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While U.S. regulators crack down on crypto and the industry struggles within a broader banking crisis, new projects continue to flourish and push the sector forward.

Polygon will launch zkEVM mainnet beta on March 27, and developers may look to integrate their platforms. Metaverse Fashion Week, hosted by Decentraland, returns this week for its second year, and 15 projects testing various use cases for an Australian CBDC begin a two-month trial on March 31. 

Here are the crypto events to mark in your calendars for the coming week. 

Polygon launches zkEVM mainnet beta 

Polygon’s zkEVM mainnet beta will go live on Monday, after a year under development. This network will offer a scalability solution for the Ethereum ecosystem with a zero knowledge-rollup performing off-chain computations on a secondary layer for faster and cheaper transactions, while prioritizing security.

The network will support the same code as Ethereum, which allows developers to onboard Ethereum applications without needing to make significant changes. In the coming weeks, more developers may show interest in integrating their platforms with the zkEVM. 

Decentralized lending protocol Aave was considering deploying a minimum viable version of Aave version 3 on the Layer 2 network, The Block previously reported. The protocol also proposed to include a consideration for issuing Aave’s GHO stablecoin on the zkEVM. 

Other partnerships are already on the table. Polygon and web3 game builder Immutable announced last week they are collaborating to launch a Layer 2 blockchain network called Immutable zkEVM.

Metaverse Fashion Week returns

Metaverse Fashion Week is back for another year. Decentraland will host a series of runways, design competitions, boutiques and panels in the virtual world March 28-31, following the curatorial theme “future heritage.”

This marks the second iteration of the event. This year, there is focus on bridging between the physical and the digital, and enabling interoperability between virtual worlds. Brands like Adidas and Coach will join for the first time, while returning participants include Dolce&Gabbana, Tommy Hilfiger and DKNY.

Apart from luxury firms, Dencentraland’s own designer community, or neo designers, will take the virtual stage. “We are seeing the return of many luxury fashion houses, and also the emergence and elevation of digitally native fashion,” said Dr. Giovanna Graziosi Casimiro, head of Metaverse Fashion Week at Decentraland Foundation.

Fashion brands are taking up more space in the metaverse. For example, companies including Gucci, Hugo Boss and Louis Vuitton have already appeared or shown interest in entering metaverse spaces. 

Australia to begin CBDC pilot

A selection of 15 projects will launch a two-month experimentation period to test different use cases for an Australian central bank-backed digital currency on March 31. Examples include using CBDCs for offline payments, tokenized foreign exchange settlements and livestock auctions.

A public-private partnership between the Reserve Bank of Australia and Digital Finance Cooperative Research Centre are orchestrating the project. The study will examine use cases for a CBDC and involve Mastercard, ANZ and the Commonwealth Bank as partners.

The trial period for experimenting with the selected pilot projects is set to stretch until the end of May. After the program is complete, a report will compile the results and outline the next steps, expected in mid-2023.

The pilot will “contribute to hands-on learning by industry, and it will add to policymakers’ understanding of how a CBDC could potentially benefit the Australian financial system and economy,” Brad Jones, Reserve Bank of Australia assistant governor for financial systems, said in a release.

© 2023 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.

Former public policy attorney Keiko Yoshino writes about why she started paying attention to crypto, particularly the regulatory missteps.

EUL tokens jumped 47% on the transfer of tokens.

The Euler Finance exploiter has returned 51,000 ether to the DeFi lending protocol.

Euler lost $197 million in a flash-loan attack on March 13. The euler token price is up 43% to $3.76, according to CoinGecko. 

The exploiter previously returned 3,000 ether on March 18, worth around $5.4 million at the time. 

The Euler exploiter originally drained $136 million of staked ether, $34 million of USDC, $19 million of wrapped bitcoin and $8.7 million of DAI from the protocol.

© 2023 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.

Crypto prices whipsawed throughout the week, rising ahead of the Fed, dropping after the 25 basis point increase and beginning to claw back losses afterward. 

The leading cryptocurrency by market cap, bitcoin, was trading around $27,600 by 10 a.m. ET, up about 0.4% over the past seven days, according to TradingView data. 

Ether slipped about 2.1% to about $1,750, while it was a mixed bag for altcoins. Binance’s BNB fell 4.2%, Polygon’s MATIC plunged 10% and Solana’s SOL was down 4%. 

