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Ethereum killers are great for investors but little else, Blockchain.com’s Smith says

Backing Layer 1 blockchains has proven an incredibly successful bet in the past and may remain so — despite none of them truly threatening Ethereum’s crown — according to Blockchain.com co-founder and CEO Peter Smith.

If the likes of Solana, Avalanche and Near Protocol were the first wave of so-called Ethereum killers, Aptos and Sui — brand spanking new Layer 1 blockchains based on Move, a programming language originally developed by Facebook engineers — are the second.

Sui developer Mysten Labs is reportedly in talks to raise hundreds of millions of dollars from investors, while the team behind Aptos has already banked $350 million across two raises this year.

Yet Ethereum remains very much alive — and the dominant protocol on which to conduct decentralized business. Indeed, it’s in the final stages of switching to a proof-of-stake model in an effort to make the network cheaper to use and more energy efficient.

Yet despite the growing competition, it’s little surprise that investors continue to plow into base layer blockchains, according to Smith — because they can still prove incredibly profitable. 

“None of these alternative Layer 1s have come close to beating Ethereum, but they have made investors a lot of money,” he told The Block in an interview. “If you’re an early investor in a Layer 1 that gets some kind of scale, even if it’s small scale, that’s generated phenomenal returns for you.”

“That’s where it becomes necessary in this conversation to differentiate between ‘is this stuff going to have a huge and meaningful impact on users and daily lives and building the future of finance?’ from ‘can we make money?’ Because the two things are not always one-to-one.”

In the wider world of venture capital, it’s unusual to see investors backing multiple startups within one niche — in part because they run the risk of conflicts of interest between companies that may become competitors. Not so in crypto. Some venture capitalists have backed multiple projects whose mission is to take down Ethereum. Solana and Aptos, for instance, both count Andreessen Horowitz, Multicoin Capital, Jump Crypto, BlockTower Capital, ParaFi Capital and others as backers.  

For Smith, the rationale for backing Layer 1 blockchains is clear: they are capable of delivering eye-watering returns in relatively short order, irrespective of whether they succeed in challenging Ethereum. 

“We’re seeing a lot of investors cycle out of successful Layer 1 bets from the last cycle — Solana, Avalanche, Near — and into new Facebook-related Layer 1 bets,” he says.

The cycle of life

Between the start of 2021 and November that year, the market capitalization of SOL — Solana’s native token — shot from less than $100 million to nearly $80 billion, per CoinGecko data. It has since dropped back to around $15 billion. Were early backers of the project, who would typically have acquired tokens instead of equity, to have cashed out even a fraction of their holdings at the top, they would be supremely in the black.

“I think there’s some capital reflexivity at play where there’s a lot of incentive to keep betting on Layer 1s to take down Ethereum, because you’re very in the money on that strategy already. Even though, ironically, no Layer 1 has ever come close to taking down Ethereum,” says Smith.

There is nothing ostensibly wrong with such thinking. It is, as Smith points out, a free market. Indeed, he thinks it likely that a lot of the capital for backing the first wave of Ethereum challengers came from successful bets on bitcoin and ether — or at least the knowledge, among investors’ limited partners, of how successfully such bets panned out. The question Smith poses is instead whether successive Layer 1 investments are a productive use of capital.

“The thing that I find kind of hard to take seriously with some of the Layer 1s being launched now is: what are you bringing to the market that is that much better than Solana, Avalanche, Near, as a backup to Ethereum?” says Smith. “And each one of these chains would have their answer, but at the end of the day all users care about is stability and how much it costs to transact. And so I think that’s where it gets kind of complicated for me to see — is this the best application of capital, both human and financial at the time?”

A sizable slug of the money poured into new wave Layer 1s thus far has gone to incentive schemes, which were all the rage late last year.

Avalanche set aside close to half a billion dollars in its native AVAX tokens across two incentive programs in August 2021 and March this year, all in an effort to lure developers and projects into its ecosystem. The total value locked (TVL) on the blockchain surged from around $160 million in early August 2021 to a high of over $12 billion by December, according to DeFi Llama data. TVL had dipped to roughly $10 billion by mid-April this year, before nosediving to the current level of $2.5 billion.

The health of the wider crypto market is also a factor here. Solana, which has not rolled out a landmark incentive package, has experienced a decline in TVL that is similar to Avalanche’s across the same period.

