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Crypto lenders may be facing the same fate as ICO issuers.

Brain Armstrong, the CEO of leading crypto exchange Coinbase, took to Twitter on Tuesday night to criticize the Securities and Exchange Commission’s handling of Coinbase’s proposed Lend product.

Coinbase Lend is, in principle, a high-interest savings account for USDC, the USD-pegged stablecoin administered by the Centre consortium, backed by Coinbase as well as crypto startup Circle.

Similar products already exist on the market. Gemini Lend is another that already exists at a competing U.S. exchange. Crypto neobank BlockFi has seen a range of state securities regulators train their sights on its interest account offering. However, federal authorities in the U.S. have not yet entered the public field to this extent.

According to Armstrong, Coinbase sought to get the SEC’s approval before launching in a few weeks. “They responded by telling us this lend feature is a security. Ok – seems strange, how can lending be a security?” said Armstrong.

A subsequent blog post from Paul Grewal, the firm’s chief legal officer, provided more legal details.The SEC had sent the firm a notice that it intends to sue them if they launch their new yield product.

As Grewal wrote:

“Coinbase’s Lend program doesn’t qualify as a security — or to use more specific legal terms, it’s not an investment contract or a note. Customers won’t be ‘investing’ in the program, but rather lending the USDC they hold on Coinbase’s platform in connection with their existing relationship.“

He continued to criticize the SEC for responding to their requests by directing the firm to SEC v. Howey and Reves v. Ernst & Young. Those Supreme Court decisions respectively fleshed out the terms “investment contract” and “note,” which the opening of the 1933 Securities Act defined as securities.

The Howey test became famous among the crypto community as the SEC’s justification for intervening in the initial coin offering boom.

The Reves test is both newer, and newer in crypto, and spells potential trouble for lending products. Outside of a narrow list of exceptions, it classifies all notes as securities, with the burden of proof of exemption on the party offering the note

Coinbase seems to be looking for crypto-specific guidance, operating on the belief that the new technology justifies new guidance. The SEC, meanwhile, maintains resolute technological neutrality — its guiding documents date to 1933 and 1934.

Some are seeing Coinbase’s feud with the SEC as naive. Philip Moustakis, an attorney with Seward & Kissel and formerly of the SEC’s enforcement division, told The Block:

“There’s plenty of case law on what kinds of notes constitute securities and what kind do not. That analysis does not change simply because a new technology is utilized in the issuance of a note. In existing law, notes are presumed to be securities.”

Similarly, Anderson Kill attorney Preston Byrne tweeted that “‘Yield’ products are securities. They differ in no material respect from an unsecured bond. They just don’t use the name.”

Attorney and frequent crypto critic Frances Coppola noted: “Oddly enough, because of its history, the US doesn’t like high-yield deposits to be unregulated, especially when the marketing target is naive retail investors, the interest payments rely on extremely risky speculative investment, and the FDIC is not involved.”

If the SEC has decided to treat crypto interest accounts and lending products as non-exempt notes or corporate bonds, those classifications would incur a whole different level of disclosure.

Cease and desist letters from state authorities to BlockFi already had the industry worried. The SEC, which has federal authority, bringing Coinbase, a publicly traded firm, to heel is a new expansion.

Indeed, Armstrong lamented that Coinbase had been unfairly singled out for being proactive with regulators. Moustakis disagreed with Armstrong’s argument that uneven enforcement was a sort of injustice, telling The Block:

“The SEC does not have unlimited resources. It has to bring enforcement actions that have a programmatic impact. That is, enforcement actions that will grab the attention of the public in such a way that will change the behavior of the public going forward.”

The move, however, was not totally unpredictable. SEC chair Gary Gensler has been clearly centering crypto lending platforms in his speeches, alongside decentralized finance. The nature of DeFi makes it tougher to scrutinize — not that the SEC isn’t trying.

A representative for Gemini declined to comment on the significance of Coinbase’s saga for Gemini Earn. The new developments could also prove significant for Celcius and Nexo, two international competitors to BlockFi.

On a longer horizon, the SEC’s stated focus on DeFi could encompass lending protocols as well.

Alex Christian, founder and CEO of lending platform Data Mynt, told The Block: “I’ve reached out to US regulators for years to no avail. Some regulators are keen on optics. The optics — absent legal action or guidance — lend arguably to market manipulation and scare tactics.”

