be overstated. We need a decentralized, resilient system for archiving and sharing these works, ensuring they remain accessible and free for all to enjoy.&nbsp;



It will likely fall to librarians, archivists and the Web3 technologists — the monastic orders of the future — to ensure that something of the heady days of our &#8220;digital revolution&#8221; remains interpretable for future generations.&nbsp;



Preservationists could create digital tokens representing ownership in the preserved TV content and allow supporters to contribute to the preservation efforts in exchange for these tokens.&nbsp;



NFTs can also be used to track authenticity or ownership rights. Smart contracts could be used to establish transparent and immutable ownership and distribution rights for TV content, making it easier for preservationists to navigate the complex legal and ownership issues associated with old TV shows and movies.&nbsp;



TV is one of the most powerful generators of our collective memories, the most addicting and shocking reflection of society (sometimes a black mirror, if you will), and the most virulent incubator of social trends. Our heritage will diminish if this vast record of our culture is allowed to vanish.&nbsp;



Preserving our cultural history — whether it be the television shows that shaped us or medical journals with breakthroughs that saved us — will be Web3’s killer application.



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


<div class="wp-block-post-author-biography">Evan is the team lead for Research at Protocol Labs. He has lived in California his whole life, bouncing between NorCal and SoCal. He spent enough of his childhood at beaches that a sandy shore always feels familiar; the rest was spent sitting at a computer, reading books, or disassembling things. He eventually majored in Materials Science and Engineering at Stanford after unintentionally picking up minors in math and CS. He was then driven by his curiosity to a PhD in Applied Physics at Caltech and, upon completion, was lead to Protocol Labs by a desire to build systems that affect real people.

Evan still loves beaches, reading, and disassembly. Figuring out how things do, should, or could work is a passion, and sharing that knowledge is a favorite hobby. He’ll go on for hours if you tell him you’re interested in his thesis, so set a time limit before starting on that particular odyssey of quantum optics and nanofabrication.</div>


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TV Is Dying, but Decentralization Is the Cure

Shalini Nagarajan

Meta and Alphabet must implement stricter crypto advertising policies on its social media platforms within the European Union (EU), according to a complaint lodged by consumer group BEUC with the European Commission and consumer authorities.



On Thursday, BEUC said it called upon the Consumer Protection Cooperation Network — a group of European Union enforcement authorities — for more robust crypto rules on Instagram, YouTube, TikTok and Twitter.



BEUC is urging measures to be implemented that would prevent influencers from misleading consumers about crypto, among other actions. BEUC, otherwise known as the European Consumer Organization, is a collective of 46 independent bodies hailing from 32 countries.



In a <a href="https://www.beuc.eu/sites/default/files/publications/BEUC-X-2023-073_Hype_or_harm_The_great_social_media_crypto_con.pdf" target="_blank" rel="noreferrer noopener">report</a> titled &#8220;The Great Social Media Crypto Con,&#8221; BEUC stated that crypto investment products pose significant risks to consumers because of their high volatility and speculative nature.



It referred to instances in 2018 when Instagram (Meta) and YouTube (Google) banned cryptocurrency promotion but later allowed it under a weak approval process. This approach fails to protect consumers from misleading claims about crypto benefits and downplays the risks, BEUC said.



The report mentioned an incident in April 2023 when Twitter CEO Elon Musk <a href="https://www.theguardian.com/technology/2023/apr/04/twitter-changes-logo-to-dogecoin-cryptocurrency-image-in-apparent-late-april-fools-day-gag" target="_blank" rel="noreferrer noopener">changed</a> the microblogging site&#8217;s logo to <a href="https://blockworks.co/price/doge" target="_blank" rel="noreferrer noopener">dogecoin</a>, resulting in a 30% surge in value within a few hours.



“This again contributes to creating a positive perception of crypto among consumers and prevents them from clearly understanding the risks associated with them,” the group said.



