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The Blockchain Association has filed a brief giving further context to Grayscale’s legal face-off with the Securities and Exchange Commission over its failure to approve a spot-bitcoin exchange-traded fund.

The Blockchain Association, a DC-based advocacy group focused on blockchain policy, filed an amicus brief in the Grayscale suit today. Amicus briefs allow outside parties with court approval to offer additional information or insight, though they cannot introduce new facts.

The Blockchain Association’s brief supports Grayscale’s argument that the SEC’s denial of its application to convert its flagship fund into an ETF violates its procedures. It began the appeal process soon after it received its rejection. 

“After approving futures-based Bitcoin ETPs, the SEC has abandoned its investor protection mandate and abused its discretion by denying every application for a spot-based Bitcoin ETP, including Grayscale’s application,” said Blockchain Association Head of Policy Jake Chervinsky in a statement.

Because futures are priced based on the underlying market, Grayscale and its supporters claim the SEC should be comfortable with a product that holds the underlying asset itself. With that line of thinking, supporters say that the SEC’s approval of futures-based bitcoin ETFs starting last year should have cleared the way for a spot product. However, the SEC has rejected every application before it on the grounds that there aren’t sufficient protections against manipulation in the spot market. 

“Continuing to deny proposals to list spot Bitcoin ETPs ignores the exchanges’ existing fraud surveillance apparatus, as well as the robust anti-fraud and antimanipulation features of the spot Bitcoin ETPs, including unique features of the Grayscale Trust,” said the Blockchain Association amicus brief.

The Blockchain Association filing says denying the proposals is inconsistent with the Commission’s treatment of similar products and “cuts against SEC regulatory and policy imperatives,” by depriving consumers of a product they contend is often more suited to certain investor demands. 

“The Commission’s use of a double standard to evaluate Bitcoin futures ETPs and spot ETPs is not only bad policy, but also in contravention of law,” said the Blockchain Association filing. “The Commission must treat like cases alike.”

Other advocacy groups like Coin Center and the Chamber of Digital Commerce are seeking amici status in the case. Grayscale filed its opening brief in the appeal case last week, and the SEC response is due next month. 

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

The Federal Reserve may undertake a higher-than-expected interest rate hike next month as inflation and the labor market stay strong.

“Federal Reserve officials have coalesced around a plan to raise interest rates by three-quarters of a point next month,” according to the New York Times. The current economic conditions come at a time when officials at the U.S. central bank remain unclear about when they may step back on interest rate adjustments.

The Times reported that markets are betting this trend will persist until at least December, or perhaps by a meeting in November, based on economic projections, statements from the central bank, and a Fed presidential speech.

Another indicator that rates are on the rise comes from the Consumer Price Index figures that showed a climb of 6.6% over the year through September, constituting a 40-year high – data that may forestall any such decision to back off raising rates by Fed officials.

Restrictive monetary policies from the Fed will persist, according to Vice Chair Lael Brainard, who addressed the issue of rising inflation in a speech on Oct. 10. Brainard cited negative shocks, including a global pandemic and supply chains impacted by Russia’s invasion of Ukraine.

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

New court filings in the Voyager bankruptcy proceedings show the group tasked with investigating the lead-up to the lender’s demise is recommending settlements with top executives over their roles in a nearly $1 billion loan to fallen hedge fund Three Arrows Capital.

The documents come as part of a purchase agreement that will go before the court Wednesday. FTX purchased the embattled lender’s assets for about $1.4 billion at the close of last month, bringing the Chapter 11 bankruptcy process into its end game. The court and creditors still need to approve the sale process.

Part of that sales process includes acting on the results of a special committee investigation into the business, including possible missteps by its executives.

Among its recommendations is a settlement with CEO Stephen Ehrlich and previous CFO Evan Psaropoulos. Ehrlich and Psaropoulos agreed to lend 3AC $1 billion in crypto. The hedge fund would suffer a sudden implosion with the collapse of the TerraUSD stablecoin and leave Voyager with a nearly $1 billion claim and concerns that perhaps Ehrlich and Psaropoulos failed to do sufficient due diligence or structure the loan in a way that could have better protected Voyager. 