“So far, it’s not clear that any of these chains have really had staying power,” Smith says. Ethereum’s TVL has also declined, according to DeFi Llama’s data, albeit less dramatically — falling from around $160 billion in November last year to $84 billion today.

Despite his scepticism, Smith concedes that any issues with Ethereum’s much-anticipated switch to proof-of-stake consensus — known as “the merge” among the crypto cognoscenti — will mean it’s once again “game on” for rival blockchains. That includes both Solana and the first wave and the new Move-based protocols.

“The challenge for all of those blockchains is that you really have to hope that something goes wrong for them to be successful,” says Smith. “If Ethereum delivers on the merge and on the sharding roadmap, there isn’t going to be a huge reason for a lot of those chains to exist.”

© 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.

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Author: Ryan Weeks

Crypto prime brokerage Floating Point Group secures VASP registration in Cayman Islands

Crypto-focused prime brokerage Floating Point Group has secured registration as a virtual asset service provider (VASP) in the Cayman Islands.

“With our current regulatory posture in the Cayman Islands and our business structure, Floating Point Group is able to hold customer assets safely and ensure that its customer’s assets are protected from its own creditors in the unlikely event that the company becomes bankrupt,” the firm said in a press statement. 

Floating Point Group has about 100 customers and surpassed $10 billion in cumulative customer trading volume earlier this year, co-founder Kevin March said. It recently released a new crypto asset management platform called FlowVault.

Hoboken, New Jersey-based Floating Point Group was founded by MIT students in late 2017. The company closed a $10 million Series A round in September 2021 with participation from several investors, including Tribe Capital, Coinbase Ventures and Anthony Scaramucci. That funding followed a $2 million seed round backed by investors such as AngelList co-founder Naval Ravikant.

The Cayman Islands Monetary Authority recognized the company’s subsidiary Floating Point Group International as a registered VASP on April 21, according to a government database. The self-governing British territory passed a law in 2020 to establish a regulatory framework for digital assets, known as the “VASP Law.” 

“It is incredibly important right now, of all times, to lean into the regulatory frameworks that have been provided for us in each of the places we do business,” John Peurifoy, Floating Point Group CEO and co-founder said in a statement. 

© 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.

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Author: Kristin Majcher

Bitcoin mining stock report: Friday, August 12

As the week of trading comes to an end, most bitcoin miners showed positive results.

Bitcoin’s value rose above $24,000 on Friday, trading at almost $24,200 by the end of the day, according to data from TradingView.

Hut 8’s stock rose by 18.92% on Nasdaq, a day after revealing its second-quarter earnings. In terms of percentage change from Monday, the company’s shares also had the highest performance among the companies tracked by The Block (+42.51% on Nasdaq).

Core Scientific, which also announced its second-quarter earnings report on Thursday, after market close, saw its stock go up by 3.7%. The miner posted an $862 million net loss and $164 million in revenues.

Here’s how crypto mining companies performed on Friday, August 12:

An overview of how miners fared over the week of trading:

© 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.

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Author: Catarina Moura

Ethereum Name Service: An Essential Web3 Building Block

Quick Take

  • Ethereum Name Service (ENS) boosts Ethereum’s user-friendliness by mapping machine-readable identifiers onto human-readable names
  • Governance is enforced through a DAO that encourages community members to actively shape the future of the protocol
  • Uncoupled from NFTs’ bleak market conditions, interest in ENS domain names has exploded lately

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members of The Block Research.
You can continue reading
this Research content on The Block Research.

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Author: Thomas Bialek

Coinbase shares shrug off S&P downgrade

Coinbase shares were 5% higher on Friday as investors appeared to largely shrug off yesterday’s S&P downgrade. 

The rating agency’s move cited the company’s disappointing earnings report earlier this week, in which the cryptocurrency trading platform reported a $1.1 billion loss for the second quarter. S&P Global Ratings cut Coinbase’s long-term issuer credit rating and senior unsecured debt ratings to BB from BB+ days.

“The downgrade reflects our view that weak earnings have weakened the company’s coverage ratios and that cyclical variations for Coinbase have increased beyond our previous expectations due to market share erosion and a higher risk of margin compression,” the agency said. “Moreover, competitive risk has intensified in the crypto exchange sector, with the company’s market share decreasing this year.”

