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The Federal Reserve Board is opening up its access to Fed “master accounts” to new charter types — in theory.

On August 15, the Federal Reserve announced that it had finalized new guidelines on reserve banks considering offering master accounts to new institutions. Master accounts are a critical link in the US (and international) financial chain; without them, financial servicers are dependent upon intermediary banks that have them. 

The new guidelines effectively standardize consideration for master accounts for firms with “novel charters.” The finalization follows an extensive comment period, which the Fed noted as featuring a vocal response from “institutions with novel charters, such as cryptocurrency custody banks, and their trade associations.” 

Criticism included the notion that the proposal would “expand access to accounts and services to institutions with novel business models that pose high levels of risk to the payments and banking system,” specifically naming “‘fintech’ related business models.” 

All seven members of the Federal Reserve Board voted in favor of the motion. The new guidelines maintain that institutions without FDIC insurance will face more scrutiny in consideration of a Fed master account.

The issue of master accounts for fintech firms has been remarkably contentious. Crypto bank Custodia, formerly known as Avanti, is suing the Fed for delaying a decision on its application. 

Reserve Trust Company secured such a charter in 2018 after hiring former Fed Governor Sarah Bloom Raskin, resulting in a controversy that ultimately sandbagged Bloom Raskin’s re-nomination to the Fed early in 2022. 

© 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.

Starkware launched a new form of scaling technology on August 11 for its starkEx and Starknet scaling solutions.

The technology is called recursive proving, which aims to improve the speed and transaction fees by allowing Starkware to increase its overall scalability.

Recursive proofs are a relatively new concept in the race to scale blockchains via rollups. Rollups execute transactions separate from the Ethereum network but still post transaction data to the network. Data availability is one of the largest scalability bottlenecks, and rollups aim to solve this problem to scale the network while still deriving security from Ethereum.

As Starkware’s CEO Uri Kolodny put it: “Recursive proving is an enthralling concept as it defies what we intuitively think to be the limits of scaling.”

Starkware’s previous proving system was able to roll up thousands of transactions into a single proof. With recursive proofs, now it will be able to take hundreds of these single proofs, each of which attests to thousands of transactions, and roll them into another single proof.

“It’s like finding a way to comfortably fit thousands of passengers in a jet instead of a few hundred. Turning on recursive proofs means that we massively boosted the extent to which we can scale,” said Starkware’s head of core engineering Gideon Kaempfer.

This is the fourth major milestone for Starkware scaling. The previous three were STARK scaling, Cairo (general computation without needing to understand the complex math behind STARKs), and SHARP (shared proofs between applications).

© 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.

Decentralized finance (DeFi) lending protocol Aave has said wallet monitoring due to government sanctions cannot be enforced on a smart contract level unless the community agrees to it, the platform told The Block.

“The wallet monitoring here is only at the front-end layer,” Aave told The Block referring to the platform’s new policy to screen users following the Tornado Cash sanctions.

“As for on-chain, contract-level [wallet monitoring] as it applies to the Aave Protocol, the Aave smart contracts are decentralized — no one person or entity can change, control, update or shut down the protocol. For any change to occur to the protocol, an AIP would have to be proposed, voted on, and approved by the Aave DAO” Aave added in a statement to The Block.

For context, AIP stands for Aave Improvement Proposals. AIPs are submitted to the Aave DAO governance for discussions and possible on-chain voting before being implemented on the protocol. Aave DAO is the decentralized autonomous organization that oversees the protocol.

The DeFi lender also clarified that the recent block on wallet addresses with indirect Tornado Cash interactions only occurred on its front-end app.

Several notable crypto personalities, including The Daily Gwei newsletter founder Anthony Sassano and Tron creator Justin Sun, reported that their wallet addresses were blocked on Aave. Both Sassano and Sun were among notable public figures whose wallets were involved in a Tornado Cash “dusting” incident where someone sent 0.1 ETH to several publicly-known wallet addresses. This dusting incident was in response to the sanctions imposed on Tornado Cash by the US Treasury.

