The Protocol: The CFTC Is Cracking Down on Crypto

September 14, 2023

Crypto winter continues to be dogged by regulatory attacks and court drama. Most notably, the U.S. Commodity Futures Trading Commission placed a trio of decentralized crypto platforms into its crosshairs last week. An aggressive set of charges from the CFTC – which zeroed in on how the trading platforms handle certain kinds of third-party token swaps – contrasted with the regulator’s more lenient image. Tech developments have not abated, however: Consensys announced a pair of upgrades for MetaMask, its crypto wallet, and Infura, its crypto infrastructure platform. Ethereum co-founder Vitalik Buterin also got the crypto community talking with a research proposal for regulation-friendly privacy mixers.

Today’s feature from Margaux Nijkerk is about Ethereum’s plan to phase out its biggest testnet, Goerli, in favor of a new one, Holesky. Like its predecessor, Holesky will look like a clone of the main Ethereum network, but it will allow developers to test their programs with lower financial stakes. If all goes to plan, the new testnet will be operated by a larger network of validators than Ethereum itself, which should make it better than Goerli for testing applications and upgrades under realistic network conditions.

RIPPLE REVIEW: Riding high after its partial court victory over the U.S. Securities and Exchange Commission in July, Ripple Labs, the blockchain developer that uses the XRP token in its payments network, may now have to defend the decision before a U.S. appeals court. In a filing last week, the SEC argued that an appeals court should decide the question of whether Ripple violated securities law in making XRP available to retail investors by putting it on crypto exchanges. “The Defendants themselves say that the issues have industry-wide significance and are of special consequence,” the SEC wrote. Separately, Ripple is plowing forward on the business side, announcing last week that it has acquired Fortress Trust, a Nevada-based chartered trust company with a crypto and Web3 focus. Ripple declined to disclose further details when contacted by CoinDesk, though a person with knowledge of the matter said the price tag was less than the $250 million it paid for custody firm Metaco in May.

DEXES DINGED! Last week, the Commodity Futures Trading Commission charged three decentralized finance (DeFi) platforms – Opyn, Inc., ZeroEx (0x), Inc. and Deridex, Inc. – with operating illegal derivatives trading services. Notably, the CFTC reprimanded the smart-contract based trading platforms for supporting tokens that were issued by third-parties. Just a week earlier, a New York court dismissed similar claims against Uniswap in a class action case, with a judge arguing that the decentralized exchange platform was not accountable for third-party “scam tokens” listed to its platform. The CFTC charges were significant in the context of the wider U.S. regulatory landscape. For several years now, the CFTC and Securities and Exchange Commission have been in a jurisdictional turf war over who should regulate the U.S. crypto industry. The industry has generally lobbied in favor of oversight by the CFTC, which holds a reputation as the less strict agency, but last week’s aggressive CFTC actions drew long-standing assumptions about the regulator into doubt. On the other hand, CFTC Commissioner Caroline Pham did pitch a relatively crypto-friendly, “time-limited” program last week to pave the way for regulated crypto markets and tokenization.

TOKENIZATION TALK: The market for tokenized assets could mushroom to $16 trillion by 2030 according to a 2022 report from the Boston Consulting Group, and a wide slate of financial firms – traditional and crypto-focused alike – are positioning themselves to bite out a piece of the tokenization pie. Mirae Asset Securities, a South Korean financial group with over $500 billion in assets under management, said last week that it had partnered with Polygon Labs to develop a tokenized securities network. Meanwhile, a group of crypto industry heavyweights including Coinbase, Circle and Aave formed the Token Advocacy Coalition to foster the adoption of public blockchains and DeFi, and to bring the “next trillion dollars of assets” on-chain. The tokenization hype hasn’t gone unnoticed on Wall Street: JP Morgan is reportedly considering its own blockchain-based token for settling payments.

Also:

Vitalik Buterin’s X account was hacked last week and used to promote phishing links. Scammers reportedly managed to loot $691,000 from unwitting followers of the Ethereum co-founder.

Founder of collapsed Turkish crypto exchange Thodex was sentenced to 11,196 years in prison, according to local media.

