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:

• The IRS crypto threat

• Kraken listing stocks, ETFs?

• PayPal’s stablecoin on Venmo

• Seal 911 to the rescue

• CBDCs are evil, m’kay?

The Latest

Technological convergence meets crypto

The taxman cometh dept.

Update to the IRS crypto threat

 We’ve written many many words here at Decential on the sorry state of crypto regulation in the U.S. It feels a bit at this point like shouting into a gale and the slow pace of Congressional action doesn’t help matters when the Securities and Exchange Commission has a full pipeline of enforcement cases it’s using to create policy.

So it’s no fun to be reminded of probably an even bigger threat to crypto — the Internal Revenue Service. A story we published in November 2021 laid out the details — in short a change to the tax law that would require “certain ‘recipients’ of digital assets valued over $10,000 to report the sender’s name, address, and Social Security number to the government,” as author Abraham Sutherland, a lecturer at the University of Virginia School of Law, wrote at the time. The change was proposed by Congress and after passage was sent to the IRS to work out the details. Those details are now out, and they don’t look good for anyone in the U.S. working in crypto.

Coindesk covered the latest developments here, it’s worth a read. The gist of the issue is that in a decentralized financial system where I may be trading crypto with a smart contract as my counterparty on a DEX the idea of reporting the identity and SSN of a bit of code is ridiculous and obviously unworkable.

As someone who has covered the way regulation starts in Congress and then progresses through other U.S. agencies, this development is deeply troubling. We are getting to late stages in this rulemaking with not a lot of opportunity to have changes made. The time for that was before this bill came out of Congress but it appears to me that not many people knew what was in the Congressional text until it was passed. That’s bad.

How bad? “In short, the proposal – as currently written – spells the end of DeFi in the United States and shows the catastrophic, far reaching effects that rulemaking can have,” Sarah Milby, the senior policy director at the Blockchain Association, wrote in Coindesk this week. Milby implored readers to submit comments to the IRS explaining how these rules would be unworkable. We share her concern at Decential and if you are so inclined — and you should be — you can submit a comment letter by using the link on this IRS page.

Never a dull moment, eh? — ML

Quick Bits

Kraken wants to list stocks, ETFs

• Kraken is hoping to offer trading in U.S. stocks and exchange-traded funds by 2024, Bloomberg reported. One of the oldest U.S. crypto exchanges, Kraken has applied to become a broker-dealer with the Financial Industry Regulatory Authority, the news service said.

• I would’ve loved to be a fly on the wall when the SEC got wind of this. A mostly-unregulated crypto exchange that just settled U.S. charges of offering unregistered securities asking to list shares in Apple, the SPY and Ford. When heads explode at the SEC, is there anything in them? 😉

PayPal’s stablecoin on Venmo

• PayPal’s new stablecoin PYUSD is now available on Venmo. PayPal got a lot of deserved attention when it introduced PYUSD earlier this year but Venmo shouldn’t be lost in the conversation.

• Venmo has an entire crypto section on its app with the ability to buy Bitcoin, Ether, Litecoin and Bitcoin Cash as well as tutorials and educational material. The payment possibilities inherent in crypto are working their way into the pipes of the mainstream, kind of like a warm campfire amid this bleary crypto winter.

Seal 911 to the rescue

• In aquatic mammal news, a group of whitehat hackers and security experts called Seal 911 prevented $200,000 from being stolen in real time from the protocol dice9win after an exploit was made known to the group.

• The Telegram channel connects to 30 folks like Pascal Caversaccio and samczsun who then race to try to fix exploits before it’s too late. How cool is that? As samczsun told DL News one of the trickiest things in reporting a bug is knowing the right person to tell for fear of alerting more bad guys to the nuts and bolts of the hack.

And last but not least

CBDCs are evil, m’kay?

Unintended consequences are one of life’s more interesting phenomenon, and crypto is of course not immune to them. Take maximum extractable value, or MEV. That’s when validators reorder transactions that are included in a block to profit, sometimes in really dubious ways that would look like front running to someone in the traditional financial world. More than $686 million has been extracted via MEV, according to Chainlink. I can’t imagine the creators of Ethereum meant for MEV to become a thing, yet here we are.

While MEV is somewhat harmless and a bit like a transaction tax, a much more insidious unintended consequence of crypto is the possibility to create central bank digital currencies. In their most invasive form, CBDCs can be used to track every purchase a person makes via the public blockchain record. A surveillance state’s wet dream, in other words. China is far along in its pilot program with its digital yuan, the e-CNY, and is now allowing tourists to use Mastercard or Visa to fund their wallet while in the country. So not only can the Chinese monitor a large swath of their own population’s spending habits, they can get a bead on that lovely family from Brisbane as well.

In the U.S. there are growing conversations about the Federal Reserve’s role in creating a digital dollar. On the private side, the Digital Dollar Project is a group we’ve covered here at Decential, run by the former head of the CFTC Chris Giancarlo. A government-issued stablecoin should be resisted at every opportunity. The only true freedom we have is over our own finances and the U.S. government has never not abused a power it’s been given over its citizens. Good news then, to see Congressman Tom Emmer introduce a bill to ban the development of a CBDC by the Fed. The bill passed the House Financial Services Committee and will be taken up by the whole chamber next. Let’s also not let American policymakers speak out of both sides of their mouth — threatening to kill crypto via regulation while also wanting the benefits of a digital dollar. They’ve made a glorious mess of the fiat clearing and settlement system, let ‘em keep it and we’ll have crypto. — ML

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