Warren’s alleged work with short-seller shows anti-crypto army heating up

https://cointelegraph.com/news/warren-s-alleged-work-with-short-seller-shows-anti-crypto-army-heating-up

What do progressive Democrats, Republican national security hawks and Wall Street traders have in common? They are all apparently enlisting in United States Senator Elizabeth Warren’s “anti-crypto army.” The progressive senator’s reported alliance with Marc Cohodes, a Wall Street short-seller who profited from the recent carnage at crypto banks, is the latest example.

Crypto natives likely see the unusual pairing as further proof that entrenched interests are conspiring to kill Web3 in the United States. They aren’t entirely wrong, but America’s polarized factions are uniting against crypto for a reason. The industry has consistently failed to address valid concerns about financial crime and national security. That needs to change, or Warren’s anti-crypto army will continue attracting recruits.

Publicly traded crime scene?

In late 2022, Cohodes circulated a memo on Capitol Hill flagging “existential” regulatory risks at Silvergate, a crypto-friendly bank. The short-seller dubbed the bank a “publicly traded crime scene” and claimed, among other things, that Silvergate had “huge” Know Your Customer (KYC) and Anti-Money Laundering (AML) liabilities. These rules require U.S. financial institutions to carefully due-diligence their customers, and they are rigorously enforced.

Cohodes had reason to be concerned. Problems with KYC/AML compliance are rampant in crypto, and Silvergate appears to have been a striking example. According to New York magazine, Silvergate was “the go-to bank for more than a dozen crypto companies that ended up under investigation, shut down, fined, or in bankruptcy,” including FTX, the defunct crypto exchange. Cohodes claimed the bank went so far as to help FTX siphon user deposits into its sister fund, Alameda.

Silvergate shut down after FTX’s flameout in March, but its collapse may be symptomatic of serious industry-wide problems. The crypto bank, Cahodes claimed, was “a worldwide money laundering story… with a crypto wrapper.”claimed, was “a worldwide money-laundering story […] with a crypto wrapper.”

Anti-crypto army

Cohodes’ Silvergate memo reportedly found a receptive audience in Warren, who has become one of crypto’s most caustic critics. Unlike her calls for a wealth tax of up to 6% or a “just and equitable cannabis industry,” Warren’s crypto critiques are resonating far beyond progressive circles. Her message is simple: Crypto, Warren says, enables bad actors — from drug traffickers to rogue states — and is a threat to national security.

Her anti-crypto crusade is gaining traction. In January, three U.S. financial regulators published a joint statement on crypto banking. It heavily echoed Warren’s proposals, effectively laying the groundwork for a regulatory crackdown. The senator is working with Republicans on a bill that would impose strict industrywide KYC requirements. She is even attracting cautious support from banking lobbyists.

The problem isn’t with Warren’s overarching concerns. Web3 should be accountable for filtering out bad actors. It’s that clumsy policy implementation risks damaging the nascent industry irreparably. For example, Warren’s proposed KYC/AML legislation appears to indiscriminately target almost every touchpoint in crypto, including validators. It could severely undermine network decentralization, arguably Web3’s most essential feature.

Crypto should embrace KYC/AML to undermine Warren

Silvergate may have collapsed, but KYC/AML liabilities still permeate Web3. It’s no accident. Anyone familiar with crypto’s cypherpunk origins knows that, for many users, anonymity is a feature, not a bug. Indeed, privacy and self-custody are Web3’s raison d’etre.

It’s a mistake to dismiss crypto as a tool for money laundering. Blockchain’s unique attributes have transformative applications in industries ranging from asset management to media. Unfortunately, they are also setting up the industry for a head-on collision with U.S. regulators.

Web3 isn’t out of options. Emerging technologies are creating new ways to address policy concerns without compromising crypto’s core values. For example, zero-knowledge identity proofs promise seamless on-chain KYC/AML checks that respect users’ privacy. Meanwhile, blockchain intelligence platforms, such as Chainalys have been a boon for financial crime enforcement agencies.

The industry should stop burning political capital on resisting KYC/AML requirements altogether. Instead, we need to start attacking these challenges ourselves — or Warren’s army will.

