Top Stories of the Week - 3/24

In the newsletter, we cover the CEA’s annual economic report for the president and what it says about crypto, sushiswap DAO receiving an SEC subpoena, and NFT marketplace heavyweight magic eden adding support for bitcoin ordinals. Subscribe here and receive Galaxy's Weekly Top Stories, and more, directly to your inbox.

White House Economic Advisors Slam Crypto in Annual Report

The President’s Economic Report argues crypto has “no fundamental value.” The White House’s Council of Economic Advisors, the president’s chief economic analysis resource, published its annual report covering a range of economic topics including international partnerships, children’s care and education, supply challenges, digital competition, climate change, and digital assets.

The 37-page section on digital assets admits that “crypto assets appear to be here to stay” but details a large number of risks related to digital assets and advises policymakers to “consider these risks to avoid a ‘Minsky Moment’ caused by crypto assets.”

In order, the report first details several “claims” made by crypto asset supporters in a section called “The Perceived Appeal of Crypto Assets.” In the next section, the authors methodically refute each claim (“crypto assets are mostly speculative investment vehicles,” “cryptocurrencies generally do not perform all the functions of money as effectively as sovereign money, such as the U.S. dollar,” etc.). While there are some positive takeaways from the report, the conclusion can ultimately be seen as a net-negative, with the authors writing “although the underlying technologies are a clever solution for the problem of how to execute transactions without a trusted authority, crypto assets currently do not offer widespread economic benefits. They are largely speculative investment vehicles and are not an effective alternative to fiat currency. Also, they are too risky at present to function as payment instruments or to expand financial inclusion.”

Our take

The CEA is more an intellectual economic resource to the President than a policymaking one, focused on providing the White House with empirical research and producing this annual report. The braintrust of the administration’s policy apparatus is usually a mixture of the National Economic Council (now directed by former Federal Reserve Vice Chair Lael Brainard), the Domestic Policy Council (DPC, which at times has been subordinate to the NEC), and the Treasury Department, with the Treasury Secretary (Janet Yellen) as the President’s chief economic spokesperson. The point is that the CEA is not a policymaking body, but nonetheless the White House relies on its research to inform policymaking decisions.

One obvious takeaway is that the framing of each section is negative: “The Perceived Appeal of Crypto Assets” with each potential positive crypto narrative referred to as a “claim.” The subsequent section then purports to debunk each “claim,” while mostly ignoring the myriad real ways actual people are currently using crypto assets. The authors repeatedly cite crypto’s most sordid bad actors as broadly indicative of the industry as a whole. When referring to frauds, they use BitConnect, one of the most blatant scams of the 2017 bull run (which by the way was exposed by the crypto community in real time and only charged by the SEC 4 years after the scam had run its course in 2021). When describing problems in the market infrastructure space, of course FTX is their primary example, despite the fact that the apparent criminality of the FTX enterprise is not analogous to large portions of the legitimate cryptocurrency industry. When describing the usage of “blockchain” to inappropriately pump frauds, they refer to the infamous instance of “Long Island Iced Tea” company adding the word “blockchain” to its name and seeing its share price triple.

The authors also cite criticisms of blockchain technology broadly by two prominent computer scientists as evidence that even the underlying technology may not be legitimate, but the authors fail to note that there are thousands of prominent computer scientists that believe the technology is transformational or are even working on it. For example, the authors fail to note that MIT, Stanford, U.C. Berkely, University College of London, and hundreds more prominent universities are deep into conducting significant technical research on blockchain and crypto assets, or to mention the myriad prominent cryptographers and computer scientists who advocate for and develop on blockchain technology (the list is frankly too vast for me to mention here).

Another standout point is that the report acknowledges that crypto’s growth has revealed a demand for a faster and more inclusive financial system, which the authors then use as a launchpad to promote the forthcoming launch of FedNow - the Federal Reserve’s long-awaited realtime payments system – and a Central Bank Digital Currency (CBDC), which the report suggests “could help bring the U.S. financial infrastructure into the digital era ina clear and simple way, without the risks or irrational exuberance brought by crypto assets.” It’s hard not to view the forthcoming launch of FedNow and the promotion of a CBDC against the backdrop of the recent closures of private real-time settlement networks SEN and Signet and the regulatory actions against stablecoins.