NounsDAO barrels toward treasury split after NFT holders rally for “rage quit.”

Protocol Village

Highlighting blockchain tech upgrades and developments.

Fireblocks CEO Michael Shaulov (Fireblocks)

Particle Network, Web3 infrastructure provider, “has unveiled V2 of its Wallet-as-a-Service (WaaS) solution,” according to a message from the team. “Major enhancements have been made to privacy, user experience, and transaction efficiency with the latest version…. V2 introduces a number of new technologies including a zero knowledge (ZK) component and a protocol layer that prioritizes user privacy and security.”
BNB Chain, the popular blockchain from exchange giant Binance, releases opBNB, its Ethereum layer 2 network, after months of testing. The new network, which goes live on Wednesday, uses Optimism’s OP Stack to provide fast and cheap transactions for users. The network comes around a month after Coinbase, a major Binance competitor, released Base, its OP-based layer 2 network.
Fireblocks, a cryptocurrency custody firm, is launching a non-custodial wallet service that uses multi-party computation (MPC) technology to reduce counterparty risk and enhance user privacy.
MetaMask, the popular crypto wallet from Consensys, is introducing Snaps, a new feature that allows users to install plugins that extend the functionality and interoperability of the wallet.
Infura, a blockchain infrastructure platform also built by Consensys, plans to release a decentralized version of its service by the end of 2023, per The Block.
Lukso, a layer 1 blockchain for creatives, is adding Universal Profiles, a feature that gives users an on-chain identities via an easy-to-recover crypto wallet and a profile for interacting with web3 apps.

Money Center

Brine Fi founders from left to right: Shaaran Lakshminarayanan, Ritumbhara Bhatnagar and Bhavesh Praveen (Brine Fi)

Fundraisings

BrineFi, a decentralized exchange based on zero-knowledge proofs, raises $16.5 million at valuation of $100 million. The round saw participation from Pantera Capital, Elevation Capital, StarkWare Ltd, Spartan Group, Goodwater Capital, Upsparks Ventures, and Protofund Ventures.
Animoca Brands, web3 gaming company, raises $20 million for its Mocaverse NFT project and loyalty program, per Decrypt.

Deals and grants

Bitget, crypto trading platform, establishes a $100 million pot to fund growth of its ecosystem through investing in exchanges, data analytics firms and media organizations.

Data and tokens

Binance, the world’s largest crypto exchange, says it will expand its zero-fee trading promotion so users will now be able to trade bitcoin (BTC), ether (ETH) and Tether’s USDT stablecoin with the Argentine peso, Brazilian real and South African rand.
Starknet, the Ethereum layer-2 network, posts record-high throughput on Sept. 3 “after Braavos, a Starknet wallet provider, published and then quickly deleted an article” revealing that the project’s “long-awaited STRK token will soon be available to the public,” according to The Defiant.
North Korea has been linked to this week’s $54 million CoinEx hack, according to blockchain data analyzed by ZachXBT and verified by CoinDesk. North Korea has stolen more than $3 billion in crypto over the past few years, according to the Wall Street Journal, with some of that money reportedly helping to fund its missile program.

Regulatory, Policy and Legal

LBRY, blockchain-based file-sharing network, to challenge ruling it violated U.S. securities law.
FTX Founder Sam Bankman-Fried’s bid to be released from jail ahead of his October trial is denied by a judge.
Ex-FTX Executive Ryan Salame pleads guilty to federal criminal charges, admits to serving as “straw donor” to funnel FTX money to Republicans. Salame, who once helmed FTX’s Bahama’s division, agreed to pay $5.5 million in restitution to FTX victims. He’ll also need to hand over $6 million, several properties, and his Porsche 911 sports car to the government ahead of his 2024 sentencing – otherwise, he’ll need to fess up $1.5 billion for participating in a “conspiracy operate an unlicensed money-transferring business.”

Bitcoin Ordinals Inscriptions Aren’t Going Away

Bitcoin NFT sales have declined but Ordinals inscriptions continue rising, according to TokenInsight. A record 418,240 inscriptions were minted on Sept. 3, the second highest daily mint to date, the research outlet reported last week.