<figure class="wp-block-image size-large"><img decoding="async" loading="lazy" width="1584" height="910" src="https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-08-at-14.30.08.png?w=1024&amp;h=1024" alt="" class="wp-image-58304" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-08-at-14.30.08.png?w=1584 1584w, https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-08-at-14.30.08.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-08-at-14.30.08.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-08-at-14.30.08.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-08-at-14.30.08.png?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-08-at-14.30.08.png?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-08-at-14.30.08.png?w=454 454w, https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-08-at-14.30.08.png?w=381 381w, https://blockworks-co.imgix.net/wp-content/uploads/2023/06/Screen-Shot-2023-06-08-at-14.30.08.png?w=80 80w" sizes="(max-width: 1584px) 100vw, 1584px" /><figcaption class="wp-element-caption">The front page of BEUC&#8217;s report, co-funded by the European Union</figcaption></figure>



BEUC cited discovery of crypto advertisements on TikTok despite the platform’s ban on crypto-related content. The group further noted that influencer endorsement is a major concern as it often involves misleading advice that can harm consumers.



Kim Kardashian and boxer Floyd Mayweather are currently facing a class action lawsuit, which a US judge <a href="https://www.reuters.com/legal/litigation/kim-kardashian-floyd-mayweather-cant-evade-emax-crypto-investors-claims-judge-2023-06-07/" target="_blank" rel="noreferrer noopener">refused</a> to toss out, for allegedly promoting the now-defunct crypto token EthereumMax (EMAX) inappropriately on social media.



<h2 class="wp-block-heading">EU already passed sweeping crypto regulation</h2>



The Market in Crypto Assets (MiCA) regulation is <a href="https://blockworks.co/news/european-parliament-mica-doesnt-touch" target="_blank" rel="noreferrer noopener">pegged to regulate crypto assets</a> in the EU. But the law is not yet implemented and is expected to come into force only by early 2025.



“Crypto will be regulated soon with the new Market in Crypto Assets Regulation but this legislation does not apply to the social media companies benefiting from the advertising of crypto at the expense of consumers,” BEUC Director General Monique Goyen said in a statement.&nbsp;



“This is why we are turning to the authorities in charge of protecting consumers to ensure Instagram, YouTube, TikTok and Twitter fulfil their duty to protect consumers against crypto scams and false promises.”



Outside the EU, the UK&#8217;s leading financial regulator is also working on finalizing rules for crypto ads.



The Financial Conduct Authority (FCA) said this week it has <a href="https://blockworks.co/news/uk-new-crypto-marketing-rules" target="_blank" rel="noreferrer noopener">introduced new rules</a> that mandate clear risk warnings, prevent misleading advertisements and provide investors with the option to withdraw from investments within a specific timeframe.



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Meta, Alphabet Must Do More To Protect EU From Dodgy Crypto: BEUC

David Canellis

Arbitrum, the Ethereum layer-2 scaling solution, stopped sending transactions to mainnet for roughly two hours on Wednesday due to a software bug affecting the optimistic rollup&#8217;s sequencer.



The snafu effectively left more than $2.2 billion in crypto in the lurch, locked inside dapps running on the blockchain, including GMX and Uniswap.



Arbitrum, like other rollup-centric networks, is intended to relieve Ethereum mainnet of activity by providing users an off-chain environment in which to transact. The company behind Arbitrum is <a href="https://blockworks.co/tag/offchain-labs" target="_blank" rel="noreferrer noopener">Offchain Labs</a>.



Every so often, Arbitrum must batch those transactions together and forward them to Ethereum for finalization. Code associated with a network node crucial to this process — <a href="https://developer.arbitrum.io/sequencer" target="_blank" rel="noreferrer noopener">the sequencer</a> — was responsible for the outage.&nbsp;



In order for the node to send the transactions to Ethereum, one of the two wallets associated with the node needs enough ETH to pay for transaction fees.&nbsp;



Arbitrum developers explained in a tweet <a href="https://twitter.com/ArbitrumDevs/status/1666549901403074563" target="_blank" rel="noreferrer noopener">thread</a> that a “malfunction” in the sequencer meant batches of transactions stopped being passed to the Ethereum mainnet. This interrupted an automated function that refilled the node’s wallet with ETH for transaction fees — effectively causing transactions to pile up for hours, awaiting settlement.&nbsp;



“The Sequencer spent the ~5 ETH it had, but the gas-refunder (which had ~250 ETH) didn&#8217;t refill it until it posted a successful batch,” the developers tweeted.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">The funding design has an important fail-safe protection built in. The Sequencer is ONLY refunded if it can post the batches successfully. If there is a malfunction in the Sequencer, then it cannot spend its way through the high ETH balance of the gas refunder.&mdash; Arbitrum Developers (💙,🧡) (@ArbitrumDevs) <a href="https://twitter.com/ArbitrumDevs/status/1666549901403074563?ref_src=twsrc%5Etfw">June 7, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Despite the incident, the group described the system as “working as intended,” as the sequencer is only provided ETH if it can successfully post batches. “If there is a malfunction in the Sequencer, then it cannot spend its way through the high ETH balance of the gas refunder.”



