The Clouds Are Clearing For Grayscale

Gensler should resign IRS reporting requirements | MakerDAO default

Author

Decential Media
September 01, 2023

Decential Media
A weekly recap of the most insightful news, analysis, and capital flows in the wild west we call crypto.

Hello and welcome back to the Web3 Rewind! Per usual in this industry, lots has happened this past week. Here's what we have in store for you:

  • Judges side with Grayscale

  • IRS proposed tax reporting requirement

  • MakerDAO default

  • SEC and NFTs

  • Disincentivizing competitor usage in crypto

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The Latest

Please Resign, Gary Gensler

The time has come for Gary Gensler to resign from the head of the U.S. Securities and Exchange Commission.

Gensler’s handling of digital asset regulation has been a shambles, with the most recent rebuke to the agency he runs coming from the United States Court of Appeals in Washington, DC. A panel of three judges unanimously found the SEC fell “short of the standard for reasoned decisionmaking” in how it rejected multiple attempts by Grayscale Investments to create an exchange-traded fund backed by Bitcoin. Not a Bitcoin futures contract – the SEC already approved an ETF based on BTC futures – but actual Bitcoin.

See the lack of reasoned decisionmaking? Anyone who knows the futures market knows its correlation to spot – or wholesale – prices is rock solid (the court agreed). So on what basis would you on the one hand approve a Bitcoin ETF based on futures and deny one based on actual Bitcoin? But that was Gensler’s SEC’s approach, which the court rightly shred to bits.

The irony is that Gensler came to the job with a lot of good will in the crypto industry, mostly from his stint teaching classes at M.I.T. about blockchain. He handled the regulation of the over-the-counter derivatives market with a fierce determinism when he headed the Commodity Futures Trading Commission, where I got to know him on a professional level as someone who covered the CFTC. But Gensler today has too-broken a record as SEC chairman to be able to continue. Why would the crypto industry and it’s lobbyists take him in good faith after so much SEC bad faith? From strong-arm tactics as reported by Coinbase CEO Brian Armstrong, to enforcement overreach in the absence of cryptocurrency-specific laws passed by Congress, to being responsible for countless crypto startups leaving the U.S. or geofencing its customers because of the regulatory morass (I speak to founders every week who are doing this) – Gensler must go.

Gensler has foes in Congress, yet what they needed was cover to go after him. Now they have it with the court of appeals decision. Look for calls for him to be fired or resign to grow ahead of his scheduled  appearances before Congress next month. Rather than draw this out as jobs flee overseas, we’re asking him to do the right thing and resign now.  — Matthew Leising, editor in chief, Decential Media

We are so back dept.

Grayscale’s petition will get reviewed

On Tuesday morning, it was announced that a three-judge panel sided with Grayscale in its ongoing battle with the SEC. For those who need a refresher, in June 2022, Grayscale sued the SEC, claiming that the SEC approved various Bitcoin futures ETFs but not Grayscale’s proposed products.

With this new ruling, the SEC has to re-review Grayscale’s application. There are a few things to unpack here. This doesn’t mean that Grayscale can convert GBTC to an ETF just yet. The SEC can still reject the application. However, with the judge's ruling, the case for an SEC rejection is likely much weaker. In addition, it also doesn’t mean that a spot Bitcoin ETF is a guaranteed thing. However, judging by how the market reacted, with COIN up 15% and BTC up 6% on the day, it seems like everyone is taking this as a very positive decision. Importantly, the first deadline for several spot Bitcoin ETF applications is fast approaching, the end of the week to be exact.

Truth be told, the SEC and Gary Gensler have been getting pummeled lately. Between the XRP ruling a few months back, congressmen calling for Gensler to be fired, and mounting industry pressure, I wouldn’t want to be working in the SEC right now. Despite the fact that they have historically helped provide a massive amount of investor protection and initiated legal procedures against malicious individuals, crypto likes their scapegoats, and Gary Gensler is the perfect target.