A representative for Coinbase declined to go on the record with The Block.

When reached for comment, Byrne said that “if the issues BlockFi and Coinbase are having with regulators are any indication, I think it is likely we’re going to see more activity in this area with the passage of time.” He further noted that Congress needs to step in to protect crypto lending in a fashion akin to bank lending.

Moustakis went even further, ominously referencing the SEC’s pursuit of ICO issuers.

“I think that what we’re going to see unfold in the context of notes is what we saw unfold in the context of investment contracts,” he remarked.

© 2021 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.

CFTC Commissioner Dan Berkovitz, who drew headlines earlier this summer for his criticism of the decentralized finance ecosystem, said Thursday that he will leave office next month.

Berkovitz said in his issued statement that “[t]o every thing there is a season, and now is a time for me to turn to other challenges.” 

He made a passing reference to crypto in his remark, saying: “As the CFTC gained responsibility over the swaps market, and new products like cryptocurrencies have emerged, the staff has worked diligently to expand its expertise and capabilities.”

Berkovitz took office in September 2018 following a nomination by former President Donald Trump. His term was set to expire in 2023.

In June, Berkovitz questioned the legality of decentralized finance systems, in particular the lack of intermediaries between participants. At the same time, he acknowledged the limited scope of his knowledge in this particular area, referring to the Wikipedia page for the topic. 

© 2021 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 Securities and Exchange Commission (SEC) has extended its consideration of VanEck’s Bitcoin exchange-traded fund application a final time.

The U.S. securities regulator posted an extension notice on Wednesday, saying it intends to take an additional 60 days to review the proposed rule change. Now, hopefuls can expect an answer on November 14, 2021. 

Cboe BZX Exchange first filed a 19b-4 to list VanEck’s Bitcoin Trust on March 1 of this year, starting the clock on an SEC decision. The agency has continually kicked the proverbial can on a final ruling with previous extensions and a notice soliciting additional comments on the proposal.

The Commission can take up to 180 days from the publication date of the filing to decide, which would put decision day at September 15. However, regulators are permitted to take an additional 60 days if it’s deemed “appropriate” and publish their reasoning. 

“The Commission finds that it is appropriate to designate a longer period within which to issue an order approving or disapproving the proposed rule change so that it has sufficient time to consider the proposed rule change and the issues raised in the comment letters that have been submitted in connection therewith,” said the notice.

The VanEck offering is the furthest along in the application cycle, meaning it will likely be the first to receive a decision amid the current wave of Bitcoin ETF applications. Issuers previously reached an impasse with the SEC when the Commission rejected the last remaining applications before it, in 2019. 

Since then, Canada has approved a number of bitcoin and ether-based ETFs, leading some to believe that an approval could be on the horizon. Other issuers put in applications, including Valkyrie, Fidelity, WisdomTree, Kryptoin and Skybridge among others.

Still, SEC chair Gary Gensler has said that the SEC is more likely to approve a product tied to bitcoin futures before approving one tied to the asset itself. Firms like Galaxy and Valkyrie are betting that’s the case, since both have filed for ETFs tied to bitcoin futures. 

© 2021 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 Sotheby’s auction of 101 Bored Ape Yacht Club (BAYC) NFTs closed at $24.4 million — more than $6 million above the originally anticipated price. 

As The Block previously reported, the lot of BAYC NFTs had an estimated price range of $12 million to $18 million. Bids exceeded $19 million three days before the auction closed, and ultimately surpassed its higher-end estimate with $24,393,000. 

“What an historic moment for the club: the @Sothebys auction of 101 Bored Apes has closed at over $24m. Congratulations and THANK YOU to the whole ape community. To the buyer, I think we speak for everybody when we say: WELCOME TO THE CLUB,” the official BAYC account tweeted Thursday.

The collection of 101 BAYC included apes with rare properties, such as solid gold or trippy fur, an unshaved face, and pizza hanging from the mouth. 

BAYC was originally created by the startup Yuga Labs and involves 10,000 NFTs randomly generated from over 170 unique properties. An ape cost 0.08 ETH at first launch but now has a floor price of 40.42 ETH on the NFT marketplace OpenSea. 

Interest in BAYC gained traction in August of 2021, reaching its all-time high trading volume of $132.14 million on August 22, according to The Block’s Data Dashboard. 

© 2021 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 investment firm that owns Bitstamp has returned fire against the crypto exchange’s former CEO Nejc Kodrič.