But the investigation found that it would be challenging to pursue negligence claims against the executives and is instead recommending settlements that would have them return $1.3 million to $3 million of personal assets and up to $20 million through directors and officers liability insurance. The investigation found no evidence of fraud or clear missteps around the 3AC loan that could easily be proven in court. While the settlement would not make a dent in the cost the executives’ decisions may have led to, prosecuting them would likely result in less money, said the filings.

“The Special Committee made the decision to settle, subject to Court approval, based on the fact that the individuals do not have personal assets available to satisfy any potential judgment even if the claims were successfully prosecuted, whereas the cost of prosecuting would likely dissipate the available D&O insurance coverage and the assets that are being paid through the settlement in defense costs,” said the filing.

This settlement would further release claims against Ehrlich and Psaroupoulos – a sticking point for the committee representing creditors.

In recent weeks, the creditor committee has filed a limited objection to the sale plan over releases that would protect the executives from the possibility of future legal action. The committee is asking the court to alert creditors to these stipulations and enable a third voting option in the creditor vote that assents to the plan but objects to the releases.

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Twitter founder Jack Dorsey’s decentralized social media initiative, Bluesky, announced on Twitter that it would rename its protocol from “ADX” to the Authenticated Transport (AT) Protocol and provided additional documentation on the scope of the project.

As Twitter’s answer to a call for a decentralized approach to social media platform creation, AT Protocol will hinge on account portability, algorithmic choice, interoperation, and performance according to a thread posted by Bluesky. Thus far the project has an official website that remains under construction, and the company teased the release of an upcoming socially-focused Bluesky App, built on the AP Protocol, for which users may join the waitlist.

AT Protocol will run on a federated network, said Bluesky, which is a type of network configuration featuring central management frameworks that allocate shared resources across a number of connected networks, or locations. To explain the network model, Bluesky offered an example where many sites run the protocol, and users may choose among providers. In turn, individuals or businesses can choose to self-host.

In terms of online identity management, in an effort to provide greater control to users, AP Protocol will enable accounts swaps between providers that Bluesky said will not incur any data loss or impact social graphs. Bluesky’s approach to account management “doesn’t require ties to real-world identity,” Dorsey tweeted response to another user in his own thread on the announcement, adding that to do so would be “very wrong.”

Closed source algorithms that select what users see and who they can connect with can become problematic in cases where misinformation or divisive messages become overtly prevalent. Bluesky will support open-source algorithms that, it said, will put a greater degree of control back into the hands of users in terms of content and connectivity.

In August 2021 Bluesky hired Josh Graber, a former Zcash and Skuchain software engineer and founder of the social event startup Happening Inc., to drive development for the decentralized social media protocol.

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

The Senate Agriculture Committee is negotiating changes to a bill that would grant the Commodity Futures Trading Commission more power over bitcoin and other digital assets, in preparation for a potential committee vote before the end of this Congress.

Among the items under negotiation is a provision that would require the CFTC to consult with the Securities and Exchange Commission as to whether a digital asset is a security, a possible blow to the hopes of those lobbying for the CFTC to become crypto’s regulator of choice.

Capitol Hill and lobbying sources familiar with the talks stressed that they remain ongoing, and portions of the bill could still change before a possible vote — if one even occurs before the end of the year. Other changes to the bill under discussion include adding a required report on decentralized cryptocurrency protocols that would guide future regulation. 

Senate Agriculture Committee Chair Debbie Stabenow, D-Mich., co-author of the bill, told The Block last month that she hoped to hold a committee vote on the bipartisan bill before the end of this Congress, though little time remains to advance the bill after midterm elections. The Agriculture Commitee holds jurisdiction over the CFTC because a majority of commodities are agricultural products, like corn, soy, and other crops. 

“We have no updates at this time and continue working with our Republican counterparts to find a time to advance our bipartisan crypto legislation,” a Democratic committee spokesperson wrote in response to an inquiry. Patrick Creamer, a spokesperson for Sen. John Boozman, R-Ark., Stabenow’s Republican counterpart on the committee and bill co-author, stressed that talks around the bill remain “fluid.”

