Sebastian Sinclair

SEC Chair Gary Gensler has taken to the media to rally against crypto startups for shirking basic finance principles: disclosing key facts and figures when raising money from the public.



While the two-year-old <a href="https://blockworks.co/price/xrp" target="_blank" rel="noreferrer noopener">XRP</a> case persists, the SEC has pushed a renewed <a href="https://blockworks.co/news/sec-crypto-enforcement-actions-accelerate">enforcement campaign</a> against big players in the crypto space, targeting the likes of Kraken, Gemini and Genesis.



The actions — particularly focused on staking-as-a-service products and other interest-bearing accounts — have resulted in fines and settlement.



<a href="https://blockworks.co/tag/gary-gensler">Gensler</a> suggested in a recent Politico <a href="https://www.politico.com/news/2023/03/07/gensler-crypto-overseas-sec-00085909" target="_blank" rel="noreferrer noopener">interview</a> that these actions have done little to persuade firms to play along. Crypto as an industry “seems to belie” coming into compliance with US securities laws, he said.



Read more: <a href="https://blockworks.co/news/sec-crypto-enforcement-actions-accelerate">SEC Land Grab: Crypto Enforcement Actions Accelerate Under Gensler</a>



“The path to compliance is clear,” Gensler said. But the SEC’s overarching ‘regulation by enforcement’ strategy has drawn out criticism from <a href="https://blockworks.co/news/sec-commissioner-speaks-out-kraken">crypto-friendly Commissioner Hester Peirce</a>.



Peirce says Gensler’s SEC is restricting investor access to crypto and slowing innovation. In extreme cases, the approach has even prompted individuals and businesses to <a href="https://blockworks.co/news/us-citizens-are-moving-abroad-to-sidestep-crypto-regulation-law-firm-says">relocate abroad</a> as they seek to mitigate unknown regulatory risks.



<h2>No need for new crypto rules: Gensler</h2>



The crypto industry worldwide has been busy lobbying local lawmakers and regulators to create more accommodating rules.



In particular, Gensler criticized the European Union’s Markets in Crypto-Assets (<a href="https://blockworks.co/tag/mica" target="_blank" rel="noreferrer noopener">MiCA</a>) framework, taking a dig at the sweeping regulations as they don’t “even cover bitcoin.” To date, the SEC considers bitcoin the only crypto commodity.



<a href="https://blockworks.co/news/eu-members-reach-agreement-on-mica">MiCA establishes a set of rules for issuers of digital assets</a>, service providers and trading platforms to enhance investor protection, market integrity, and financial stability across the EU.&nbsp;



Initially, the bill included provisions to prohibit proof-of-work-based cryptocurrencies, such as bitcoin. However, the proposal was later abandoned in the final version of the bill.



Gensler maintained that he’s focused on helping shield the public from financial harm, and that long-lasting securities laws should apply to crypto businesses.&nbsp;



He faces strong opposition from crypto executives and their House allies. Republicans in the House of Representatives are ramping up oversight of his crypto enforcement actions.



Despite the pressure, Gensler said he remains committed to his role and has been praised by some for the hardline stance, particularly from fellow crypto critic Democrat <a href="https://www.youtube.com/watch?v=3OnR2qHvmVA&amp;ab_channel=EconomicLiberties" target="_blank" rel="noreferrer noopener">Elizabeth Warren</a>.



Gensler also threw light shade on crypto innovation to date. Artificial intelligence could end reshaping finance more than crypto, particularly as brokerages and the like adopt the technology, the SEC chief reportedly told Politico.



“The much more transformative technology right now of our times is predictive data analytics and everything underlying artificial intelligence,” Gensler said.



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SEC Chair Gensler Is More AI Fan Than Crypto Degen

Artificial intelligence-related tokens took a beating Thursday as markets stooped amid revelations the SEC had charged Terraform Labs’ CEO and fugitive, Do Kwon, with fraud.