S&P has a negative outlook on the company and said further ratings cuts may follow.

On Aug. 9, Coinbase reported trading volume of $217 billion for the second quarter, down from $309 billion in the previous period. The company narrowed the range for its annual forecast for MTUs to 7 to 9 million from between 5 million and 15 million as crypto prices tumbled in the first half of 2022.

Adding to the negative news, the company revealed in a regulatory filing after the results that its staking activities are being investigated by the Securities and Exchange Commission.

Tighter regulation could threaten revenue growth, including by curtailing the growth of its staking activities, which S&P said accounted for 8% of total revenue in the first half of 2022, compared with 1% in the prior year.

© 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.

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Author: Christiana Sciaudone

Indian authorities freeze $46 million worth of Vauld’s assets

India’s Enforcement Directorate (ED), a law enforcement agency that investigates financial crimes, has frozen assets worth 3.7 billion rupees (around $46 million) belonging to Vauld, a troubled crypto lender.

ED conducted searches on an Indian company called Yellow Tune Technologies and found that this company, a client of Vauld’s Indian entity Flipvolt Technologies, was involved in a money laundering case, according to a statement on Friday. The case is linked to Chinese loan apps that were involved in digital lending in India.

Since 2019, most Chinese companies were reportedly entering India for lending business by establishing fintech apps, but as the Reserve Bank of India (RBI) was not giving them a non-banking financial company (NBFC) license, they were making agreements with local NBFCs.

“While doing fund trail investigation, ED found that large amount of funds to the tune of Rs 370 Crore were deposited by 23 entities including accused NBFCs and their fintech companies into the INR wallets of M/s Yellow Tune Technologies Private Limited held with Crypto Exchange M/s Flipvolt Technologies Private Limited. These amounts were nothing but proceeds of crime derived from predatory lending practices,” ED said.

It went on to say that Yellow Tune Technologies — with assistance from Flipvolt — helped accused fintech companies in avoiding regular banking channels and taking out all the fraud money in the form of crypto assets.

ED further said that Vauld failed to provide the complete trail of crypto transactions made by Yellow Tune Technologies and that it maintains lax know-your-customer (KYC) and anti-money laundering (AML) processes.

“By encouraging obscurity and having lax AML norms, it has actively assisted M/s Yellow Tune in laundering the proceeds of crime worth Rs 370 Crore using the crypto route. Therefore, equivalent movable assets to the extent of Rs 367.67 Crore lying with Flipvolt Crypto-exchange in the form of Bank and Payment Gateway Balances worth Rs 164.4 Crore and Crypto assets lying in their pool accounts worth Rs 203.26 Crore, are frozen under PMLA, 2002, till complete fund trail is provided by the crypto-exchange,” said ED.

ED’s action is the latest blow for Vauld, which last month halted client withdrawals and owes a total of $402 million to creditors, as The Block reported at the time. Of that sum, $363 million — or 90% — comes from individual retail investors’ deposits.

Vauld has sought protection from creditors. Earlier this month, it received three months from the Singapore High Court to continue exploring its options. Vauld now has until November 7 to decide its path forward.

Vauld is currently in a due diligence process by rival Nexo for a potential acquisition deal. It remains to be seen whether the deal goes through, given these latest developments.

This is ED’s second such move in the crypto space in recent days. Last week, the Indian law enforcement agency froze bank balances worth 647 million rupees belonging to WazirX, a local crypto exchange.

© 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.

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Author: Yogita Khatri

CFTC accuses Ohio man of operating $12 million ‘bitcoin Ponzi scheme’

The US Commodity Futures Trading Commission (CFTC) filed a civil enforcement action against an Ohio man this week, alleging that he fraudulently solicited over $12 million and at least 10 bitcoins from customers as part of an apparent Ponzi scheme. The man also used cash to fund a “lavish lifestyle” complete with yacht rentals, a luxury car and the use of a private jet, according to the complaint. 

Rathnakishore Giri and his companies, NBD Eidetic Capital, LLC and SR Private Equity, LLC., are accused of fraudulently soliciting money from 150 customers and misappropriating customer funds intended for digital asset trading. The complaint also charges Giri’s parents as relief defendants “in possession of funds to which they have no legitimate interest.”