In a public interview on Friday, SEC Chair Gary Gensler indicated support for greater CFTC crypto market authority, and CFTC Chair Rostin Behnam, a former Stabenow staffer, testified in favor of the bill last month. Both sit on the super committee of regulators, the Financial Stability Oversight Council, that voted to ask Congress to grant regulators more direct authority over digital commodities earlier this month. The SEC regulates securities, a rubric most digital assets fall under, but bitcoin and ether, the two largest cryptocurrencies by market capitalization, are currently seen as commodities. The CFTC can enforce against fraud and market manipulation, as well as regulate derivatives and futures of those digital assets, but this bill would grant them the ability to regulate the actual bitcoin and ether markets. 

Despite a narrow window to the bill becoming law before the end of this Congress, it has high profile support. Sam Bankman-Fried, the founder and CEO of crypto exchange FTX, has praised the legislation. The crypto mogul said he was “really excited” to see the senators “introduce a strong bill to bring customer protection and federal oversight to crypto” when the legislation was filed in August.

Not everyone is as enthusiastic though. The Blockchain Association, a digital asset industry trade association, publicly requested changes to the bill last month.

“We look forward to working with these offices and the broader committee to sharpen and expand existing language within the DCCPA,” the group’s head of policy, Jake Chervinksky, said in a Sept. 15 statement.

Frank Chaparro contributed reporting to this story. 

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Quick Take

• On October 18, 2022, Silvergate Capital ($SI) reported Q3’22 earnings
• $43.3mm net income for the quarter, a +12.2% gain and +84.3% gain QoQ and YoY, respectively
• $1.28 Diluted EPS for the quarter, a +13.3% gain and +45.5% gain QoQ and YoY, respectively 
• 1.677 digital currency customers as of September 30, 2022, a +5.8% gain and +28.5% gain QoQ and YoY, respectively 
• SEN processed ~$112.6bn of transfers in Q3’22, a (41%) decline and (30%) decline QoQ and YoY, respectively
• Digital asset customer fees contracted to $7.9mm for Q3’22, a (10%) decline and (2%) decline QoQ and YoY, respectively
• Shares of Silvergate closed at $54.88, a (22.5%) decline in 1-day price movements
• To date, Silvergate shares have decline (63.0%) from their $148.20 per share on January 1, 2022 

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Most bitcoin mining stocks tracked by The Block trended downward on Tuesday.

The coin was trading at around $19,200 by market close, according to data from TradingView.

SAI.TECH’s stock fell by 10.72%, followed by Core Scientific (-9.57%), Cipher Mining (-7.76%), and Digihost Technology (-7.02%).

Here’s how crypto mining companies performed on Tuesday, Oct. 18:

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

The Celo network-based decentralized finance lending protocol Moola Markets paused operations following an $8.4 million exploit.

According to an analysis by The Block Research’s Igor Igamberdiev, the exploiter used 243,000 CELO tokens originating from Binance and in turn loaned 60,000 CELO to Moola to borrow 1.8 million MOO for use as collateral. With the remaining CELO, the exploiter pumped the price of MOO and proceeded to use the borrowed MOO as collateral to borrow tokens across a series of other DeFi lending protocols.

For the efforts, the attacker netted 8.8 million CELO ($6.5 million), 765,000 cEUR ($700,000), 1.8 million MOO ($600,000), and 644,000 cUSD ($600,000).

Moola Market said its team is actively investigating the incident and that all activity on the platform has been paused. In the meantime, users are advised by Moola not to trade mTokens.

“To the exploiter, we have contacted law enforcement and taken steps to make it difficult to liquidate the funds. We are willing to negotiate a bounty payment in exchange for returning the funds within the next 24 hours,” tweeted Moola Market.

Moola Market did not immediately respond to The Block’s request for comment.

This is a developing story.