Aave quickly rectified the situation once news emerged that it was blocking access to its platforms for wallets with only indirect interaction with the sanctioned crypto mixer. The DeFi lender has since said the temporary blocklist happened due to a misconfiguration of the platform’s TRM API integration. TRM is a compliance solution utilized by several crypto companies. Aave says it has corrected the misconfiguration and that its front-end should be accessible to previously blocked users who do not have any direct interactions with Tornado Cash.

Aave is not the first crypto app to block wallets from its front-end. Decentralized exchange platform Uniswap did so in April, long before the Tornado Cash sanctions. The sanctioned mixer itself was also blocking sanctioned addresses from its front-end as early as well.

© 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.

BitGo has hit back against Galaxy Digital, which announced earlier Monday the termination of its plan to acquire the crypto custody firm.

In a statement shared with The Block, BitGo said it “intends to take legal action against Galaxy Digital for its improper decision to terminate the merger agreement with BitGo, which was not scheduled to expire until December 31, 2022, at the earliest and to not pay the $100 million reverse break fee it had promised back in March 2022 in order to induce BitGo to extend the merger agreement.”

BitGo has retained the law firm Quinn Emanuel, according to its press statement. “The attempt by Mike Novogratz and Galaxy Digital to blame the termination on BitGo is absurd,” partner R. Brian Timmons said in a statement.

BitGo said it would either seek the $100 million fee or more than that amount in legal damages, per the statement.

As previously reported, Galaxy announced the termination due to a “failure to deliver, by July 31, 2022, audited financial statements for 2021 that comply with the requirements of our agreement.”

“No termination fee is payable in connection with the termination,” the firm had added.

Last year, Galaxy Digital announced its planned acquisition of BitGo for $1.2 billion. However, The Block reported this past March that the terms of the deal were being renegotiated. 

© 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.

Coin Center, a crypto-focused policy think tank, is prepping a challenge to the Treasury’s sanctions on Tornado Cash.

In an August 15 blog post, Coin Center analyzed the contradiction of sanctioning a smart contract. “By treating autonomous code as a ‘person’ OFAC exceeds its statutory authority,” wrote Jerry Brito and Peter Van Valkenburgh, respectively Coin Center’s executive director and director of research.

The Tornado Cash sanctions targeted the smart contract that runs the DeFi mixer as well as a fleet of crypto wallets associated with the coders behind the project. But, Coin Center argues, a smart contract, unlike other designated entities, cannot challenge a designation from the Treasury’s Office of Foreign Assets Control in court.

“This action sends a signal—indeed seems to have been intended to send a signal—that a certain class of tools and software should not be used by Americans even for entirely legitimate purposes,” the blog says. 

Laying out its plan for removing the designation, Coin Center promised that its first step was to engage OFAC. But, notably, the organization wrote “we will begin exploring with counsel a court challenge to this action. Stay tuned.”

Announced last week, the sanctions have been at the center of a storm of controversy. Since their announcement, Coin Center has flagged the contradiction of calling a smart contract a sanctionable entity.  

Coin Center has only sued one executive agency in the past. In June, the organization filed against the Treasury over a new 60501 provision that entered the tax code in a controversial provision to last year’s infrastructure bill.  

© 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 European Union is poised to create a brand new regulator with direct crypto oversight.

While the crypto industry’s attention has been on the Markets in Crypto Assets regulation and the controversial Transfer of Funds Regulation, these are part of a broader package of EU anti-money laundering (AML) policy that will have major implications for all financial institutions.

The European Commission released its proposal for the Sixth Directive AML/CFT, or AMLD6, last July. The European Council released its version last month. European Parliament will take it up following the ongoing August vacation. Once it passes its version of the regulation, the three bodies will enter into largely opaque negotiations called trilogues. 