Bitstamp Holdings NV – an investment vehicle owned by NXMH, which acquired Bitstamp in October 2018 – is being sued by Kodrič in the United Kingdom’s High Court over an attempt to snap up his remaining 9.8% stake in the company on the cheap.

NXMH, which is owned by South Korean gaming billionaire Kim Jung-ju, has now filed its defense and counterclaim.

The thrust of the argument put forward by the company’s lawyers Allen & Overy is that it was, and remains, contractually entitled to acquire Kodrič’s shares at a discount – based on a call option agreement negotiated at the time of the acquisition.

Kodrič claims he was given assurances by Hendrik Ghys, who was appointed to Bitstamp’s board by NXMH, that the options would not be exercised while the crypto exchange pushed for a $1 billion valuation through an initial public offering.

But NXMH denies that Kodrič was offered any assurances. The firm argues Ghys neither confirmed that the option would not be exercised nor had the authority to do so.  

“If Bitstamp was valued at a billion dollars, Holdings’ call option under the Side Letter would entitle it to purchase Mr Kodrič’s shares at a discount of tens of millions of dollars to their market value. This made it even less plausible that Holdings would give those rights up informally and without further discussion,” stated NXMH in its filing.

NXMH tried to exercise its call option on July 21, a move that would have seen it claim Kodrič’s remaining shares in Bitstamp for $13.46 million — a price he claims is “very significantly lower” than their value.

NXMH hits back

In a counterclaim, NXMH is seeking either to force through either the transfer of the shares from Kodrič’s family office or claim damages equal to their value.

Kodrič’s lawsuit in August revealed Bitstamp’s ambition to pursue an IPO, but also details of how he was replaced as CEO by former Gemini executive Julian Sawyer.

Part of Kodrič’s claim is that he was told by NXMH’s representatives that his involvement was crucial to any IPO drive, but the investment firm has denied this.

“It is denied that NXMH and Holdings regarded Mr Kodrič’s involvement as a shareholder or director to be critical or necessary. The value of Mr Kodrič’s involvement in any capacity was dependent on whether he remained focused and committed to Bitstamp,” stated NXMH in its defense.

© 2021 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.

Payment services company Mastercard has acquired blockchain analytics firm CipherTrace to bolster its own cyber security tools and to better comply with crypto regulatory guidelines, according to an announcement on Thursday. The amount offered for the acquisition remains undisclosed. 

“With the rapid growth of the digital asset ecosystem comes the need to ensure it is trusted and safe,” said Ajay Bhalla, president of Cyber and Intelligence at Mastercard, in the statement. “Our aim is to build upon the complementary capabilities of Mastercard and CipherTrace to do just this.”

In addition to gathering data in the crypto space, CipherTrace publishes yearly reports about the trends in the crypto ecosystem and has built compliance tools for decentralized exchanges. 

CipherTrace, however, has a smaller influence in the blockchain surveillance arena than firms Chainalysis or Elliptic. According to data compiled by The Block Research, CipherTrace brings in 0.67% and 9.21% of federal contract payments compared to Chainalysis and Elliptic respectively.

© 2021 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.

A16z, the crypto wing of VC firm Andreessen Horowitz, has onboarded a heavy-hitter from U.S. federal regulation. 

Brian Quintenz, whose last day as a commissioner at the Commodity Futures Trading Commission was at the end of August, has joined a16z Crypto as an advisory partner, per a September 9 announcement shared with The Block. 

In a blog post announcing the hire, Andreessen Horowitz general partner Katie Haun wrote: “We are grateful that Brian is joining the team to help in our work of translating crypto for the policy community, and translating policy for the crypto community.”

Quintenz has been one of the CFTC’s leading voices for light-touch cryptocurrency regulation since 2017. Since the announcement of his departure, speculation has been rife among the industry as to where he would head next. 

In the new role, Quintenz will be joining a rapidly growing regulatory team that includes such major figures as Bill Hinman, who, during his time at the Securities and Exchange Commission, was part of determining that ether was likely not a security. 

© 2021 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.

Generative artist Tyler Hobbs, like many of his peers, is still trying to adjust to his newfound fame.

“This has already been a really big reality shift for me so I’m trying to give myself a little bit of time to adjust to it,” said Hobbs.  