Alex O’Donnell is the founder and CEO of Umami Labs and worked as an early contributor to Umami DAO. Prior to Umami Labs, he worked for seven years as a financial journalist at Reuters, where he covered M&As and IPOs.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

The US should promote USDC — before it’s too late

https://cointelegraph.com/news/the-us-should-promote-usdc-before-it-s-too-late

Ignore the doomsayers. The United States is still the world’s leading economy and will remain so in the future. With its global talent pool and world-class institutions, the U.S. has a competitive edge in virtually every emergent technology. Web3 is no exception.

Despite its advantages, America is bungling its chance to dominate the digital economy. In what Messari CEO Ryan Selkis aptly dubs “a colossal public policy failure,” America’s semi-official stablecoin, USD Coin (USDC), is losing ground to its ex-U.S. rival, Tether (USDT). If policymakers don’t step up soon, America may fall behind for good.

Manifest destiny in the metaverse

Until recently, USDC seemed destined to become Web3’s de facto reserve currency. Regulated by the U.S. Treasury and managed by Circle Internet Financial, USDC is a rare beacon of accountability in crypto. It is also phenomenally liquid. USDC is redeemable 1:1 for dollars, which Circle holds as cash or deposits in a transparent reserve managed by BlackRock.

Users have taken notice. Since its launch in 2018 until last year, USDC’s circulating supply has grown at a blistering pace, averaging 860% annually, according to Circle. By mid-2022, USDC’s market capitalization had crested at $55 billion. Meanwhile, Circle began rolling out a veritable Marshall Plan for Web3 infrastructure, including on-ramping rails and custody solutions. It is now onboarding institutional clients.

Importantly, Circle heavily emphasizes U.S. regulatory compliance, including American sanctions. For better or for worse, Circle can freeze USDC in blacklisted wallets at its discretion. It has frozen more than 8 million USDC across more than 150 wallets to date, according to Dune. It’s clear that USDC is already a potent tool for projecting America’s power on-chain, and it’s just getting started.

Changing fortunes

In the past year, USDC’s fortunes have reversed dramatically. Since its 2022 highs, its market capitalization has dropped by nearly half to around $30 billion. In a brief but unsettling depeg in March, USDC’s price dipped below $0.90 on some exchanges. Even more concerningly, USDC has started losing ground to its ex-U.S. rivals, particularly Tether.

To be sure, USDC’s decline partly reflects sector-wide outflows, and its depeg, triggered by Silicon Valley Bank’s collapse, was a product of market panic, not poor fundamentals. However, the fact remains that, as USDC’s market capitalization hemorrhaged in recent months, Tether’s increased by around $15 billion.

Now, with more than $80 billion in circulating supply, USDT’s market dominance is beyond dispute. That’s a win for Tether’s Hong Kong parent, iFinex Inc, which also runs the Bitfinex crypto exchange. However, it’s a blow to U.S. interests, as well as Web3 as a whole.

From a U.S. policymaker’s perspective, iFinex is Circle’s evil twin. While Circle’s fiat reserves are transparent, iFinex’s are famously opaque; while Circle’s relationship with U.S. regulators is friendly, iFinex’s is fraught; and while Circle is aligned with American interests, iFinex is a mercenary.

Choosing sides

It’s not too late for USDC to regain its footing. In fact, even without active support from policymakers, USDC is likely to thrive on its own merits. The U.S. Treasury’s oversight has established USDC as the gold standard among stablecoins, and Circle’s infrastructure stack is certain to attract new users.

That said, American officials shouldn’t leave the outcome to chance. Bipartisan crypto legislation may be elusive, but plenty of policy levers exist already that could advantage USDC at negligible cost. For starters, the Federal Reserve should greenlight Circle for its reverse repo program, which would backstop USDC with a deep well of highly liquid, risk-free loans.

Similarly, the Securities and Exchange Commission should encourage the proliferation of compliant, tokenized securities denominated in USDC. Meanwhile, regulators should support Circle’s infrastructure initiatives with clear guidance for issues such as on-chain Know Your Customer, Anti-Money Laundering and financial reporting.

For too long, the U.S. has treated Web3 as a regulatory headache rather than as a strategic priority. In the contest for stablecoin dominance, the stakes are too high to ignore. It’s time for the U.S. to pick sides.

Ethereum is going to transform investing

https://cointelegraph.com/news/ethereum-is-going-to-transform-investing

Ethereum is often depicted as traditional finance’s adversary in a Manichean struggle for decentralization. In reality, there isn’t any conflict at all. Rather than subverting the traditional financial sector, Ethereum is improving it. Soon, the two systems will be inextricably entwined.