Ripple’s XRP was buoyed by positive murmurings from its trial with the SEC and was up 17%. A verdict has not yet been reached in the ongoing case. 

Crypto stocks and structured products

Coinbase shares tumbled this week as the exchange received a Wells notice from the U.S. Securities and Exchange Commission. The firm’s staking products, Coinbase Earn and Coinbase Wallet, face investigations, as do asset listings. Shares in the exchange were down 3.8% over the week, according to TradingView data. 

On Thursday, Jack Dorsey’s Block became the latest target of short seller Hindenburg Research. In its first report since tackling India’s Adani Group, the firm said after a two-year investigation that Block has “systematically taken advantage of the demographics it claims to be helping.”

The payments company’s success has nothing to do with disruptive innovation, rather, it was the firm’s willingness to “facilitate fraud against consumers and the government, avoid regulation, dress up predatory loans and fees as a revolutionary technology, and mislead investors with inflated metrics,” it claimed. Shares crashed about 20% directly after the report and are down 19% over the week.

It was a quiet week for MicroStrategy, adding 0.45%.

Macro matters

The Fed considered a pause in the days leading up to this week’s decision, but ultimately it chose to increase the Fed Funds target rate by 25 basis points.

There’s a long way to go until inflation falls to the Fed 2% goal, and it’s going to be a bumpy ride. As such, the Federal Open Market Committee increased the target rate range to between 4.75% to 5% from 4.5 to 4.75% on Wednesday. Markets whipsawed during the news conference. 

Market volatility is three times higher during Chair Powell’s news conferences than those held by his predecessors, a recent report by the Centre for Economic Policy Research showed. His time in front of reporters also tends to reverse the market’s initial reaction.

“Rate hikes by the Fed have been a headwind for digital assets (such as bitcoin) as non-yield bearing assets look relatively less attractive, especially as inflation declines and real yields rise,” Chris Kuiper, director of research at Fidelity Digital Assets, told The Block. 

The drop in bitcoin following the announcement “may have been a similar reaction given the Fed’s posturing that higher rates may still be warranted,” he added. The narrative may be shifting, he noted, as investors appear to be pricing in rate cuts “sooner rather than later,” as evidenced by a decline in the two-year treasury yield — which typically leads or coincides with the Fed’s target rate. 

“We think that a shift to easier money and more liquidity will likely be a positive for digital assets in the longer term, and particularly bitcoin,” Kuiper concluded.

The market is now pricing in an 88% probability of a pause at the FOMC’s May meeting and a 54% probability of a cut by July. Powell emphasized a rate cut is not in the committee’s base case. 

© 2023 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.

U.S. regulators are showing no signs of relenting as they continue to come down hard on crypto. Meanwhile, bugs and human errors prove costly.

The Securities and Exchange Commission (SEC) was busy this week, charging Justin Sun, Lindsay Lohan, and Jake Paul. The regulator then turned its ire on Coinbase, issuing the exchange a Wells notice for its staking service, Coinbase Earn and Coinbase Wallet products. 

Elsewhere, research showed how costly human error and bugs can be. Here are the week’s top stories. 

Shot across the bows

Coinbase was issued a Wells notice by the SEC on Wednesday. While this notice does not imply a conclusion or foregone action, it is issued to entities under investigation. 

The notice was related to the firm’s asset listings, staking service, Coinbase Earn and Coinbase Wallet. With regard to asset listings, this could have a significant impact on the exchange’s business model — which revolves around offering a “multitude of tradable pairs,” Needham analyst John Todaro said.

If the exchange is forced to delist assets, it could lead to “materially lower revenue,” Todaro added. Coinbase shares sank following the news. 

Guest list

Before it was revealed Gensler’s SEC had issued Coinbase a Wells notice, the regulator charged Tron’s Justin Sun — and a litany of Hollywood “celebs.”

The SEC charged Sun and three of his companies, including Tron Foundation, for the unregistered offer and sale of two “crypto asset securities.”

Sun’s companies,  Tron Foundation, BitTorrent Foundation and Rainberry, allegedly offered and sold Tronix and BitTorrent as investments “through multiple unregistered ‘bounty programs,'” according to the regulator. 

The SEC also accused Sun of violating federal securities laws. The regulator alleges he conducted a scheme to artificially inflate the trading volume of TRX in the secondary market.  

