Carbono Insights #77 | Grayscale wins a battle for ETFs. Also, NFTs can be securities, Aerodrome, a world without Binance, Product Market Fit, and SWIFT.
We knew that a powerful enough catalyst would trigger some volatility in a low trading volume crypto, and the catalyst happened: Grayscale’s legal victory against the SEC sparked a short-lived peak of optimism before retracting to last week’s numbers.
The rally didn’t last because there are no strong enough reasons to change the direction of the market these days. The decision over Grayscale attracted some impulsive traders. And as easily as they came, they left a few days later, maybe repelled by the SEC’s announcement to delay their decision on the bitcoin spot ETF submissions. An expected stance, but lately, it looks like there’s not much more to hold on to.
Regulation | The SEC will have to come up with new reasons if they want to reject Grayscale’s ETF
On Tuesday, a three-judge panel for the U.S. Court of Appeals delivered a crushing interpretation of the Securities and Exchange Commission’s logic for denying an ETF, finding the agency acted “capriciously” and “arbitrarily.” The Real Reasons the Grayscale Bitcoin ETF Decision Matters
Grayscale Bitcoin Trust launched in 2013 as one of the few ways investors could get exposure to crypto. Throughout a long history of mistakes, misunderstandings, and mishaps from Grayscale, partners, close friends, and regulators, GBTC became a cursed financial product: Investors could purchase GBTC shares that followed the evolution of BTC but could never redeem their share for the underlying asset. Since late 2022, GBTC shares’ relationship to the NAV price (the underlying asset price) has lived below the -40%.
Grayscale tried to turn their trust into a spot bitcoin ETF, but they always had the SEC against them. The firm went as far as to sue the Commission last year for treating differently spot bitcoin ETFs to bitcoin futures ETFs, a product the SEC revised and approved in October 2021.
The wait was worth it. The judges have confirmed that the verdict from the SEC was unjustified. This does not turn GBTC into an ETF automatically. It just says that the SEC will have to think of different and better reasons to fight their battle if they still want to reject Grayscale’s proposal.
This has two positive outcomes for crypto:
- One, it brings good omens to the myriad new spot bitcoin ETFs that sprung after BlackRock’s filing in June (you can almost tell the date of the filing by looking at the NAV chart above)
- Two, it’s another important loss for the SEC, which loses face as the ultimate arbiter of crypto.
2. Regulation reloaded | NFTs can also be securities
But Gary won’t be deterred so easily!! Last week, we witnessed another regulatory precedent when the SEC took its first NFT-related enforcement action.
Impact Theory, a California-based media company, raked in nearly $30 million selling three tiers of NFT offerings the SEC deemed to be securities (…) The NFTs qualify as securities because Impact Theory’s team promised investors would profit off the collectibles, touting their “tremendous value,” according to an SEC order. SEC Issues First Enforcement Action Targeting NFTs (Coindesk)
Apparently, the company (and LLC, not a decentralized protocol in any shape or form) claimed to be en route to becoming the next Disney and marketed their initial batch of NFTs as access to the organization’s future revenue. They were even called Founders Key (could have tried Collector’s Key or Frens Key…)
This is the first time the SEC claims an NFT is a security. But, to be honest, who cares if the underlying protocol is an ERC-20 or an ERC-720 if all the boxes of the Howey Test get ticked?
3. Decentralized Exchanges | Aerodrome: Base takes flight
First, it was the memecoin $BALD luring degens, then it was friend.tech (luring degens again?), now it’s Aerodrome. Not a week goes by without Base, Coinbase’s Layer 2, taking crypto’s spotlight.
Aerodrome is a decentralized exchange built using Velodrome code. Velodrome is currently the leading exchange on Optimism and leverages the so-far successful ve(3,3) model of incentivization of liquidity providers, token holders, and traders. ve(3,3) is quite complicated, but if you want to get acquainted with the concept, we wrote this for you.
Aerodrome has attracted more than $200M in TVL thanks to the combined forces of a well-known DEX design, the popularity of Base (current TVL, ~$300M), the airdrop of their token $AERO, and the initial yield farming opportunities.
4. Crypto | A world without Binance
If you haven’t started yet, it might be a good moment to begin planning for a doomsday scenario when Binance is fully under siege by regulators. Nothing drastic has occurred, to be honest, but if it eventually happens, we won’t be able to say that the signs weren’t there.
In the case of Binance, the latest was a strange move by the SEC. Normally, SEC’s litigation is made public for everyone to read, but recently, the Commission filed a “sealed motion” in their case against Binance. This can mean many things. Broadly, making the documents public could damage an ongoing criminal investigation (SEC’s cases are civil cases) You can read the former chief of the SEC Office for the Internet, John Reed Stark’s, surprised post on X.
5. The future of crypto | Product-Market Fit in crypto, a different beast
In the world of cryptocurrency, the traditional concept of Product-Market Fit (PMF) has taken on a new meaning. While PMF historically represented the moment a product aligns perfectly with the customer’s needs, in crypto, the investors’ needs are the center of attention. Friend.tech, exemplifies this perfectly. This crypto application took crypto by storm last week and put Base on the map, allowing users to buy shares in other users’ social media presence. Why would someone do that? the short answer is “to access a private chat”. But that is not the reason it attracted millions in revenue. Users are quite unimpressed by the content side of Friend.tech (and the proof is that its minutes of fame have already faded). Friend.tech’s temporary PMF had more to do with the ability to tokenize social personas and turn them into trading assets. The old adage of “buy low and sell high”, this time applied to Twitter-like profiles.
This trait of crypto applications is quite extended and reflects the broader challenge in crypto: finding value beyond investments. The question now is how to leverage crypto’s evolving feature set for more profound purposes.
We wrote a longer piece for our medium. Read it here.
6. Institutional investment | SWIFT and Chainlink’s efforts to open DeFi
Speaking of the progress of use cases for crypto, we’ve recently come across another big step, this time in the area of institutional investment. SWIFT, the global messaging network and standard for securely transmitting financial information and instructions between banks and financial institutions worldwide, recently published the results of an experiment in the area of tokenization.
There is growing belief across the financial industry that tokenization — the process of converting physical and non-physical real-world assets such as stocks, bonds, property, or even art into digital tokens — has the potential to become a new source of significant value, as well as driving greater efficiency, security, and transparency in post-trade processes. (download the full report here)
SWIFT wants to take a central role in this trend and has conducted a series of experiments to find out how institutions can leverage their current SWIFT infrastructure as the single entry point in their communication with public and private blockchains.
For this experiment, SWIFT has collaborated with over 10 top financial institutions and has used Chainlink’s interoperability solution, CCIP, as the gateway to the blockchain realm.
As SWIFT explains in their conclusions, the hurdles are still big: there are regulatory and privacy concerns, and use cases are still lacking.
Does it ring a bell?
Still, infrastructure continues to build and wait until the doubts around crypto dissipate, which is very likely to happen.