Ethereum’s core value propositions — self-custody, transparency and disintermediation — are enormously relevant to financial institutions, and they can be realized within existing regulatory frameworks. Ethereum has already taken the first steps toward institutional adoption, and with its unmatched network decentralization, it is all but destined to become the primary settlement layer for the world’s financial transactions.

Neutrality in a multipolar world

Ethereum isn’t here to deliver a stateless alternative currency or an anonymized shadow economy. What it offers is simple: neutrality.

Ethereum is the global financial system’s first truly unbiased referee, and its arrival couldn’t be more timely. The geopolitical stability afforded by the United States’ preeminence is eroding, and domestic politics in major economies have become increasingly volatile. In a multipolar world, the financial system urgently needs to maintain reliable rules of the road.

Ethereum’s system for settling transactions and storing data is practically incorruptible. That is largely because of the unrivaled decentralization of its consensus layer, which spans more than 500,000 validators distributed among more than 10,000 physical nodes in dozens of countries. Despite concerns to the contrary, Ethereum is trending toward greater decentralization over time, not less.

To be sure, Ethereum will never replace traditional contracts or legal authorities for mediating disputes. What it promises, with its inviolable and unbiased code, is to prevent countless disputes from arising in the first place.

Solving the principal-agent problem

From Celsius to FTX and Silvergate, the events that led up to “crypto winter” speak more to the shortcomings of traditional finance than to the failings of crypto. In each instance, the classic principal-agent problem was worsened by lax oversight and overcentralization.

Historically, the default approach to this problem has been regulation. Greater oversight is certainly needed, but Ethereum offers more foundational solutions. Trustless smart contracts and distributed ledgers can remove certain dimensions of the principal-agent problem entirely.

Soon, Ethereum and its scaling chains will permeate traditional banking and asset management. From savings accounts to retirement portfolios, virtually every investor will self-custody their assets in trustless smart contracts, and carefully regulated on-ramps will render the tokenization of fiat currencies virtually frictionless.

*Ethereum’s market capitalization, 2016-23. Source: CoinGecko*

Meanwhile, investors and, eventually, regulators will insist that asset managers report fund performance using trustless on-chain oracles. In these areas, Ethereum won’t run afoul of regulations, it will reinforce them. Eventually, authorities will become as attentive to the technical specifications of smart contracts as they are to required liquidity reserves.

The future of Ethereum is not permissionless. Identity-based permissioning will be standard fare, but so seamless as to be practically unnoticeable. With the proliferation of central bank digital currencies, state censorship will be a serious concern. Laws restraining governments from arbitrarily freezing digital assets will gather significant political momentum.

In short, Ethereum has the potential to dramatically reduce private financial malfeasance, but its impact on state censorship will be more limited.

Nascent institutional adoption

Ethereum’s future may still be far off, but its building blocks are already here. Decentralized finance (DeFi) overheated into a speculative conflagration in 2021, but that frenzy of activity spurred considerable innovation. The technology now exists to create a wide array of disintermediated markets and tokenized financial instruments.

What is missing is connectivity with the broader financial system. That is the focus of an emerging class of regulated fiat-to-crypto on-ramps and custodians, such as Circle. The U.S.-based company had laid the foundation for the digital economy with USD Coin (USDC), its tokenized dollar. Circle is now building out additional critical infrastructure, such as hybrid fiat-and-crypto accounts that on-ramp directly to Ethereum and its scaling chains.

In the coming years, expect to see a proliferation of tokenized securities, starting with risk-off fixed-income assets. There will also be heavy investment in Ethereum staking pools, which will emerge as a critical strategic asset in the institutional crypto market. Other areas of focus will include on-chain financial reporting, streamlined user flows for regulatory compliance and institutional-grade tokenized derivatives.

To be sure, a recent spate of enforcement actions has cooled development activity in the U.S., but it will remain a major market for the coming wave of regulated protocols.

Tending the infinite garden

The surge in regulatory pressure on crypto, particularly DeFi, marks the end of an era. Large swaths of Ethereum’s ecosystem, especially protocols that can’t or won’t adapt to the changing landscape, will effectively be weeded out. Those that remain, however, will be well adapted to integration with the existing financial system. Ethereum’s transformative impact on traditional finance has only just begun.

