Law Decoded: Closing remarks on the future of crypto law, March 5

Editor’s note

Ladies and gentlemen, it is bittersweet to welcome you to the final installment of Law Decoded, at least with yours truly at the helm. Though someone may pick this newsletter back up at some point, there are no plans to do so now.

Taking advantage of the rose-tinted glasses or maybe the graduation goggles that are in effect for this final newsletter, I will be shaking up the format. As last week’s Law Decoded focused on a few long-standing stories in crypto, this week, I wanted to get thematic.

As I will no longer be guiding you through the trees of crypto law weekly, I wanted to give you some idea of how I see the forest shaping up right now. There are plenty of major laws in motion and courts in session, but I’m going to be zooming back from those to present you with what I find to be the three issues to watch in crypto law. These are also predictions and opinions, so bear in mind that they are mine, not those of Cointelegraph as a whole. And I could very well be wrong about what the future holds.

Certainty and securities

Prediction: The role of securities regulators, especially the U.S. Securities and Exchange will continue to determine the fate of new token issuance. And, it may take a while, but the SEC and other securities regulators are going to start kicking back at some but not all DeFi projects, as soon as they can figure out how.

Situation: High-profile legal actions against firms like Telegram, and Ripple has scared many would-be token issuers out of the market. Less dramatic than these clampdowns have been the quiet tentative successes. Developers like the Filecoin Foundation and Blockstack seem to have found ways of not only raising money to develop tokens according to SEC exemptions but also of decentralizing those tokens to the point where the SEC has, for now, not stepped in when those firms stopped filing registration statements for those tokens.

Formalizing the process of token decentralization will help new developers enormously, whether it is by classifying tokens in statute or adopting a safe harbor à la Hester Peirce. Likely incumbent chairman Gary Gensler will not indulge securities issuance masquerading as decentralized tokens. We will not see another 2017. Optimistically, however, Gensler is clearly interested in formalizing the market, which means clear rules of the road.

Meanwhile, publicly traded companies like Square, Tesla and Microstrategy are increasingly becoming oblique means for stock market investors to get exposure to Bitcoin’s price movements. BTC ETFs in Canada and vast market interest in the U.S. mean that it’s only a matter of time before the SEC greenlights one in the U.S. Slowly but surely, tokenization of securities continues.

As for DeFi? The commission is going to be hashing that out for years. I predict with low confidence and the hope of being wrong that there will be attempts to hold programmers legally accountable for DeFi code.

The wealth of CBDCs

Prediction: Central bank digital currencies are going to move forward. Some will launch more quickly, but the ones that have actual significance as peer-to-peer payment mechanisms will take significantly more time, if they ever happen at all. Distributed ledger technology will need to do some serious upgrading if it’s going to play any role in this transformation, which I am not confident it will.

Situation: CBDCs had been mostly on the back-burner for some time. To crypto advocates, they were a hypothetical use case. To monetary authorities: unnecessary techie mumbo jumbo. Interest waxed and waned at various points, with the involvement of tech giants in digital payments adding brief moments of pressure to central banks to update old systems. But those moments would fade.

The COVID-19 pandemic, however, exposed the flimsiness of existing payment rails in a way that everyone could see. The need to get money into the hands of citizens alongside the sudden fear of spreading disease via in-person contact and, especially, the contaminant of cash pushed the CBDC concept to the top of the agenda for many of the world’s largest central banks.

CBDC development is going to remain a critical subject of conversation and development for the foreseeable future. It is, however, riddled with misconceptions and unconfirmed assumptions. None of the five great monetary powers — the issuers of the dollar, the euro, the yen, the yuan and the pound — have committed to specific features of their prospective digitization, nor even whether they will launch at all. Will CBDCs be bearer instruments? How anonymous will they be? Where will transaction data go? Will they be accessible to banks, businesses, citizens, or the world? Will they run on distributed ledger technology?

People are touchy to any changes to their money. If true self-settling currency ever hits the market, it will do so slowly. Of those five major currencies, the Chinese yuan has seen the most “digitization,” which has attracted the crypto world’s attention. But to all appearances, that currency bears none of the hallmarks of what the crypto world professes to want to see. The digital yuan seems designed to be just another third-party payment app except that the Chinese government is that third party.

CBDCs will be an interesting trend to watch in coming years. But don’t hold your breath. The public’s memory of not getting their checks for months will fade as the pandemic subsides. Along with it, so will broad political pressure.

All about AML

Prediction: Smart anti-money laundering rules are good for the world. The next few years of AML may not be good for crypto. The biggest economies have either tried to ban crypto entirely or have made major strides in deputizing fiat gateways — namely exchanges. The crypto industry has largely accepted this. But coming rules are going to get more intrusive.

Situation: In its much-repeated origin story, Bitcoin emerged when the global financial system was unraveling. Satoshi’s timing in pushing a means of moving power away from monetary authorities and financiers alike was perfect.