Top AI tokens, including SingularityNet’s (AGIX), Fetch.ai’s (FET) and Artificial Liquid Intelligence’s (ALI) sank 14%, 12% and 11.5% respectively, representing some of the worst impacted assets above a $200 million market cap over the past 24 hours.



The market value for the entire AI sector dipped 11.2% from yesterday’s reading of $2.14 billion to $1.9 billion, marking the industry’s worst-performing sector, data provided by <a href="https://www.coingecko.com/en/categories/artificial-intelligence" target="_blank" rel="noreferrer noopener">CoinGecko</a> show.&nbsp;



Today’s decline can be viewed as a continuation of the unwinding occurring across AI-related digital assets following their incredible run up earlier this year. FET’s year-to-date performance for example — which began in earnest immediately following Jan. 1 — is a gain of 360%.



AGIX is soaring high, posting an eye-watering 800% gain this year, while ALI and Ocean Protocol’s (OCEAN) are up 610% and 174% respectively. Related AI projects have been riding shotgun alongside a renewed interest in the underlying tech sector’s success from the likes of OpenAI’s ChatGPT and DALL·E 2.



It would appear, for now, traders are yet to concede on the bullish momentum driving associated AI tokens and projects higher.&nbsp;



Stablecoin in/out flows remained fairly mixed with Tether’s USDT exhibiting a greater flow out of exchanges than in, signaling traders are opting to remain long by keeping assets off centralized platforms, data from <a href="https://app.intotheblock.com/coin/USDT/deep-dive?group=exchanges&amp;subgroup=on-chain-flows&amp;chart=outflow-volume" target="_blank" rel="noreferrer noopener">IntoTheBlock</a> show.



By comparison, major cryptos ether and bitcoin are down around 2.2% and 3.5% over a 24-hour period but remain squarely in the green in YTD terms, up around 38% and 42%. Other top 20 cryptos, while down around 1% and 6% on the day, continue to hold their head above water on a YTD basis.



<h3>SEC moves against Terraform’s Do Kwon</h3>



The latest bout of volatility comes as Terraform’s <a href="https://blockworks.co/news/sec-charges-do-kwon-terraform-labs-with-fraud-misleading-investors">Do Kwon</a> was slapped with two charges late Thursday over allegations he violated US securities laws last year and deceived investors on a number of “inter-connected suite of crypto asset securities.”



Traders began to sell into the news, forcing bellwether crypto bitcoin -3.3% lower on the day to roughly $23,400. The asset was last seen trading at around $23,800 good for around a 1.8% bounce, TradingView data show.



Questions continue to hang overhead like a sword of Damocles on how exactly the Securities and Exchange Commission intends to regulate crypto, as well as its intentions to forge ahead with its own definition of what constitutes crypto asset securities.



Blockworks was told Wednesday the crypto ecosystem could see <a href="https://blockworks.co/news/hong-kong-crypto-moves">regulatory volatility</a> throughout 2023.



While AI tokens took a hit, those associated with layer-2 projects and protocols remained steady, posting a roughly 6% jump in market value collectively from $14.6 billion to $15.6 billion, <a href="https://www.coingecko.com/en/categories/layer-2" target="_blank" rel="noreferrer noopener">CoinGecko data</a> show.



In the face of depreciating values and market uncertainty, the sector represented the strongest-performing category on the day. Assets belonging to proof-of-stake sidechain Polygon (<a href="https://blockworks.co/price/matic">MATIC</a>), which is also launching <a href="https://blockworks.co/news/polygon-zkevm-beta-live-on-ethereum">a layer-2 zkEVM</a>, and Loopring (<a href="https://blockworks.co/price/lrc">LRC</a>) which were up between 6% and 2% respectively over the last 24 hours and showed little sign of capitulation from intra-day traders.