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Quick Take

• Rapid Insights provide a deeper analysis of the current crypto landscape in a timely fashion.
• Frax Finance, an algorithmic stablecoin protocol, has recently announced the launch of its liquid staking venture.
• This comes after the Ethereum Merge, significantly reducing the costs of running an Ethereum validator node.
• Frax Finance’s pivot could be a critical diversification for its current operations after a potential bill that outlaws “endogenously collateralized stablecoins.”
• Disclaimer: This is a market commentary research piece and includes opinionated views from our research team. Nothing contained in this piece constitutes a solicitation, recommendation, endorsement, or offer by The Block Research

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A month has now passed since The Merge took place, switching Ethereum from a mining-based system to one focused on staking.

The launch went relatively smoothly and no major bugs have yet to emerge. But The Merge did have several significant impacts on the Ethereum blockchain that can be observed — two of which could prove tricky for the network in the long run.

Let’s take a look at some of the ways in which The Merge affected Ethereum.

Ethereum dropped its high energy consumption

The main purpose of The Merge was to change Ethereum’s current proof-of-work consensus mechanism to proof of stake. In doing so, the upgrade made the network far more energy efficient.

Ethereum energy consumption. Image: Digiconomist

After The Merge, Ethereum’s annual energy consumption fell from 80 TWh to merely 0.01 TWh per year, according to Digiconomist. 

Using proof-of-stake, a single Ethereum transaction can be roughly translated to carbon emissions of up to 22 VISA transactions, a substantially lower carbon footprint when compared to its former design.

It’s worth noting that transactions aren’t directly linked to energy use and that this doesn’t include transactions made on Layer 2 networks.

The issuance of new ETH has fallen

After the transition, the amount of new ether being created has dropped by nearly 90%. This is a result of validator rewards being significantly smaller than the miner rewards issued under the old system.

The supply of ether has increased by nearly 6,500 ETH since The Merge; otherwise, the supply would have increased by an estimated 400,000 ETH, according to data tracking site ultrasound.money. Both figures take into account the amount of ETH burned during the transaction fee process.

Ethereum’s supply growth since The Merge. Image: Ultrasound.money

As of now, Ethereum’s supply is still inflationary, with a supply growth rate of 0.06%. If activity on the network rises and more ETH is burned during the transaction fee process, it could become deflationary — where more ETH is destroyed than created each day. 

Ethereum validators grew in number

Following The Merge, proof of stake validators are now running the blockchain and are responsible for processing transactions.

A day after The Merge, on Sept.16, Ethereum’s validator participation rate, the metric to see all validators expected to verify blocks, fell off by 3%. This was a temporary bump in the transition as the participation rate returned to its optimum state in a matter of days. The participation rate currently sits at 99.5%, meaning that almost all online validators are processing new blocks.

The number of Ethereum node validators has increased to over 435,000 from nearly 420,000 a month after the Merge, according to data from beaconcha.in. These validators have collectively staked about 13.2 million ether.

A few staking providers have cornered the market

A downside of The Merge is that it has resulted in a handful of staking providers controlling the majority of validators on Ethereum.

Just four providers — Lido and exchanges Coinbase, Binance and Kraken — account for more than 55% of Ethereum’s validator nodes. Lido is different from the others because it is a liquid staking protocol that passes on the validator process to other validators but it still remains a potential point of centralization.

The centralization issue is expected to be at least partially resolved after Ethereum’s next upgrade, called Shanghai, which will let users unstake their tokens from these providers and potentially enable more competition.

Shanghai is slated to take place sometime in the next year.

MEV Boost saw growing adoption amid censorship concerns

After The Merge, Ethereum validators have been increasingly using MEV Boost, a software that enables a marketplace for maximum extractable value (MEV).

This software allows block builders to run what’s called a “relay” that tells Ethereum validators which transactions they should prioritize in block production and receive MEV rewards.

MEV Boost represents a bit of a no-brainer for validators because it results in them making extra rewards, but this service has come with unwanted consequences.

While there are multiple firms that run their relays for MEV Boost, the most widely used relay is offered by Flashbots. Its relay has been censoring transactions, refusing to process any anything connected to mixing protocol Tornado Cash to comply with U.S. Office of Foreign Assets Control (OFAC) sanctions against the decentralized crypto mixer.

Currently, 47% of Ethereum blocks are built using Flashbots.

© 2022 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.