#240—The US takes aim at crypto

It’s a full court press

Jan 30, 2023

Welcome to Yaka Stuff, our weekly newsletter that covers news, industry perspectives, and updates from the Hard Yaka ecosystem. Check out last week’s report here.

This week:

The US takes aim at crypto
Everything you need to know about Nostr in 16 min.
Ecosystem updates
Stuff happens

1. The US takes aim at crypto

This past Friday, we got a better sense of the current administration’s approach to crypto (via Chris Lewis). Here’s what happened:

The Fed published a policy statement requiring banks to ask permission regarding any “crypto-asset-related activities.”
At exactly the same time, the Fed announced they were denying Custodia Bank from joining the Federal Reserve System.
Not to be left out, the White House laid out their roadmap for crypto.

As Axios described it, the vibes were “hostile”:

The vibes out of the White House and the agencies its appointees lead were bleak Friday, at least for anyone trying to run a cryptocurrency business.
Quick take: The words were neutral-sounding bureaucratese; the subtext was full-on hostility, Brady writes.
Why it matters: If a full crackdown on the business begins in Washington, insiders shouldn't look for prices to start going up and to the right again any time soon.
…
As if that didn't make the point clearly enough, the Fed also put out a policy statement on banks engaging in crypto activity.
Tl;dr: It basically says banks have to ask permission to do anything in the space, and a "yes" in such cases sounds about as likely as a Bitcoin ETF.

The Fed’s statement builds on the joint letter published along with the FDIC, and OCC on Jan. 3, citing their collective intention to mitigate crypto risks within the banking system. For banks, that likely meant not messing around with crypto or permissionless blockchains:

Based on the agencies’ current understanding and experience to date, the agencies believe that issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices. Further, the agencies have significant safety and soundness concerns with business models that are concentrated in crypto-asset-related activities or have concentrated exposures to the crypto-asset sector.

The Fed affirmed that position on Friday:

The Board has not identified any authority permitting national banks to hold most crypto-assets, including bitcoin and ether, as principal in any amount,17 and there is no federal statute or rule expressly permitting state banks to hold crypto-assets as principal. Therefore, the Board would presumptively prohibit state member banks from engaging in such activity under section 9(13) of the Act. 18

On the subject of stablecoins and tokenized dollars, the Fed largely deferred to OCC rules:

Certain state member banks have proposed to issue dollar denominated tokens(dollar tokens) using distributed ledger technology or similar technologies. The permissibility of the issuance of dollar tokens to facilitate payments for national banks is subject to OCC Interpretive Letters 1174 and 1179, including the conditions set out therein.21 A state member bank seeking to issue a dollar token would be required to adhere to all the conditions the OCC has placed on national banks with respect to such activity, including demonstrating, to the satisfaction of Federal Reserve supervisors, that the bank has controls in place to conduct the activity in a safe and sound manner, and receiving a supervisory non objection before commencing such activity.

On this point, however, the Fed re-emphasized how it feels about open, permissionless blockchains:

The Board generally believes that issuing tokens on open, public, and/or decentralized networks, or similar systems is highly likely to be inconsistent with safe and sound banking practices.22 The Board believes such tokens raise concerns related to operational, cybersecurity, and run risks, and may also present significant illicit finance risks, because—depending on their design—such tokens could circulate continuously, quickly, pseudonymously, and indefinitely among parties unknown to the issuing bank. Importantly, the Board believes such risks are pronounced where the issuing bank does not have the capability to obtain and verify the identity of all transacting parties, including for those using unhosted wallets.23

(It probably isn’t too surprising that the Fed would prefer a more permissioned approach.)

The White House statement is also more or less what you would expect in a post-FTX reality.

There is, of course, the standard “we support innovation” line:

The Administration wholeheartedly supports responsible technological innovations that make financial services cheaper, faster, safer, and more accessible.

But the rest of the letter signals more of a crackdown—such as this message to Congress that could potentially pour cold water on crypto legislation:

While congressional action in these areas would be welcome, Congress could also make our jobs harder and worsen risks to investors and to the financial system. Legislation should not greenlight mainstream institutions, like pension funds, to dive headlong into cryptocurrency markets. In the past year, traditional financial institutions’ limited exposure to cryptocurrencies has prevented turmoil in cryptocurrencies from infecting the broader financial system. It would be a grave mistake to enact legislation that reverses course and deepens the ties between cryptocurrencies and the broader financial system.