The regulator also accused eight celebrities of violating securities laws in touting related tokens. The list included Lindsay Lohan, content creator Jake Paul, Austin Mahone, and rappers Soulja Boy and DeAndre Cortez Way. All except Cortez Way and Mahone agreed to pay $400,000 in disgorgement, interest and penalties to settle the charges without admitting or denying the SEC’s findings.

Goodbye forever 

Research from a Coinbase director revealed that more than $1 billion of ether has been lost forever to bugs and human error. 

Coinbase Director of Product Strategy and Business Operations Conor Grogan said the company’s research had categorized losses attributed to mistakes and bugs on the Ethereum blockchain. The losses don’t include people who had lost access to wallets. 

Grogan on Twitter categorized thousands of instances of Ethereum typos, user errors and contracts with bugs. The former Bridgewater Associates employee cataloged 636,000 ether (or $1.15 billion) that had been lost. This represented 0.5% of the total circulating supply of ether.

About 514,000 ETH was linked to a 2017 bug in the Parity crypto wallet. Another 60,000 ETH was lost to failed exchange Quadriga and 11,500 ETH to a failed NFT mint.

Ethereum users have cumulatively sent 24,000 ETH to a burn address, where the coins can no longer be accessed.

Still, at the time of the losses, most of the ether wasn’t worth nearly as much in dollar terms.

© 2023 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.

While capital flowed into bitcoin amid a period of uncertainty, the cryptocurrency’s fractured liquidity arguably played the largest role in its surge.

Episode 28 of Season 5 of The Scoop was recorded at Paris Blockchain Week with The Block’s Frank Chaparro and Google Cloud’s Web3 Head of Strategy Rich Widmann and Web3 Engineering Director James Tromans.

Listen below, and subscribe to The Scoop on Apple, Spotify, Google Podcasts, Stitcher, or wherever you listen to podcasts. Feedback and revision requests can be sent to podcast@theblockcrypto.com.

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In this episode — recorded at Paris Blockchain Week 2023 — Google Cloud’s Web3 Head of Strategy Rich Widmann, and Web3 Engineering Director James Tromans break down Google’s crypto strategy and how Google Cloud’s Blockchain Node Engine is making it easier for web3 developers to focus solely on building their products.

During this episode, Chaparro, Widmann, and Tromans also discuss:

• Google Cloud’s partnership with Coinbase
• How big brands are entering web3
• Google’s infrastructure expertise

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This episode is brought to you by our sponsors Circle, Railgun, Flare Network

About Circle
Circle is a global financial technology company helping money move at internet speed. Our mission is to raise global economic prosperity through the frictionless exchange of value. Visit Circle.com to learn more.

About Railgun
Railgun is a private DeFi solution on Ethereum, BSC, Arbitrum and Polygon. Shield any ERC-20 token and any NFT into a Private Balance and let Railgun’s zero-knowledge cryptography encrypt your address, balance and transaction history. You can also bring privacy to your project with Railgun SDK, and be sure to check out Railgun with partner project Railway Wallet, also available on iOS and Android. Visit Railgun.org to find out more.

About Flare
Flare is an EVM-based Layer 1 blockchain designed to allow developers to build applications that can use data from other blockchains and the internet. By providing decentralized access to a wide variety of high-integrity data from other blockchains and the internet, Flare enables new use cases and monetization models. Build better and connect everything at Flare.Network.

© 2023 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.

Hong Kong was once an epicenter of crypto activity, but it’s lost that status amidst a broader clampdown by Chinese authorities on digital assets and the more recent exodus of talent during several years of especially strict Covid-related quarantine measures.

In an effort to regain its standing, the province introduced a new licensing regime this year, betting that it can lure back developers and companies who left for Singapore and elsewhere.

But early returns look shaky. Crypto companies and their lawyers already want changes to the new licensing rules before they’ve even taken effect, arguing the proposed regime is too stringent and won’t attract the caliber of companies needed to meet the government’s goal of restoring the city as a digital assets center.

A limited pool of qualifying tokens that exchanges can offer retail investors, onerous cold storage requirements and unclear licensing rules are among concerns that industry members said they would highlight to the SFC in submissions to the consultation, people involved in drafting responses told The Block.