Gary Gensler’s term ends on June 5, 2026, so we still have a ways to go, but eventually, or hopefully, the regulatory tide will turn. If we do get a spot Bitcoin ETF approved in the next half a year, that should theoretically lead to a large amount of inflows, both from actively managed funds and from passive index funds, which right now do not have easy access to digital assets. Regulation seems like the only bullish catalyst there is out there right now, so it is regulatory actions that we shall trade on.  — Joseph Cooper, Decential Media

Quick Bits

IRS proposed tax reporting requirement

  • Last Friday, the IRS released a proposed rule on tax reporting requirements for brokers of digital assets. A broker is “any person that provides facilitative services that effectuate sales of digital assets by customers.”

  • If you’ve pieced it together, that will likely include every DEX and wallet provider out there today. All of these companies or protocols will be required to collect customer information and report sales information. For decentralized protocols, this would be a near impossible requirement to meet.

MakerDAO default

  • MakerDAO might have another default. This comes hot on the heels of a default at the end of July. This time, it’s ConsolFreight, a collaborative cargo consolidation platform for freight forwarders who will likely default on $2.1M worth of loans.

  • This is a drop in the bucket considering MakerDAO’s almost $9B in TVL. However, it does go to show how challenging real world lending is and how tricky the credit underwriting process can be.

SEC and NFTs

  • On Monday, the SEC charged Impact Theory, a media and entertainment company, for conducting an unregistered crypto asset securities offering. But this time, it was through NFTs rather than your standard ERC-20 token.

  • Here’s a pro tip if you’re an NFT founder. Do not say you will deliver” tremendous value to purchasers” anywhere, ever. This seems like reasonable legal action, but it will likely leave some NFT founders looking over their shoulders for the next few months.

Crypto charting

Here's a deeper look into the economics and mechanics of web3 and crypto courtesy of charts by Pyth Data Association. To see more Pyth research click here.

zk Growth

zkSync Era has established itself as the leading zk-based Layer 2 ecosystem after launching a mere 5 months ago. Pyth Price Feeds have been available on zkSync Era from day 1 and secure 90% of the ecosystem’s TVS. The increase in daily price updates is clearly evidence of how this zk-based ecosystem is growing organically.

Grayscale Bitcoin jump

The federal appeal court handed Greyscale a significant victory in its fight to convert its Bitcoin Trust, GBTC, into an ETF, with some very pointed questions asked by the presiding judges. SEC’s latest setback left them with limited options in denying Greyscale’s application as the courts called it arbitrary and capricious. BTC rallied from its previous base of $26,000 to trade around $27,500 on the back of this news.

And last but not least

Disincentivizing competitor growth

We’ve all seen the classic hockey stick growth chart. Part of that is playing in a sector with exponential growth. The other component is dominating your competitors. On Monday, friend.tech announced that if you are a friend.tech user, and if you are also simultaneously using forks and copies of friend.tech, you will automatically opt out of earning points and forfeit existing points. This would likely disqualify you from a future airdrop, so there is a certain monetary cost to the user. However, this decision got huge pushback from the crypto community. Personally, I think this is CT being selfish and wanting to be mercenaries and extract as much out of the airdrop as possible. It seems perfectly rational for a company to disincentivize one from using a competitor, especially if it’s an exact clone.

Uber doesn’t want you using Lyft. Disney+ wouldn’t want you using Netflix. Amazon would probably pay you money not to use Shopify. Yet in those business models there’s no mechanism to hurt — er, we me disincentivize — your customers if they go against your wishes. That’s not the case in crypto, and is one of the more interesting aspects of this new technology. Unlike in tradfi, there is quite literally “free money” in crypto in the form of an airdrop. Disincentivizing competitor usage by promising less or no “free money” is a smart business decision, perhaps with the caveat here that friend.tech’s existing user base is largely comprised of crypto degens, and it is entirely possible that this will have a net negative effect on the protocol.

Blockchains uniquely enable this. First, by having novel incentive or disincentive mechanisms through token distribution. Second, by having a wallet address being a store of user activity across an infinite number of protocols. Both of these are impossible to achieve simultaneously in a web2 context. Sure, you can use Google to login into one website, but how would one website know you logged into another website? Similarly, even if a website wanted to pay you money, it’s not like your Google account is connected to your bank account. — JC

Have you read the definitive history of Ethereum? No? Well then get your copy of Out of the Ether while you can.