It is unfortunate that the report strikes such a negative tone and fails to acknowledge widely-known benefits and uses of bitcoin and crypto assets, but the authors do admit that the industry is “here to stay” and leaves the door open to there being productive use cases. It’s similarly hard to ignore that the report strikes such a negative tone against the backdrop of last year’s Executive Order, which was much more tech-neutral and broadly viewed as positive towards the digital asset economy. This may be attributed to personnel departures from the White House/NSC and other economic events that we’re seeing the more pronounced negative voices within the executive branch find their stride. While the report may help give political cover to the White House and others throughout the executive branch/independent agencies if they intend to continue a broad-based crackdown on the crypto asset industry in the United States—a notably different approach than the rest of the world is taking, which we’ve written about—the report does signal some willingness to further education, and the industry should work to expose the positive use cases of crypto assets to policymakers. -AT

Sushi Gets Served by the SEC

Sushi DAO and “Head Chef” Jared Gray served with SEC subpoena. The information was revealed in a governance proposal posted by Jared Grey that proposes establishing a legal defense fund of 3m USDT to cover legal fees for Sushi's core contributors. Details of the SEC subpoena were not provided, but Grey noted in the post that the Sushi team are cooperating with the SEC and that they do not intend to comment publicly on the ongoing investigations or other legal matters. Grey proposed that the financing of the legal defense fund come from trading fees, grants, and from the Sushi Treasury with a contingency of an additional 1m USDT if the initial funds are depleted. Following feedback from the community, the proposal was edited to increase the contingency cap to two 1m payouts (totaling 5m USDT for the defense fund; extra funds subject to governance approval) and to extend legal coverage to multisig participants.

Jared Grey was elected as the Head Chef of the Sushi DAO on 10/3/22 as part of the Sushi 2.0 reorganization plans. Prior to his election, Sushi has had a troubled history with internal conflicts that led to the departures of its original management team including the co-founder, head chef, and CTO in 2021 (0xMaki, Chef Nomi, Joseph Delong, respectively). The approved Sushi 2.0 reorganization plans included implementing a new Sushi Legal Structure that creates three new entities across crypto friendly jurisdictions intended to limit liability for Sushi’s contributors, although it does not appear that Sushi has yet completed setting up its legal structures.

Our take

No one yet knows whether the Sushi subpoena will result in yet another SEC action against a crypto entity, adding to the growing list of recent SEC actions against crypto entities, including fining Kraken over its staking program and issuing a Wells Notice to Paxos over its BUSD stablecoin (and now issuing a Wells Notice to Coinbase). It’s important to stress that receiving a subpoena is not, on its own, evidence of wrongdoing or a prelude to being sued. It simply means that the recipient has been legally required to participate in a legal proceeding in some capacity—often as a mere witness or to compel someone to produce documents or other evidence related to some legal case. While it’s too early to tell why the SEC is interested in Sushi and what this subpoena portends for the protocol, Sushi receiving a subpoena is still noteworthy since Sushi is a DeFi protocol operated by a "DAO" rather than a CeFi entity that is more easily addressable like Kraken or Paxos, which operate as corporations. With no legal wrapper, questions abound as to who the SEC’s subpoena is directed towards, since Sushi is just code deployed on various public blockchains. Note that Ooki DAO was sued by the CFTC for operating an unregistered futures trading facility and failing to conduct KYC checks. Questions in the governance forum asked for details around the subpoena's contents, how the DAO was served, and what parties are included (e.g., Head Chef, Core Contributors, multisig signers). In December 2022, MakerDAO proactively established its own legal defense fund (no confirmation that active participants were targeted by legal/regulatory action) - a prudent action that could become more common practice for other DAOs to follow.

DAOs are a novel organizational structure - the "decentralized" aspect, to the extent they are decentralized, introduces important legal questions about liability. Where a DAO is not incorporated, it will likely be considered a “general partnership” under the law, which means every member of the DAO could be considered a “partner” of that general partnership. Unlike shareholders of corporations or members of limited liability companies (LLCs), partners of general partnerships bear joint and several liability (i.e., unlimited personal liability) for the partnership’s obligations, which means that DAO members’ personal assets could be used to pay off the partnership’s obligations if found liable for some wrongdoing. While the Sushi Legal Structure as part of the Sushi 2.0 reorg was intended to incorporate the DAO in crypto-friendly jurisdictions to provide greater protections for Sushi members and more flexibility for the Sushi protocol, it’s not clear whether the protocol has yet formally availed itself to a legal wrapper. ShapeShift founder and decentralization advocate Erik Vorhees tweeted: “If there’s an entity, it’s not a DAO…Don’t let lawyers talk you into incorporation… unless you want to be a corporation,” although new and innovative legal structures have been designed to combat this view, like the Wyoming DAO law. (We wrote about DAO legal structure issues in our November 2021 whitepaper).