“Giri seized upon the contemporary fervor for digital asset investment opportunities and lured unwitting investors to contribute over $12 million in cash and bitcoins to his funds with the promise of exceptional returns without the risk of financial loss,” CFTC Commissioner Kristin Johnson said in a statement.

According to the complaint, the defendants solicited and accepted the money to invest in digital asset investment funds beginning in March 2019. Giri and his companies are accused of making false statements, including profit guarantees. The defendants also allegedly told customers they could withdraw their funds at any time, which was false, according to the complaint. Further, Giri is accused of commingling customer funds with his own funds and bank accounts belonging to his parents, Giri Subramani and Loka Pavani Giri.

“Rather than using customer funds to acquire and trade digital assets as promised, Giri simply pocketed customers’ money, using their invested funds to bankroll his lavish lifestyle — characterized by use of private jets, yacht rentals, an extravagant vacation home, a luxury car and expensive clothing,” Johnson said.

The CFTC filed its civil enforcement action in the US District Court for the Southern District of Ohio on Thursday. The CFTC is seeking restitution to defrauded customers, disgorgement of ill-gotten gains and civil monetary penalties. The commission is also seeking permanent trading and registration bans and a permanent injunction against further violation of the Commodity Exchange Act and CFTC regulations. 

© 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.

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Author: Stephanie Murray

Hawaii House candidate gets a boost from a pair of crypto super PACs

A crypto-friendly Democrat is on the ballot in Hawaii this weekend, and a pair of super PACs linked to the industry are spending cash to help him get elected.

Crypto PACs have spent well over a quarter of a million dollars to boost Hawaii Democrat Patrick Pihana Branco in the state’s congressional primary. Branco is one of six candidates running. Voters in Hawaii head to the polls on Saturday. 

PACs linked to the crypto industry are not the only outside groups spending in the congressional race, and the contest won’t hinge on crypto policy. But political spending by Web3 Forward PAC and DAO for America PAC signals that the crypto industry sees Branco as a potential ally in Congress — and could perhaps help him overcome a double-digit gap in the polls. 

Branco is a 35-year-old state lawmaker who previously served in the US Foreign Service as a commissioned diplomat. He was introduced to cryptocurrency when he was living in Colombia in 2019.

“I got added to a WhatsApp group one day of diplomats that was called Diplo Crypto. And they’re basically a group of diplomats that invest in crypto,” Branco said. “They text and talk about it all day.”

Branco was elected to the Hawaii state legislature in 2020, where he introduced legislation aimed at making Hawaii a more crypto-friendly state. He owns bitcoin and ether but did not say how much those assets are worth.

If elected to Congress, Branco said he would support legislation put forward by California Rep. Ro Khanna, a progressive who represents Silicon Valley. The bill, called the Digital Commodity Exchange Act (DCA), would create a new “regulatory framework for digital commodity developers, dealers and exchanges,” by filling regulatory gaps between the Commodity Futures Trading Commission and the Securities and Exchange Commission, according to a bill summary.

“What Ro Khanna is proposing, I think that’s kind of the gold standard,” Branco said. “The DCA would establish effective oversight over the digital commodity markets.” 

Branco faces an uphill climb in his primary, however. Former state Sen. Jill Tokuda is the frontrunner, according to a Honolulu Civil Beat/Hawaii News Now poll conducted at the end of June. Tokuda had 31% of support from Democratic primary voters, while only 6% supported Branco. Nearly two-thirds — 63 percent — said they had not decided who to vote for. Tokuda’s campaign did not respond to a request for comment. 

Web3 Forward PAC, which supports crypto candidates, reported spending more than $257,000 to support Branco, according to a recent Federal Election Commission report. Web3 Forward is funded primarily by GMI PAC, another super PAC founded by crypto industry leaders. 

GMI PAC has received donations from executives at Coinbase, FTX, Multicoin Capital, Messari and Andreessen Horowitz, among others. Web3 Forward and GMI PAC did not respond to a request for comment. 

Branco has also received a smaller boost from DAO for America PAC, which reported spending $37,000 on direct mail to voters in Branco’s race. The group reported two donors in the second quarter of the year. A donor named Charles Lee used Gemini Exchange to donate $87,228 worth of bitcoin to the PAC. The Miami-based Shrike Holdings gave $732,000. A third donor, Milton Chang, gave $20,000 to the PAC in April. 