Umami Labs founder: DAOs aren’t always the answer

https://cointelegraph.com/news/umami-labs-founder-daos-aren-t-always-the-answer

As the decentralized finance (DeFi) ecosystem grows in size and influence, the question of how to best govern DeFi protocols has taken center stage. In crypto-native circles, decentralized autonomous organizations (DAOs) are far and away the most popular governance structures.

DAOs are often touted as an all-in-one fix for everything from investor-manager alignment to regulatory risk. However, as a spate of well-publicized internal disputes and regulatory crackdowns has shown, DAO governance is not a panacea.

Blockchain technology, especially trustless smart contracts and distributed ledgers, has created an unprecedented opportunity to build a more transparent financial system, with fewer centralized intermediaries. However, these technologies are still nascent. They should be used to complement — not replace — traditional legal structures.

When it comes to safeguarding investors, there is simply no substitute for traditional legal entities and investor protection regulations.

The problem with current DAO models

Although DAOs purport to be decentralized and autonomous, the vast majority of them are virtually identical to conventional technology startups, with founders, investors, product roadmaps and go-to-market strategies.

The main difference between DAOs and traditional businesses is that DAOs, by and large, do not operate within established legal frameworks. Many DAOs are effectively unincorporated associations. The remainder usually opt for relatively exotic, untested legal structures, which confer few, if any, legal rights to stakeholders.

That’s bad news for investors and users, who are left with little to no recourse if something goes wrong. It’s also a problem for regulators, which has resulted in DAOs facing critical regulatory issues. This includes taxation of DAO tokens, treasuries, and investments, implementation of Anti-Money Laundering (AML) rules and Combating the Financing of Terrorism policies, as well as foundational questions of ownership, control and accountability.

Recently, DAO decision-making has drawn particular interest from the legal system, with concerning consequences for investors. In two recent court cases in the United States involving bZx DAO and Ooki DAO, officials took the stance that as governing members of a DAO, tokenholders themselves may be personally liable for legal infractions or negligence by a DeFi protocol’s core team.

As an industry, DeFi must do a better job of upholding the rights of users and tokenholders. Multiple regulatory pathways exist, both globally and within the United States, that offer important protections for investors, as well as considerable flexibility to DeFi protocols.

DAOs have potential that hasn’t been realized

While the current model of DAO governance is flawed, the underlying technology still holds vast potential. In fact, decentralized blockchain technology can be a powerful complement to traditional investor-protection regulations.

For example, trustless smart contracts and self-custodied “receipt” tokens have the potential to render many forms of mismanagement and malfeasance by asset managers virtually impossible. Similarly, decentralized oracles can ensure investors always have access to unbiased, up-to-date data on performance, thus greatly diminishing the scope for fraud.

At the same time, blockchain technologies such as zero-knowledge identify-proofs promise to ease the burden of regulatory compliance for DeFi applications while protecting users’ privacy and anonymity. With unique cryptographic proof, users can complete in-app Know Your Customer (KYC) and AML checks almost instantly without ever disclosing their personal information.

For all its flaws, on-chain governance has the potential to enable value-enhancing participation and guarantees that investor resolutions are truly binding. The only missing link preventing this technology from reaching its full potential is legal compliance.

Hybrid models can work

As with most emerging technologies, there is currently a lack of oversight regarding DAO regulation. However, the novelty of both blockchain and DAOs does not erode the need for regulatory compliance. If anything, it heightens it.

The need for proactive legal compliance in DeFi has never been more urgent. Regulatory institutions are cracking down on DAOs more than ever. A recent example of this is the Sushi DAO debacle, whereby the Securities and Exchange Commission issued a subpoena to the platform. The SEC indicated it was investigating potential securities law violations, including selling tokens that may be considered securities without proper registration.

DeFi protocols need to reconsider the DAO model. For protocols with securities-like governance tokens, the best option may be abandoning the DAO structure altogether. In the United States, established legal entities such as private funds may offer protocols considerable flexibility while clarifying and strengthening legal protections for tokenholders.

Similarly, DeFi protocols should consider housing their full-time core teams within registered limited liability companies, or their equivalent in jurisdictions outside the United States. Corporate structures are critical for protecting team members from personal liability and building effective, streamlined organizations.

DAOs have the potential to make a huge difference in both Web3 and mainstream businesses. The solution is not pitting decentralized and traditional finance against each other as adversaries — it’s integrating the strengths of both.