Read more: <a href="https://blockworks.co/news/sec-staking-enforcement-explained">Will The SEC Staking Hammer Hit Validators and Protocols Next?</a>



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Traders Flinch as SEC Goes After Do Kwon, With AI Cryptos Hit Hard

Artificial intelligence continues to grip the imagination of traditional market participants over its potential to disrupt entire sectors of the economy, though crypto is still miles ahead this year.



Several crypto-related exchange-traded funds (ETFs) are up between 9% and 64% in year-to-date terms, beating out the more mildly performing AI ETFs, up between 4% and 32%.



Global X Robotics &amp; Artificial Intelligence’s ETF (BOTZ) for instance, is up 16% YTD while Cathie Wood’s ARK Autonomous Technology &amp; Robotics ETF (ARKQ) has risen 18%.



Taking a look at crypto funds — the picture of whose ahead becomes clearer. Of the 39 AI/robotics ETFs Blockworks analyzed, performance across the board averaged around 12.4%. Crypto’s ETF performance for the year is averaging around 38.3% — a difference of roughly 26%.



VanEck’s Digital Transformation ETF (DAPP), the sector’s best-performing fund, is up a whopping 67% since the new year began. DAPP’s top 15 holdings include the likes of Coinbase, Block Inc, Bitfarms and Riot Platforms — all listed on major US exchanges.



That’s followed closely by Global X’s Blockchain ETF (BKCH) at 64% YTD and Bitwise’s Crypto Industry Innovators ETF (BITQ) — up 61% over the same period.&nbsp;



Like DAPP, both funds track roughly the same publicly-traded crypto and blockchain firms, as the choice remains relative to its more developed and long-standing AI cousins.



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe class="wp-embedded-content" sandbox="allow-scripts" security="restricted" title="Interactive or visual content" src="https://flo.uri.sh/visualisation/12625850/embed#?secret=QiOEisD1Zt" data-secret="QiOEisD1Zt" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div><figcaption class="wp-element-caption">DAPP is outperforming year to date, but BOTZ is a clear winner over the past year | Chart by David Canellis </figcaption></figure>



For the AI and robotics sector, performance is more muted, at least as the second month of the year gets underway.



Direxion Daily Robotics, Artificial Intelligence &amp; Automation Index (UBOT) is topping the list among best-performing AI-related ETFs this year, up 32%. But, it should be noted, UBOT features one of the lowest make-up of assets in its fund, when compared to its peers — totaling just $18 million.



Crypto funds total assets are also modest, averaging around $95 million, with one outlier — the $431 million Amplify Transformational Data Sharing ETF (BLOK) — up 25%.



By comparison, the average total funds in AI ETFs stand at roughly $5.89 billion, likely due to greater enthusiasm around the tech over crypto and blockchain, which is currently experiencing a lull.



Recently renewed interest in AI, courtesy of OpenAI’s ChatGPT 3 language model, Tesla’s self-driving cars and Jasper.ai’s ability to create art has led to an explosion of new business ideas.



An <a href="https://www.pwc.com/gx/en/issues/analytics/assets/pwc-ai-analysis-sizing-the-prize-report.pdf">analysis</a> by global “big-4” accounting firm PricewaterhouseCoopers (PwC) predicts the AI sector to contribute $15.7 trillion to the world’s gross domestic product by 2030.&nbsp;



Of that figure, roughly 6.6 trillion is likely to come from increased productivity while $9.1 trillion will derive from “consumption-side effects,” PwC said.



Cathie Wood’s Ark Invest expects blockchain and crypto to match that. The firm claims over the next 10 years, cryptocurrencies and smart contracts could command <a href="https://blockworks.co/news/ark-blockchains-are-future-of-money">$20 trillion</a> and $5 trillion in market value, respectively.



What does ChatGPT have to say about that?



<figure class="wp-block-image"><img decoding="async" src="https://lh4.googleusercontent.com/9WbaEpjf3I9rDmQKgT5Yvar9JIqML-lRVfct_pUGrwJHwN7lN9wHQxyux46xEYaY2lnVaW5EUENCCzfmt3Ky0pHIsxlK2dxPa6UCzJB9eua-Qk1fseKIxft8etusL-lopkXa2Z0jnv0j5Tw7dO_4qko" alt=""/></figure>



Fair enough.