The network was back processing transactions on Ethereum mainnet as normal as of 10:00 am ET, Wednesday. Since its <a href="https://blockworks.co/news/arbitrum-upgrades-to-nitro-ahead-of-ethereum-merge">Nitro upgrade in August 2022</a>, Arbitrum has encountered 8 outages of between 30 minutes and 2 hours, <a href="https://twitter.com/shotaronowhere/status/1666722165427933187?s=20" target="_blank" rel="noreferrer noopener">according to</a> blockchain bridge developer Shotaro Granzier-Nakajima.



Wednesday&#8217;s incident was not an outage of that magnitude, according to A.J. Warner, chief strategy Officer at Offchain Labs. &#8220;There is no parallel. This was not sequencer downtime. This was a bug that caused a delay in batch posting,&#8221; Warner told Blockworks. In fact, Arbitrum &#8220;often delays posting to [layer-1] in times of high [layer-1] congestion,&#8221; Warner said, noting that alternative zk rollups can also take several hours before posting data to Ethereum mainnet under normal operation.



Offchain Labs said a full postmortem on the situation would be released later today.



<h2 class="wp-block-heading">News analysis by Macauley Peterson</h2>



All Ethereum layer-2’s currently operating, employ a centralized sequencer — in Arbitrum’s case one run by Offchain Labs. That’s not the way it’s meant to be forever, but moving further out on the decentralization spectrum is mostly aspirational at this stage of their development.



According to Arbitrum’s <a href="https://developer.arbitrum.io/sequencer" target="_blank" rel="noreferrer noopener">documentation</a>, “eventually, sequencing affordances could be given to a distributed committee of sequencers which come to consensus on ordering.”



Blockworks Research’s timely report “<a href="https://www.blockworksresearch.com/research/sequencers" target="_blank" rel="noreferrer noopener">Sequencers: The Key to The Rollup Investment Thesis</a>” includes the key takeaway that “centralized sequencers bring concerns surrounding liveness, censorship resistance, and regulatory arbitrage for the L2s.”



Wednesday’s incident represents a potential censorship resistance failure. No transaction batches posted → no layer-1 finality.



The sequencer was misbehaving, although it was not strictly “down” and continued to process transactions without posting them to Ethereum mainnet.



In theory, there’s another route to getting layer-2 transactions processed by submitting them via layer-1 into what Arbitrum calls “the delayed Inbox.” That is a primary selling point of Ethereum layer-2s and the basis of the claim that they are “inheriting,” in some sense, the security of Ethereum’s mainnet.



Following a <a href="https://offchain.medium.com/todays-arbitrum-sequencer-downtime-what-happened-6382a3066fbc" target="_blank" rel="noreferrer noopener">previous incident</a> which did involve sequencer downtime in January 2022, the Arbitrum team wrote, “the network is designed to sustain even permanent Sequencer failures by falling back to using Ethereum to process transactions.”



That wasn&#8217;t necessary in this case.



Be that as it may, there is still a considerable amount of <a href="https://blockworks.co/news/arbitrum-airdrop-faq">trust in Offchain Labs required</a>, even after the launch of the ARB token and initial efforts to decentralize governance.



Until fraud proofs can be validated permissionlessly, rather than via whitelisted nodes, and solutions to the decentralized sequencer are found, tested, and battle hardened, there will always be additional risks with rollups. It’s a tradeoff users make for higher performance and lower transaction costs.



And plenty of users are making that tradeoff! Funds at risk <a href="https://defillama.com/chain/Arbitrum?tvl=true" target="_blank" rel="noreferrer noopener">have climbed</a> from a July 2022 trough of about $560 million to a recent peak in May of $2.55 billion.



The Arbitrum token (<a href="https://blockworks.co/price/arb" target="_blank" rel="noreferrer noopener">ARB</a>), with a current market cap of $1.44 billion, fell roughly 5% on the news, but has recovered about half of that since.



Updated: June 8, 2023, at 10:48 am ET with comments from Offchain Labs received after publication.



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