To be clear, nothing has been disclosed about the contents of the subpoena, which investigation it supports or who or what is the target of any investigation, or if there is one at all. Nonetheless, the service process and the DAO’s reaction have been fascinating to watch on the governance forums. The legal structure for decentralized organizations is a fascinating legal question that will undoubtedly continue to evolve. -CY/AT

Infrastructure for Ordinals Heats Up

Magic Eden, the fifth largest NFT marketplace by all-time volume, launched an official marketplace for ordinals. The new Ordinals marketplace supports native Bitcoin wallet's Hiro and Xverse, allowing collectors to list, purchase and sell Ordinals. Xverse and Hiro wallet are emerging as popular ordinals wallets due to the sat selection functionality, allowing collectors to move ordinals safely. To help onboard new users, Magic Eden teamed up with popular ordinals projects to spread awareness for the new marketplace. Magic Eden's co-founder, Zhouxun Yin, said that the motivation behind the expansion to Bitcoin stems from the platform wanting to onboard more users from different NFT ecosystems. Although Magic Eden supports Ethereum and Polygon NFTs, the marketplace primarily caters to Solana NFT collectors. Magic Eden's Co-Founder also displayed his growing interest in Ordinals mentioning, “There's a lot of high-value items that are being inscribed or created on the bitcoin chain, and for a very, very burgeoning NFT ecosystem that it's, it's been super exciting to see.”

Our take

Magic Eden entering the ordinals ecosystem is a significant win for Bitcoin and ordinals adoption. Now, the fifth largest NFT marketplace by volume will introduce ordinals to over 1.4mn new collectors. This also benefits bitcoin as new ordinal collectors on Magic Eden (majority SOL NFT collectors) will be required to buy bitcoin with their Xverse or Hiro wallets to purchase ordinals. Magic Eden's volume for Ordinals is already showing large purchases of 1.13 btc (DeGods) and 0.35 btc (Ordinal Apes); the top 5 sales in the first day account for $147,317. As trading volume for Ordinals increases, Magic Eden is positioned to capture significant economic value from their 2% marketplace fee on every sale.

Magic Eden's brand recognition coupled with being the largest ordinal marketplace will result in the platform onboarding more users than smaller ordinal marketplaces like ORDX, Ordswap, and OpenOrdex. However, Magic Eden's announcement comes after Gamma launched their ordinals marketplace and X2Y2 signalled upcoming support for ordinals. The marketplace wars for ordinals is emerging. In Galaxy's research report on Ordinals, we estimated that by 2023 Q2, significant marketplace infrastructure will be developed. So far, our predictions are on track and will likely accelerate as significant creators like Yuga Labs, who made over $16mn in primary sales from their first bitcoin collection, and marketplaces continue to enter the fray. Our view is that major NFT marketplaces like OpenSea will be next to signal support for ordinals, further propelling the emerging ecosystem in the right direction.

Since the release of Galaxy’s ordinals report, the ecosystem is showing no signs of slowing down. Cumulative inscriptions stand at 574,000 and continue to increase. The recent onboarding of Yuga Labs and DeGods is further evidence that ordinals are maturing into an established digital collectables ecosystem. Magic Eden's ordinals marketplace will further signal to the broader NFT community that the ordinals saga is not a fad and here to stay. -GP

Other News

• Coinbase receives Wells Notice from the SEC

• Coinbase CEO Brian Armstrong and General Counsel Paul Grewal publicly discuss SEC Wells Notice

• SEC sues Tron founder Justin Sun alleging market manipulation

• SEC issues bulletin urging investors to exercise caution when investing in digital assets

• Luna Founder Do Kwon arrested in Montenegro

• Florida Gov. Ron DeSantis (R) proposes law to ban CBDCs

• Stablecoin DeFi protocol MakerDAO votes to retain USDC as a primary reserve asset

• Arbitrum users claim 42m ARB tokens in much-anticipated airdrop – 23,000 individual wallets (3% of eligible wallets)

• FTX bankruptcy estate to claw back $460m from Modulo Capital

• Kraken suspends ACH deposits/withdrawals following Silvergate shutdowns