Commentary on Current Events Involving Blockchain and Digital Assets

May 31, 2023

Traditional Finance Embraces the Digital Frontier: 'Crypto Cranes' Signal Industry Transformation​

Commentary by Chris Nekvinda, Ph.D., Director of Digital Assets , on the article: Wallstreet firms to take on Binance Coinbase, other crypto-native exchanges

Economists have long used construction cranes as an indicator for future economic growth beyond traditional financial indicators like GDP, unemployment, and market data. The RLB Crane Index is used to show the top 13 cities in the U.S. with the highest amount of construction activity. Why is that important? It indicates investments made by the public and private sectors. It indicates job growth and the need for more housing, food, and entertainment. It’s an economic indicator of where growth will happen as businesses will fill those new buildings meaning more economic growth. What are the equivalents when we look at Blockchain and Digital Assets? From this lens, it’s less about consumer adoption right now, and more about the type of infrastructure that is being built and who is doing the building. We can metaphorically call these “Crypto Cranes.”

The Digital Asset financial market data indicates that we are in a “crypto winter,” the digital asset version of a bear market. While this has happened six times previously, what types of “Crypto Crane” activity in this bear market might indicate businesses are preparing for an uptrend beyond the recent uptick in the digital asset markets? We can look at what traditional financial companies are doing in this crypto winter to prepare themselves to capitalize on the next uptrend. Consider the following that has happened over the last 18-24 months despite major stories of Terra Luna’s stablecoin collapsing and the FTX collapse and scandal.

• Fidelity pushes forward, allowing retail investors to place Bitcoin in 401(k)s
• Coinbase and Blackrock reach a deal to provide Blackrock’s institutional investors with data from Coinbase retail trading of Bitcoin, and soon other digital asset trading data
• Fidelity, Charles Schwab, and Citadel Securities launch EDX Markets, a digital asset exchange
• Mastercard, Visa, and PayPal are working globally on payment solutions for businesses to accept payments with digital assets and receive payments in their currency of choice
• BNY Mellon, State Street, Nasdaq (and others) have launched Custody services for digital asset providers and institutional clients
• New products and services continue to reach consumers like “crypto-friendly” IRAs allowing retail investors the ability to place digital assets in Individual Retirement accounts

These are just a few examples, but they represent significant investments being made by traditional financial firms in the digital asset space. This has a familiar feel of the infrastructure investments made by early telecom companies for transatlantic telegraph communications and carried on more recently by big tech firms Microsoft, Alphabet, Meta, and Amazon funding transatlantic and transpacific infrastructure for the now globally connected internet. While the previous crypto market cycles were driven by early investors & market sentiments, it appears that these “crypto cranes” indicate the next cycles might be driven by first movers like Fidelity, Charles Schwab, Blackrock, and other traditional financial services giants.

June 6, 2023

SEC Lawsuit Lays Groundwork that Digital Assets Are Securities

Commentary by Chris Nekvinda, Ph.D., Director of Digital Assets, on SEC lawsuit against Binance and Coinbase

Recently, the U.S. Securities and Exchange Commission (SEC) brought separate suits against two of the largest Digital Asset exchanges operating in the U.S., Binance and Coinbase. The SEC asserts that each exchange did not act according to U.S. Securities laws regarding selling unregistered securities, not providing proper disclosures and, in the case of Binance, mishandling customer funds. Also of note, this lawsuit lays the groundwork that digital assets are, in fact, securities.

Investors, Digital Asset exchanges, members of both Congressional parties, and the House of Representatives Oversight Committee alike have previously requested clear guidance from the SEC regarding Digital Assets sales and handling. The SEC’s answer, relying on securities laws circa the 1940s, proclaims those rules as complete to cover this asset class, valued at over a trillion dollars. Conversely, these exchanges, investors, and Congressional leaders counter that new Congressional laws are needed for the SEC and others to protect investors and industry-related jobs properly. Senator Cynthia Lummis of Wyoming currently sponsors a bipartisan bill (Lummis-Gillibrand Responsible Financial Innovation Act) in Congress seeking to provide clear rules and guidelines to exchanges and investors alike. As such, she responded that the “SEC has failed to provide a path for digital asset exchanges to register, and even worse has failed to provide adequate legal guidance on what differentiates a security from a commodity. The SEC’s continued reliance on enforcement continues to harm consumers. Real consumer protection requires creating a robust legal framework that exchanges can comply with, not pushing the industry offshore or into the shadows.” (@SenLummis https://twitter.com/SenLummis/..., June 6,2023) 

Coinbase has stated publicly that in 2022, it met with SEC regulators on thirty separate occasions seeking clarity on operational compliance. Moreover, while the SEC charges that Coinbase is in violation for its staking program, Coinbase points to its program outline (S1 report) approved by the SEC before it went public in 2021. The report, known as the S1 report, is used when registering with the SEC before going public and references its staking program fifty-seven times. Thus, it is evident that the SEC was made aware of Coinbase’s programs and approaches in conjunction with its approval to go public.

SEC Chair Gary Gensler has previously stated that the SEC needs additional powers from Congress to regulate Digital Asset exchanges as current authorities fall outside of its existing powers (Reuters, https://www.reuters.com/techno...). Since this statement, there have been no additional powers granted by Congress to the SEC in response to their request.

Timelines toward a resolution to these new lawsuits are indeterminate. For example, the SEC’s litigation against payment blockchain company Ripple Labs has been ongoing since 2020. While all parties advocate a desire to protect investors and businesses better, it is premature to lay claim to any success. Meanwhile, the Digital Asset total market cap is 1.1 trillion dollars and markets were largely unaffected following each announcement.