Instead, it’s about giving crypto cops more power:

Congress, too, needs to step up its efforts. For example, Congress should expand regulators’ powers to prevent misuses of customers’ assets—which hurt investors and distort prices—and to mitigate conflicts of interest. Congress could also strengthen transparency and disclosure requirements for cryptocurrency companies so that investors can make more informed decisions about financial and environmental risks. To aid law enforcement, it could strengthen penalties for violating illicit-finance rules and subject cryptocurrency intermediaries to bans against tipping off criminals. It could fund greater law-enforcement capacity building, including with international partners.

Oh yeah, and stablecoins:

And it could limit cryptocurrencies’ risks to the financial system by following the steps outlined by the Financial Stability Oversight Council in its recent report, including addressing the risks of stablecoins.

As we know, Gary Gensler and the SEC have been busy in recent weeks, going after Gemini, Genesis, and settling with Nexo.

For Brady Dale at Axios, the message is pretty clear:

The bottom line: Last March, the Biden administration put out a call for its agencies to study the topic of cryptocurrency. Friday's events suggest that it's done studying, and it's come to a conclusion.

Relevant:

2. Everything you need to know about Nostr in 16 min.

Forget Twitter. Forget Mastodon. Nostr is the new flavor of the week, and it might actually have legs. The irony of web3 was that it wasn’t all that web-like. That’s also the appeal of Nostr. It’s as webby as you can get. There’s no native token here. It’s just an open communications and file sharing protocol. It’s also decentralized and censorship resistant.

As such, it’s got Jack Dorsey and the Bitcoin crowd buzzing.

The key differentiator for Nostr is that it relies on a system of relays (which anyone can host—even on a Rasberry Pi).

But this video will do a much better job of explaining how it works (via Greg Kidd):

3. Ecosystem updates

Trace Labs, creator of Origin Trail, joined the Sustainable Medicines Partnership (SMP):

The purpose of the partnership is to bring together leading organizations from across the healthcare and pharmaceutical industry to collaborate and share knowledge, in order to find sustainable solutions to the challenges facing the industry. Trace Labs will play an important role in this partnership by supporting the creation of industry relevant knowledge assets on the OriginTrail Decentralized Knowledge Graph (DKG).
These verifiable knowledge assets will be used to advance the mission of the SMP by providing data that can be used to identify and track the movement of medicines and packaging materials throughout the supply chain. This will enable the SMP to identify areas where waste is occurring and develop solutions to reduce it. Additionally, knowledge assets will be used to improve the accessibility and sustainability of medicines by providing insights into the distribution and delivery of medicines to patients.

Blockdaemon partners with BitGo:

Blockdaemon, the leading independent institutional staking and blockchain infrastructure provider, has partnered with BitGo, one of the largest regulated crypto custodians in the world, to launch institutional-grade, fully integrated MATIC staking service on the Bitgo platform. MATIC is the native token on the Polygon network. Cake DeFi, a leading Singapore-based fintech platform that provides easy access to Decentralised Finance (DeFi) services and applications, will be the launch customer for the new staking service.

Stuff happens:

Quadrata brings digital identity to DeFi through partnerships
State of Filecoin Q4 2022: “Q4 '22 marked an uptick in Filecoin usage, as active storage deals grew 10% quarter-over-quarter. While storage capacity decreased 5% from its all-time high, storage utilization grew 18x faster than storage capacity year-over-year. While decentralized storage is still in its early days, the Filecoin ecosystem continues to thrive, as over 600 projects are currently being built on Filecoin.”
Vitalik Buterin proposes 'stealth addresses' to enhance Ethereum privacy
Soulbound tokens come into their own with Pudgy Penguins move
Genesis creditors file securities lawsuit against Barry Silbert and DCG
At Patreon, mismanagement thwarts a pandemic-era star

Yaka Stuff

#240—The US takes aim at crypto

It’s a full court press

1. The US takes aim at crypto

2. Everything you need to know about Nostr in 16 min.

3. Ecosystem updates

Discussion about this post