Central to the new legislation is the creation of an EU-wide regulator for anti-money laundering. Though the legislative bodies still need to negotiate, there seems to be minimal disagreement that such a regular is needed and that it should have direct oversight over crypto asset service providers in the EU. 

In the past, European Parliament has been the most aggressive of the three bodies in terms of calling for regulation of cryptocurrency. As such, the body is especially unlikely to oppose giving the future regulator direct supervision over crypto.  

Dubbed “Anti-Money Laundering Authority,” or “AMLA,” the regulator will monitor at least “high-risk” crypto firms as financial servicers directly, per the Commission and Counsel versions. 

A parliamentary briefing shared with The Block describes the new system as follows: 

“EU-level supervision consisting of a hub and spoke model – i.e. supervisor at the EU level competent for direct supervision of certain financial institutions (FIs), indirect supervision/coordination of the other FIs, and a coordination role for supervising the non-financial sector as a first step.”

The international body will be a major shift for the EU. Previous AML directives — especially four and five, from 2015 and 2018 — established standards for member nations to collect and make available certain data, like information about beneficial ownership of corporations. 

Those registries are a good example of the disparate adoption of the regulations. Even among the countries that provide access to corporate information for free — which is far from all — the information available varies widely. The chart below illustrates the various kinds of information of this sort that nations make available.

Source: Transparent Data as of 2021

Indeed, the opacity behind certain corporate registries allowed crypto firms like Binance to tout Maltese regulation for years. 

AMLD5 established that member states should treat crypto exchanges as financial institutions. But that implementation was left up to the member states. There is recourse for the EU bodies to pursue member states, but the overall reporting requirements don’t lead to a union body.

“If [a member] does not implement it properly, then the European Commission has the right to bring, say, Malta to the European court of justice. But another way, which is what they are trying to do, is to harmonize it through an EU regulation,” explained Tomasz Krawczyk, an attorney with Teneo who was part of the negotiations behind AMLD4. 

The timeframe for implementation will hinge upon negotiations among European Parliament as well as subsequent trilogues involving the commission. Implementation of the regulation — including staffing of AMLA —  will take years. But there seems to be little doubt that such a regulator is indeed coming. 

“It’s critical to ensure that the AMLA will have sufficiently skilled staff that can deal with state-of-the-art technologies required for interacting with decentralised networks,” the EU Crypto Initiative, a trade association, said in a message to The Block.

Paul Tang, a member of the European Parliament for the Netherlands and the bill’s rapporteur, did not return a request for comment as of press time. 

© 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.

Bitcoin miner Bitfarms posted a net loss of $142 million in the second quarter, down from a net income of $5 million last quarter.

The company also increased its hash rate by 33% during the quarter to 3.6 exahash per second (EH/s), after starting production at one location and completing the second phase of development at another — both in Canada.

Despite the significant drop in bitcoin value during the quarter, Bitfarms reported a 5% increase in revenue to $42 million.

“Entering the second half of 2022, we are focused on executing our growth and maximizing our profitability,” said president and COO Geoff Morphy said in a press statement.”Overall, we are building on this strong foundation for long-term success and expanding our existing geographically diversified operations.”

Construction is ongoing at the company’s two 50-megawatt warehouses in Rio Cuarto, Argentina.

Bitfarms pushed the delivery and payment of some of its mining equipment to 2023 in order for it to better match its schedule for completing the required infrastructure. The company is still on target to reach 6.0 EH/s by the end of the year. That number was adjusted last quarter from 7.2 EH/s, as Bitfarms announced it was scaling back expansion plans.

“We optimized resources, deferring $39 million in capex spending from the fourth quarter of 2022 into 2023,” said CFO Jeff Lucas.

Bitfarms sold 3,357 BTC during the second quarter, generating $69 million and using funds to pay a bitcoin-backed loan from Galaxy down to $38 million. Last quarter it also closed a $37 million new equipment financing agreement.

“By deleveraging our balance sheet and increasing financial flexibility, we are better positioned to execute our growth initiatives to drive market share gains and increased production,” Lucas 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.