On the flip side, the subsequent decade saw a surge of attention on all of the devilish ways the powerful and corrupt have squirrelled away illicit gains all over the world, using financial instruments. The 2010s saw successive waves of mass leaks of dirty finance and offshoring — and this was after the U.S.’s “War on Terror” had expanded authority to pursue financial flows in the name of countering terror financing.

In response to, say, the Panama Papers, the public rightly reacted with outrage. Policymakers rightly set out to cut down on interjurisdictional money laundering. And crypto got rolled into these massive policy shifts and legislative packages, despite never coming close to UBS or Mossack Fonseca or Vancouver’s real estate market as a vehicle for money laundering.

But while it is not fair to slur Bitcoin as a money laundering mechanism, it’s obvious that lack of KYC has been extremely lucrative for a number of not-good actors in the crypto world. This is especially true of exchanges. It was the Paradise Papers that exposed that BitFinex and Tether are run by the same people, a fact they would clearly prefer to have kept hidden. It was only as Malta was trying to get its corporate registry in line with EU expectations that it outed Binance for lying about its registration on the island. Which is not even to mention how reckless the executives at BitMEX were.

As the EU rolls out AMLD5, and the U.S. starts demanding owner names for firms registered anonymously, the crypto world has already shifted its party line. Fewer and fewer industry voices are arguing in favor of fully law-agnostic Bitcoin, likely because many of these big players and, especially, exchanges profit by replicating the sins of the traditional financial world. Speaking in generalities, the consensus has been to center legal responsibilities like know-your-customer on fiat gateways. Which is what the Financial Action Task Force is already asking for, so in some ways this is just accepting the inevitable.

As governments have gotten more comfortable with managing exchanges, there have been pushes to go further. Most famous is the U.S. Treasury’s attempt to get info on transactions between exchanges and self-hosted wallets. Those rules are still in process and, pessimistically, some are going to stick.

I don’t foresee governments having any power over fully peer-to-peer transactions on, say, the Bitcoin network unless there has been some major operator error on the part of the wallet owner. But, pessimistically, I can envision a world of whitelists and blacklists, where it gets harder and harder to move between fiat and crypto without giving up all kinds of personal identifying information along the way. It’s not what I would call likely, at least not for several years, but it’s not impossible.


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Blockchain Association Hold Talks with Regulators Over Amenable Regulations

The Blockchain Association is putting preparation in top gear to meet with financial regulators in the President Joe Biden administration, including Treasury Secretary Janet Yellen, to make them understand the importance of bitcoin (BTC) and other cryptocurrencies and the need for amenable regulations, according to a FOXBusiness report on March 5, 2021.

Blockchain Association Meet Regulators 

The Blockchain Association, an industry trade organization that aims to function as the unified voice of the cryptospace, has revealed plans to meet with top regulators in the current administration to make them understand that digital currencies are more than just tools for money laundering and other illicit deals.

Per sources close to the development, Kristin Smith, executive director of the Blockchain Association has hinted that the organization has been meeting with key members of the Biden government and it’s on the verge of holding talks with Treasury Secretary Janet Yellen and nominated Deputy Secretary Wally Adeyemo.

If all goes as planned, the Association, which is made up of heavyweights such as Binance.US, Kraken, and Grayscale, among others,  will meet Yellen and her team in the coming weeks.

Crypto Not For Criminals

It will be recalled that Yellen said earlier in January 2021, that cryptocurrencies are majorly used for illicit financing and vowed to formulate measures that will curtail their use for money laundering. 

Yellen further made her distaste for cryptocurrencies very clear, when she stated categorically during a recent New York Times Dealbook conference that “I don’t think that bitcoin…is widely used as a transaction mechanism. To the extent, it is used I fear it’s often for illicit finance. It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s used to process those transactions is massive.

Against that backdrop, the Blockchain Association’s Kristin Smith and her team are determined to embark on the herculean task of enlightening Yellen on the burgeoning digital asset class and the important role they play in the financial ecosystem.

“Our number one priority is helping Yellen understand crypto goes beyond the financing of criminal enterprises. We want her to understand the value of crypto networks,” she declared.

Also commenting on the matter, Adam Traidman, CEO and co-founder of the crypto trading platform, BRD reiterated that the industry is not opposed to regulation, however, it is crucial to fight against innovation-stifling laws just like the one proposed by former Secretary Steve Mnuchin and implement only regulations that make it easier for crypto-linked businesses to thrive.

“One of our main objectives is to carve out crypto to crypto transactions from most regulations. If crypto transfers have to meet wire transfer regulations, that will harm the ecosystem,” he declared.

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Five Crypto Projects Are Going Mainstream This Month, Says Altcoin Daily’s Austin Arnold

Altcoin Daily founder and trader Austin Arnold says five crypto projects are going mainstream in March thanks to new business developments.

First up on Arnold’s list is Ethereum (ETH). The trader cites the announcement that Amazon Web Services (AWS) has made Ethereum available on the Amazon Managed Blockchain.


Amazon says the move will make it easier for developers to utilize the leading smart contract platform.