Crypto ETFs Outperforming AI by 26% YTD

Bessie Liu

A report making the rounds among crypto traders this week claims 97.7% of tokens launched on decentralized exchange Uniswap V2 are rug pulls.&nbsp;



But the researcher behind it said the paper’s intention has been widely misinterpreted. 



Rug pulls are when developers or promoters hype up emerging tokens without any plans to actually execute on their promises. The often-sophisticated scams absconded with <a href="https://www.statista.com/chart/27775/biggest-rug-pulls-by-estimated-cryptocurrency-usd-value-stolen/" target="_blank" rel="noreferrer noopener">$7.7 billion</a> in 2021, according to Statista. 



In an interview with Blockworks, Bruno Mazorra — a Ph.D. candidate studying blockchain, cybersecurity and cryptography at the University of Pompeu Fabra — said that his research which is making its way through <a href="https://twitter.com/DrNickA/status/1587060596234747907?s=20&amp;t=_iz2jxswArearV8528dK_A" target="_blank" rel="noreferrer noopener">crypto Twitter</a> was intended to show how artificial intelligence (AI) technology could be used to detect scam tokens, rendering regulation unnecessary. 



“I’m quite afraid that [the paper is being] misused,” he said.



Despite Mazorra’s intentions, users are concerned that the research could be co-opted by governments to dole out regulation.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true"><a href="https://twitter.com/Bitboy_Crypto?ref_src=twsrc%5Etfw">@Bitboy_Crypto</a> has our back ! He’s taking arrows to protect Defi ! But in all seriousness US gov will use this to strongly regulate decentralized exchanges.&mdash; BJ (@buc_eescrypto) <a href="https://twitter.com/buc_eescrypto/status/1587069785287938050?ref_src=twsrc%5Etfw">October 31, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



The paper caught the attention of the likes of Scott Lewis, co-founder of analytics protocol DeFi Pulse, who criticized the researchers for misusing the term “rug.”



“Most of [the tokens] on Uniswap were low effort/low revenue phishing style scams, where the token tried to look like an established token. Same scammer could launch thousands of these,” he tweeted. “‘Rug’ is an exit scam and was not 97.7% of tokens on Uniswap.”



Maya Zehavi, CEO of Stealthy Venture Labs, also picked apart the report. She said that claiming 97% of Uniswap tokens were rugpulls was equivalent to “saying 97% of Twitter accounts are fake, but none were active during the last year.”



<blockquote class="wp-block-quote">The original intention of the paper, according to Mazorra, was to show how you can use machine learning tools to detect scam tokens.</blockquote>



“This was not [a reason] for there to be more regulation in the crypto space, that is not the purpose of the paper at all,” Mazorra said. “We wanted to show how you could have the same impact without regulation.”



Mazorra also pointed out the paper — circulated by Nick Almond, the protocol leader of FactoryDAO — was a non-peer-reviewed version of the report that had been published in a bull market. An updated, peer reviewed version of <a href="https://www.mdpi.com/2227-7390/10/6/949" target="_blank" rel="noreferrer noopener">the study</a> can be found on the Multidisciplinary Digital Publishing Institute.



“It was much easier to do rug pulls in the bull market,” he said. “If we redo this paper in the bear market, I think our hypothesis or conjecture will change completely — how a scam would be deployed would be very different.”



Uniswap V2 is not the only decentralized exchange that allows users to launch tokens with very little value, Mazorra noted. In a hackathon at ETH Amsterdam, Mazorra and his research partner found similar results on Polygon and Uniswap V3.



Ultimately, Mazorra hopes his research and the machine learning tools he has developed can be a gateway for people to understand cryptocurrency tokens and make better investment decisions.



“We are just purely analyzing and understanding — we are not pushing for regulation,” he said.



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