Investment firm Dragonfly has acquired MetaStable Capital, a San Francisco-based crypto hedge fund. 

Dragonfly announced the move, along with a rebrand, in a Medium post on Monday. Previously, the firm has backed crypto enterprises such as Near Foundation, DAI-issuer MakerDAO and crypto exchange ByBit. 

“Metastable is one of the longest-running funds in crypto history, co-founded in 2014 by Naval Ravikant,” said the post. “[It] was an early investor into Ethereum, Avalanche, Cosmos, Starkware, NEAR, Zcash, Filecoin, Dfinity, and Algorand.” 

The addition of the hedge fund comes a month after it announced its liquid crypto fund, named Dragonfly Liquid. 

The terms of the deal were not disclosed in the Medium post. The Block reached out to Dragonfly but did not hear back at the time of publication. 

The news comes as some investment firms draw back from previously committed acquisition efforts. Earlier today, investment firm Galaxy Digital pulled back from its acquisition of crypto custodian BitGo. Still, crypto M&A transactions are on pace for a record year, according to a recent The Block research report, 

Chart: The Block Research

© 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

• Last month slightly more than $2 billion was allocated across 192 funding deals. Venture funding in dollar amounts for the sector has declined for four consecutive months
• The frequency of Seed and Early Stage fundraising has remained relatively constant, meanwhile, funding for Mid to Later stage companies was nearly nonexistent
• DeFi and Web3 were the only two sub-categories to have monthly increases in their number of deals  and funding in dollar terms

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Sudoswap, a decentralized marketplace for non-fungible tokens (NFTs), sparked controversy with its automated market maker (AMM), with chatter about the potential consequences of its fee structure reaching fever pitch over the weekend.  

The AMM allows people to buy and sell on any market automatically without individuals having to wait for interested buyers or sellers. This therefore allows instantaneous NFT sales at a low cost, due to the fact that Sudoswap removed artist royalties from its fees.

Sudoswap’s removal of artist royalties made sense to some who support economic leanness above all else, while others felt this could set a race to the bottom, where artists can lose a valuable source of income.  

Despite their prevalence in music and publishing industries, royalties are not a set fixture within the NFT space. They’re a “social concept,” The Block researcher Eden Au said, that are not enforced at a smart contract level.  

Thus, NFT royalties must be enforced on a marketplace level. The world’s largest NFT marketplace OpenSea set a 2.5% royalty fee. Other projects like Yuga Labs’ Meebits and Bored Ape Yacht Club set royalties at 5% and 2.5% respectively.

However, NFT utility has expanded beyond the profile picture art focus of 2021. Royalties for utility NFTs that trade quickly, such as for video games, may disincentivize trading, Au adds.  

Since AMMs are designed to quickly facilitate sales, royalties can act similarly to transaction fees on Ethereum as they make people think twice about how often they trade, the NFT artist Haley explained. Artists should be properly compensated for their work irregardless of the cost to the consumer, they added. 

“It’s extremely exploitative and against the culture and precedents established by early crypto artists,” they told The Block. “We must maintain royalties for everyone or ensure that similar solutions are built into new services in the NFT space.” 

Beyond removing financial support from creators, some NFT collectors suspect that Sudoswap’s move to axe royalties could lead to cascading effects among NFT marketplace fee structure and user behavior. 

“We will likely see competition between platforms drive fees down over time,” the NFT collector Chris Nichols told The Block. “I suspect these lower fees will attract people flipping larger collections more than those buying one-of-one art from individual artists.” 

While it remains unclear whether more NFT marketplaces will opt to chop artist royalties, NFT buyers still have the choice to pay or avoid NFT royalties if it aligns with their beliefs.  

NFT royalties are “simply the best alignment of incentives between founders and holders (right now),” Frank, the founder of the Solana-based NFT project DeGods, wrote on Twitter. “If you want to remove royalties, that’s fine. Just don’t be mad when mints become more expensive and more projects rug.” 

© 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.