“With this launch, AWS customers can easily provision Ethereum nodes in minutes and connect to the public Ethereum main network and test networks such as Rinkeby and Ropsten. With Amazon Managed Blockchain, customers get secure networking, encryption at rest and transport, secure access to the network via standard open-source Ethereum APIs, fast and reliable syncs to the Ethereum blockchain, and durable elastic storage for ledger data.”

Arnold’s next pick is the supply chain management tool VeChain (VET), citing the news that one of the largest aluminum companies in the world, the Norway-based Hydro, has initiated a pilot service built on VeChain to document product claims.

Third on Arnold’s list is the cloud-based wallet Curv. He points to news reports citing anonymous sources who say that payments giant PayPal is in the process of purchasing Curv.

“This could be big in my opinion as a fundamental green flag for the space, and by the way, the altcoins that PayPal supports. Big green flag for them as well.” 

Arnold’s next pick is the Theta Network (THETA), a decentralized video delivery network. The trader points to news that Sony’s European subsidiary plans to run a node on the Theta Network.

And last on Arnold’s list is the custody service Hex Trust, which announced this week that it launched the first fully licensed custody services for non-fungible tokens (NFTs).

The company states that the massive popularity of NFTs and their big upsurge in prices calls for a secure way for investors to hold them.

“With the NFT market surging and prices of NFT’s climbing into the millions of dollars for a single collectible, it has become urgent to provide collectors and institutions with the ability to safely custody and insure their valuable assets. The Hex Safe platform has been upgraded to fully integrate NFTs on multiple blockchain platforms and token standards including Ethereum and their ERC-721 and ERC-1155 token standards.”



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99% gone in 60 seconds: How a Polkadot trader may have crashed DOT futures

On March 5, Polkadot (DOT) experienced a flash crash at Binance perpetual futures which resulted in the contract trading as low at $0.20. While this could have been an honest fat-finger trading mistake, a number of indicators point to a planned-attack.

While no hard evidence will likely ever emerge, the open interest increase just 24 hours ahead of the event indicates that an attacker could have generated a $8.3 million profit by manipulating Binance’s matching engine.

DOT perpetual futures on Mar. 4, USD pricing. Source: Binance

As shown above, during the 3-minute candle, $20.4 million worth of DOT contracts traded. Although the swift downside move was a 99.5% flash crash, it did not result in cascading liquidations.

Futures contracts liquidations are calculated using the price of spot exchanges. Thus, a flash-crash exclusively on futures prices would not impact most traders. According to Binance:

“The Price Index is a bucket of prices from the major Spot Market Exchanges, weighted by their relative volume.”

As per Binance’s support website, Polkadot coin-margined futures index price is composed of Kraken (DOT/USD), Binance (DOT/USD), Binance (DOT/BTC), OKEx (DOT/BTC) and Huobi’s (DOT/BTC) market.

It is worth noting that this specific contract is coin-margined instead of the more liquid Tether-settled one. Cointelegraph recently analyzed those differences, stating that the Tether-based contract “doesn’t need an active hedge to protect collateral (margin) exposure, thus it’s a better choice for retail traders.”

Data uncovers the planned ‘attack’

For an attacker to set up this trade, the first step would be building a leveraged long position while simultaneously creating short exposure using another account.

To create a flash crash while risking the minimum amount possible, preferably, this event should take place not more than a couple of days ahead of the planned ‘attack’.

DOT/USD perpetual futures open interest. Source: Binance

As depicted above, DOT/USD perpetual futures open interest grew from 1.92 million DOT to 3.34 million some 30 hours ahead of the flash crash, equivalent to a $47 million increase.

To differentiate the attack from a regular leveraged-long, one should track the long-to-short ratio. To maximize gains from the flash crash, the attacker would have created a substantially higher short leveraged amount, thus impacting the long-to-short ratio.

DOT/USD perpetual futures long-to-short ratio. Source: Binance

The data above shows that the average 4.25 ratio favoring longs was severely impacted during the open interest increase. This would confirm the theory of a coordinated attack.

How the trade is executed

By holding a considerably larger net short position when both accounts are combined, the attacker would profit from a flash crash. All this entity needs to initiate the event is to market sell the net long position. This move would trigger a substantial sell order, crashing the futures contract. Meanwhile, the other account, previously net short, would score big.

762,000 DOT contracts traded during the 3-minute flash-crash candle at a $26.73 average price. Considering the change in the long-to-short ratio, the attack most likely created a $30 million long position. Meanwhile, the secondary account held a $10 million net short exposure.

Although far from the 99.5% price crash, this 19% drop from $33 likely generated a $9.5 million gain for the account holding the $10 million short exposure if 5x leverage was in play. On the other hand, the collateral lost for the $30 million long position amounts to $1.2 million is 25x leverage was deployed.

It is important to emphasize that holders of Binance DOT futures contracts were unlikely affected by the flash crash. Therefore, the attackers’ net long account should be holding a negative balance, which the Binance insurance fund will likely cover.

The above calculations are mere speculations based on exchange-provided data. As previously mentioned, it is unlikely that hard evidence of this attack will ever surface.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.