Outside groups not linked to crypto are also spending heavily to influence the primary. Super PACs and other committees, including the crypto groups, have spent nearly $598,000 to boost Branco. Meanwhile, outside groups have spent $603,000 attacking Tokuda and $199,000 in support of her, according to OpenSecrets, a nonprofit that tracks political spending. 

The influence of outside spending has even become an issue in the primary. Branco recently came under fire from Tokuda’s campaign, which has alleged that his campaign has engaged in so-called red-boxing, a practice where campaigns skirt Federal Election Commission rules to signal messaging suggestions to super PACs.

“Don’t let anyone think Hawaii’s 2nd Congressional District is up for sale,” Hawaii’s Democratic Sen. Mazie Hirono wrote on Twitter earlier this month, urging voters to cast ballots for Tokuda.

Branco dismissed such allegations. “I cannot and will not and do not coordinate with any outside group that has come in,” he said. 

© 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.

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Author: Stephanie Murray

Arrested Tornado Cash developer is Alexey Pertsev, his wife confirms

The software developer arrested this week over suspected of involvement in the Tornado Cash crypto mixing service is Alexey Pertsev, his wife has told The Block today, confirming earlier speculation on Twitter. 

Ksenia Malik, who married Pertsev last September, said the Dutch Fiscal Information and Investigation Service (FIOD) arrested Pertsev on August 10 in Amsterdam city center. 

She went on to say that she’s in shock over her husband’s arrest and is currently working with lawyers. “My husband didn’t do anything illegal,” she said.

The FIOD, in its announcement today, said it arrested a 29-year-old man suspected of involvement in concealing criminal financial flows and facilitating money laundering through Tornado Cash, which allows users to obscure blockchain-based transactions.

A spokesperson for FIOD declined to comment on the arrested person’s identity when contacted by The Block.

This is a breaking story and will be updated.

© 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.

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Author: Yogita Khatri

‘Dangerous’ precedent: crypto execs slam arrest of suspected Tornado Cash developer

Crypto industry executives reacted with alarm at the arrest of a developer suspected of involvement in Tornado Cash.  

The Dutch Fiscal Information and Investigation Service (FIOD) arrested an unidentified 29-year-old man in Amsterdam, it said on Friday, alleging that he was involved in concealing criminal financial flows and facilitating money laundering through Tornado Cash, a crypto mixing service that allows users to obscure blockchain-based transactions. 

Ryan Sean Adams, founder of Mythos Capital and Bankless, was among the first to condemn the arrest. He tweeted about two hours after it was made public that the suspect may have written “code that served as a public good for people to maintain their privacy online.”

“They put a man in jail because bad people used his open source code,” Adams wrote. “This cannot stand in any free society.” 

The arrest was also seen as an assault on privacy by Cinneamhain Ventures partner Adam Cochran. “Code is free speech. Unless there is more to this story, then arresting someone for making a privacy tool that was misused is an insane government overreach,” Cochran tweeted. 

Robin Andre Nordnes, an analyst at Outlier Ventures, tweeted via his handle @degenroot that the arrest was a “dangerous” precedent and a pivotal moment in the crypto industry that might have “huge consequences.”

Aave founder Stani Kulechov echoed Nordnes, tweeting that an arrest for writing privacy-preserving code was out of line: “This arrest makes all privacy/encryption developers a target,” he said, adding that “people use privacy tools on a daily basis online.”

Yearn core developer Banteg likened the arrest to detaining the founders of a firearms manufacturing company for facilitating a public shooting, or a pressure-cooker company founder for terrorism. 

The arrest took place on Wednesday, just two days after the US Treasury added Tornado Cash and 44 associated Ethereum and USDC wallets to its Specially Designated Nationals list. The Treasury accused the crypto mixer of laundering more than $455 million for North Korea’s Lazarus Group amid Tornado Cash’s association with high-profile hacks including Ronin and Harmony. The sanction was believed to be the first by a US regulator against a DeFi operator. 

Ryan Selkis, co-founder and CEO of crypto research firm Messari, slammed the Treasury decision. He wrote on Twitter that the US government’s crypto policies “reward scammers and bad actors,” while punishing innovators. 

© 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.

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Author: Kharishar Kahfi