Hong Kong’s Securities and Futures Commission first announced the new mandatory licensing regime for crypto exchanges and service providers last month and at the same relaxed a ban on crypto firms targeting retail investors. The planned changes were published as a public consultation, and industry members have until the end of March to respond with feedback. 

Hong Kong crypto ambitions

“It is important this regime is workable. There are some things that need tweaking and changing for it to work,” said William Hallatt, partner at Gibson, Dunn & Crutcher. “It doesn’t work well for anyone if you end up with a handful of smaller players.”

Getting the crypto licensing framework right is a key policy area for the city’s government. Officials have staked a lot of energy and political goodwill on the asset class and the technology behind it, in an effort to win back the industry. Senior leaders regularly tout the city’s crypto ambitions in meetings and at conferences. Partly, the sense of urgency comes from a realization there is still a chance to grab the crown as a respected regulated digital asset center while other markets, notably the U.S., struggle to work out how they want to handle the industry.

Just this week, Christopher Hui, Secretary for Financial Services and the Treasury, told the Aspen Digital Web 3 summit that 80 crypto service providers had shown interest in operating in Hong Kong since the new rules were proposed in late February. 

A successful regulatory regime would see crypto’s development story go full circle given China and Hong Kong-based players were once leaders in the ecosystem until Beijing started clamping down in the late 2010s.  

“The public consultation is ongoing and the SFC will consider all views received and publish the consultation conclusions in due course,” a spokesman for regulatory agency said.

License applicants

Among firms to publicly say they want to apply for the new license are BTSE, Huobi, JPEX and OKX. Bitmex, which has a large Hong Kong presence, declined to comment on its plans. Lawyers for the sector said several international exchanges were making inquiries without revealing their client names, arguing the city had immense appeal for globally minded firms given the volume of mainland Chinese customers already banked and investing in Hong Kong. Others who spoke to The Block said they expected large market makers might also apply. 

Under the proposed rules, digital asset service providers that already have a corporate structure in Hong Kong and do ”meaningful” business in the city can apply for an exemption by a June 1 deadline, which gives them a further period to apply for the license or shut down their operation. Newcomers will need to apply for the license before doing any regulated business, similar to rules for traditional finance investment managers.

For the model to work, the city will require several big name firms in order to generate the liquidity needed, several people said. That might seem a hard ask given the negative headlines around some exchanges. Binance, for example, is under scrutiny in the U.S., and a recent report by CNBC suggests the company has helped customers circumvent Chinese mainland restrictions on digital assets. The licensing process, however, would give the SFC a chance to look under the hood and impose changes on how firms operate, one lawyer said.

Requested changes

Among issues flagged in the proposed rules were strict limits on the tokens and services licensed exchanges will be able to offer retails investors. Only “eligible large-cap virtual assets” that are included in major index-providers can be considered, according to current wording. That narrows the list down to a handful of tokens, people complained.

“There is an element here of the SFC saying we want to start small with retail and we don’t want retail to take risks,” said Hallatt. “They could just start with ether and bitcoin and gradually expand out.”

Another bugbear is a requirement that 98% of client assets be held in cold storage, a ratio seen as too onerous given daily liquidity needs and the complexity of moving client money between cold and hot wallets. A 10% hot wallet limit would be more a manageable number that submissions should push for, one lawyer said. 

Token storage and the short list of digital currencies available for retail trading were both issues raised by the industry during a so-called soft consultation process that took place before the consultation document was published, one person involved in those talks told The Block. “It doesn’t look like the SFC took those ideas in,” she said, asking not to be identified speaking about confidential discussions with the regulator.

Joshua Chu, a digital assets lawyer and chief risk officer at Coinllectibles, said his submission will touch on the absence of futures trading, which remain off limits to retail investors under the proposed regulations. Crypto futures are a useful hedging tool though can also be used to make highly leveraged bets.

A further complaint was the mention in the consultation of crypto firms getting dual licensed under both the new digital asset regime and existing anti-money laundering provisions. The wording had alarmed some industry players who argued a single license under the digital asset rules already covered any AML concerns.

“The problem is you have no regulator globally that wants to be first off the ledge. It is like diving into the pool. You want to make sure the pool is deep enough so you don’t break your legs on the way down,” said Hallatt.

© 2023 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.

U.K. lobbying groups and lawmakers have been complaining that crypto clients can’t find a bank and are faced with restrictions, so they are calling the government to act.