Welcome to The Node. This is Daniel Kuhn and Prachi Vashisht, here to take you through the latest in crypto news and why it matters. In today’s newsletter:
Ethereum has finally activated account abstraction, a feature that rewrites how certain wallets function and makes recovery easier in cases of lost crypto keys. The new standard was deployed via a smart contract called EntryPoint, and has reportedly been fully audited. Speaking of new features, Polygon launched a new identity product on Wednesday that uses zero-knowledge proofs to allow users to verify their accounts without sharing sensitive information. In other news, a newly-launched decentralized exchange on Arbitrum called ArbiSwap apparently rug pulled its users by removing over $100,000 from its liquidity pools. ARBI is trading at fractions of cent, down from $1.5 – is this something account abstraction solves?
Banks and Bankless
On Wednesday, premier crypto bank Silvergate Capital announced it would delay filing its annual report, while hinting at the bank’s grim financial outlook amid a steep decline in customer deposits. The crypto-friendly bank requested an additional two weeks to complete its 10-K report for the 2022 fiscal year. Coinbase and Paxos have decided to drop Silvergate for its primary crypto competitor, Signature, while JPMorgan has downgraded the company’s stock projections to “underweight” from “neutral.” Elsewhere, IOST Network’s native token, IOST, surged by 8.65% after the company announced a deal with Amazon Web Services to use its computing services. Finally, hosts of the popular crypto podcast, Bankless, are raising $35 million for a venture capital fund focused on seed-stage Web3 startups. Show hosts David Hoffman and Ryan Sean Adams are to be the general partners along with Ben Lakoff.
World Power
Indian cryptocurrency exchange BitBNS told users a $7.5 million hack that occurred in February 2022 was just “system maintenance” perfromed on the advice of Indian authorities, said CEO Gaurav Dahake during a YouTube conversation. In other news, as the European Commission prepares to release a strategy for online virtual worlds in May, Margrethe Vestager, head of the EU’s antitrust agency, is thinking of ways to ensure healthy competition between metaverses. Finally, in Dubai, the crypto industry is celebrating the jurisdiction’s new crypto regulatory framework that gives locals a concrete licensing regime for digital assets issuers and services providers. The framework comes after the 2022 crypto market turmoil that prompted regulators globally to enforce safeguards in the industry.
Sound Bites
“Going forward, you’re gonna see more creative projects out of celebrities and athletes bringing directly to their fan base, to their ecosystem.”
– Two-time NBA All-star Baron Davis, on CoinDesk TV’s “First Mover”
The Takeaway: Before and After
Earlier this year, American Banker reported that two of the principal banks friendly to the U.S. crypto industry, Silvergate and Signature, took out loans from a federal program originally set up to back distressed mortgages. This was a painful thing to learn in some corners of the crypto industry. They remember that when Satoshi Nakamoto released the codebase for Bitcoin in 2008 it was as much a political statement as a technical revolution. Before cryptocurrencies were even called “crypto currencies,” the understanding was this alternative financial system would play by predefined rules: No bailouts.
Of course, not everyone was upset to learn Silvergate, important for getting dollars into the crypto economy, took out this Federal Home Loan Bank. Banks are banks, after all. But few will be happy to hear that Silvergate looks set to fail – even if it seems karmic. Today, the bank announced it was delaying a Securities and Exchange Commission filing for the first time, after it made last-minute asset sales to repay an outstanding balance on its federal loan. The company lost $1 billion in the fourth quarter of 2022 alone, a figure now expected to be revised higher, and still has additional loan repayment obligations– meaning it may soon be “less than well-capitalized,” a Silvergate filing said.
Betting when a company will fail is a notoriously difficult thing to do – often best left to professional investors. Even though Silvergate gave a grim financial projection, the situation can change. It does not, however, bode well that crypto exchange Coinbase is said to be switching banking partners to Silvergate’s primary competitor in the crypto industry, Signature, because of its recently disclosed financial situation. In January, one of the crypto industry’s most visible and influential investors, Ark Invest’s Cathie Wood, shed 99% of her company’s Silvergate holdings from its disruption-focused investment fund. A majority of Silvergate’s shares are sold short, including a million-dollar-plus position taken out by billionaire trader George Soros’ hedge fund.
Silvergate’s problems come amid a regulatory backlash against crypto, one particularly interested in minimizing the risks of crypto contagion spilling into the traditional economy. Nic Carter, a CoinDesk columnist and venture capitalist, went as far as calling the situation “Operation Choke Point 2.0,” a reference to the secretive Obama era policy of pressuring banks against servicing legal, but perhaps morally dubious, industries. Indeed, on one January day alone four White House advisers published a letter advising banks against crypto exposure; the National Economic Council released similar guidance discouraging more financial institutions from dealing with crypto; the Federal Reserve denied crypto custodian Custodia’s banking application and separately issued a policy statement detailing the risks of banks holding crypto-related deposits – including stablecoin reserves.
I’ve already gone on the record to say crypto will still be here on the other side of the “chokepoint,” and the increased clarity will actually increase the number and quality of banking relationships for crypto firms. The industry isn’t going anywhere, and the bankers I know still see a sales opportunity. This doesn’t exactly say anything about Silvergate, especially not about the karma question: whether it’d be ultimately good for the industry for Silvergate to fail. The bank signed its first crypto customer (Barry Silbert’s SecondMarket, which eventually evolved into CoinDesk’s parent, Digital Currency Group) in 2014, at a time when crypto companies were finding it impossible to get or keep bank accounts. FTX founder Sam Bankman-Fried once described the situation as, “Life as a crypto firm can be divided up into before Silvergate and after Silvergate.”
That testimonial from Bankman-Fried, which has been removed from Silvergate’s website, may give insight into the bank’s unwinding. The U.S. Justice Department opened a probe into Silvergate to unravel if the bank committed or contributed to fraud at FTX and Alameda Research. The investigation is ongoing, but, as the crypto gadflies at Protos noted, it’s already known that FTX used to direct customers to wire payments to Alameda’s banking account at Silvergate. In a December open letter to the bank, U.S. Senator Elizabeth Warren (D-Mass.) and others called that practice an “egregious failure of your bank’s responsibility to monitor for and report suspicious financial activity carried out by its clients.” That enough might be true. But who’s to say what is just?
The End of BUSD? On-Chain Metrics Paint a Bleak Picture (Blockworks)
Rivalries and partnerships: Aptos co-founder unveils the next move in its battle for attention (The Block)
Our Interests Are Aligned’ With the SEC: Coinbase CEO (Decrypt)
Over the past few months, CoinDesk has been developing a reward system fo Consensus 2023 attendees to bring long-term value. We’ve partnered with Art Blocks Engine, TokenProof and Passage Protocol to launch the Consensus Multi-Year, Multi-Tiered NFT Ticket, coming on March 2. Learn more.
Never Again
Kudos for making it this far! On occasion, we’ll give our loyal Node readers the opportunity to claim DESK, our social token, which is a mechanism for returning the value of engagement directly to the users who create it.