His signature project, Fidenza, debuted on the non-fungible token (NFT) platform Art Blocks in June. Generated at random by an algorithm of Hobbs’s design and rich with colorful curves and blocks, 999 of the pieces were minted at a price of 0.17 ether each (around $400 at the time). They now trade on the secondary market OpenSea for as much as 1,000 ether (roughly $3.5 million) each.

A summer surge in the popularity of NFTs has been a boon to the generative art community. According to The Block’s data dashboard, $3.25 billion in NFTs exchanged hands on marketplaces like OpenSea in August — far in excess of the previous monthly high of $315 million in March.

For generative artists, who have toiled at the fringes of the art world for decades, the current state of the market is perhaps their first “mainstream breakthrough,” according to Hobbs.

Fidenza #118

But can the good times last? Some have compared the frenzied nature of speculation in the NFT space to the Initial Coin Offering (ICO) bubble of 2017.

“I would be totally amazed if NFTs went away,”  said Hobbs. “I think they’re here to stay, and I think they’re going to play a huge role in the art world particularly for digital art for the foreseeable future.” 

Hobbs added, however, that boom and bust cycles occur in many markets. “I think we’ve certainly seen a lot of booming so it would only be natural to expect some sort of equivalent bust at some point,” he said.

Critical mass

Hobbs’s confidence stems in part from his belief that NFTs have already reached a “critical mass of social acceptance,” he said. “As long as everybody agrees that owning an NFT carries some significance, then it does.”

The Art Blocks model offers some reassurance to collectors in this regard. The platform, which has swept up a significant chunk of the cash flowing into NFTs over the summer, stores the script that is used to generate its artists’ work on the blockchain. This allows owners to verify that the pieces they own originated from the code written by the artist.

“So you’re essentially guaranteed that all that output is from one fully generative program. There was nothing done manually, there was no curation, no hand assembling,” said Hobbs.

© 2021 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 exchange Coinbase has added shiba inu (SHIB) to its Pro exchange, according to an announcement yesterday. Assuming there’s enough liquidity, trading will go live today at 9AM PT today.

Shiba inu is a memecoin based on another memecoin — and one of crypto’s oldest — named dogecoin. It is also themed around the Shiba Inu breed of dog, with a similarly fanatic community.

In 2013, dogecoin was created as a joke — despite Tesla CEO Elon Musk and Shark Tank’s Mark Cuban later taking it seriously — with a much higher supply than bitcoin, soon hitting 100 billion coins. Shiba inu took this one step further, with a current supply of 394 trillion tokens and a max supply of 1 quadrillion tokens.

Both coins have been the target of viral campaigns on TikTok and other platforms, with the idea being to get the coins to $1. These videos tend to ignore the large token supplies that make this a much more challenging feat, particularly in the case of shiba inu, which would have a market cap of $1 quadrillion were it to achieve that mark. TikTok banned crypto promotional videos earlier this year for reasons like this.

The burn that wasn’t

The other wild aspect about shiba inu is the way in which half of its supply was distributed. Half of the tokens were sent to Ethereum co-founder Vitalik Buterin’s cryptocurrency address, something that the shiba inu website described as “burning” the tokens. 

Typically, when it comes to burning a token, the token is sent to an address that nobody controls (known as a burn address). In this case, the thought process was that Buterin wouldn’t move or sell the tokens. An assumption that turned out to be mistaken.

On May 12, Buterin elected to sell half of the shiba inu tokens he was given — along with tokens from other projects that had also sent him half of their supplies — for a total of $60 million. He then sent the proceeds to charities around the world and contributed to Ethereum-focused grants program Gitcoin, along with some more of the tokens he was given.

Buterin’s sale crashed the shiba inu token’s price, as it fell from a high of $0.000035 to $0.000009 a few days later. The token’s price has since slid slowly downwards, to its current price of $0.000006.

But this hasn’t deterred Coinbase. Having announced plans to list the token on Coinbase Pro on June 15 — before running into technical difficulties — the exchange is now trying for the second time. A move that’s part of the exchange’s bold plan to list every crypto token out there.

© 2021 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

• Passive liquidity providers earn trading fees but suffer from impermanent loss when the price ratio of their pooled assets change
• SushiSwap pairs typically had lower volume-to-liquidity ratios than their Uniswap counterparts, resulting in lower returns for SushiSwap liquidity providers
• Providing liquidity to stablecoin pairs could generate more than a 10% annual yield

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