Weekly Top Stories - 3/21

This week in the newsletter, we write about advancements in undoing Operation Chokepoint 2.0, Coinbase’s move to create permissioned DeFi, and the growth of real-world assets onchain.

Federal Banking Regulator Eases on Chokepoint 2.0

The Office of the Comptroller of the Currency (OCC) updated its supervisory handbook to remove “reputational risk” from the factors banks must consider when onboarding clients. The OCC said Thursday that it had removed “reputational risk” from the list of items that banks it regulates must consider when onboarding clients, a win for opponents of crypto debanking referred to as “Operation Chokepoint 2.0.”

“The OCC’s examination process has always been rooted in ensuring appropriate risk management processes for bank activities, not casting judgment on how a particular activity may fare with public opinion,” said Acting Comptroller of the Currency Rodney Hood.

The OCC is a national banking regulator within the U.S. Treasury Department responsible for overseeing national banks, federal savings associations (“federal thrifts”), and federal branches and agencies of foreign banks. During President Trump’s first term in office, Acting Comptroller Brian Brooks oversaw the publishing of several positive interpretive guidance letters that allowed such banks to custody digital assets (Interpretive Letter 1170), custody stablecoin reserves (Interpretive Letter 1172), and use stablecoins for payment and operate blockchain infrastructure for settlement purposes (Interpretive Letter 1174). Those interpretive letters were effectively rescinded by Michael Hsu, President Biden’s Acting Comptroller when he issued Interpretive Letter 1179, which said the previously mentioned activities were legal but required banks to get a written “supervisory non-objection letter” from the OCC before engaging in them. On March 7, current Acting Comptroller Rodney E. Hood, issued Interpretive Letter 1183 which rescinded 1179, meaning that banks no longer need to seek affirmative non-objections from the OCC before engaging in the above activities. Jonathan Gould, a former counsel to the Senate Banking Committee, and former OCC Chief Counsel under Acting Comptroller Brian Brooks, has been nominated by President Trump to become the Comptroller of the Currency and is currently awaiting Senate confirmation.

OUR TAKE:

The “reputational risk” factor that had been included in the OCC’s supervisory handbook has been targeted for removal by debanking opponents for several years. Crypto firms, other industries, and some consumer advocates have all alleged that this risk factor was used by regulators to overtly or covertly pressure banks to withhold or remove services from crypto-related companies. Federal Reserve Chairman Jay Powell also appeared to acknowledge and condemn arbitrary debanking in a February appearance before the Senate Banking Committee.

This is the latest in a series of positive actions the Trump administration has taken to reform the government’s approach to digital assets, and the debanking itself was also among the most pernicious attacks on the crypto industry. When Silicon Valley Bank collapsed in March 2023, crypto opponents cast its failure as at least partially due to the crypto industry (something that we vociferously rebutted at the time). Silvergate and Signature banks, which did not collapse but were effectively strangled, were also added to the pile of supposed crypto-related failures. While the reality was that none of these bank closures were forced because of crypto-activities, they were nonetheless used by crypto’s political opponents as fodder to press banking regulators to further cut off the industry. Those days appear to be over – legitimate and legal U.S. businesses should not fear whether they can make their next payroll due to bank account access. – Alex Thorn

Coinbase Dips Toes in Regulated DeFi

Coinbase launched several permissioned AMM pools on Base this week, combining their previous work with EAS (Ethereum Attestation Service) extending Coinbase’s KYC into an elegant on-chain verification solution, with Uniswap’s recently launched v4 hooks.

How does it work? Coinbase extends its KYC on-chain using EAS, letting clients validate that an address is owned by them through a two-step process of logging into their Coinbase account (IP address geo-location also checked here), and signing a transaction from their wallet to confirm ownership. Once verified, Coinbase will utilize EAS to post a revokable attestation that the address is verified by their KYC (~600k such attestations have so far been made). This creates a one-to-one map of Coinbase users to wallets with valid KYC credentials who have opted into the address verification and become the universe of counterparties who can swap assets inside Coinbase’s verified pools.

Coinbase’s verified pools are newly launched Uniswap v4 pools, with hooks that allow custom logic to be put in anywhere in the swapping process. Coinbase launched their own custom Uniswap v4 hook three weeks ago (barely a month after the Uniswap v4 launch), with a simple pre-swap check for valid EAS attestations of both: a verified address attestation, and a verified country attestation from Coinbase. With the permissionless nature of Uniswap v4 and its hook architecture, anyone can now launch a pool and integrate the Coinbase hook into it if they want to integrate Coinbase KYC into their pool.

Coinbase is not alone amongst exchanges in looking to extend their walled garden on-chain. Binance launched their on-chain KYC solution last year with BABT (Binance account-bound token), a soul-bound NFT collection managed by Binance. Binance’s solution is elegant, yet less integrated than Coinbase’s setup, with Binance managing the distribution of soul-bound NFTs off-chain, rather than Coinbase’s attestation setup. With attestations, Coinbase can easily add other exchanges or industry groups as valid users to confirm the attestations. Allowing for a future state where all verified addresses, regardless of exchange verifying them, can interact and swap together, rather than each exchange fragmenting on-chain liquidity by extending their CEX walled garden with an isolated on-chain fort.

OUR TAKE:

With regulatory clarity lifting the miasma crypto has been working through for the past four years, we should pause to think and evaluate what the next steps are in the evolution of DeFi. DeFi clearly works in a permissionless context, with multiple blue-chip protocols on Ethereum battle-tested through multiple cycles with tens of billions of dollars at risk. In a permissioned context, it is unclear whether DeFi will flourish without a similar bootstrapping phase, with a shaky track record for permissioned launches thus far. Aave Arc was one of the original whitelisted products, with permissioned lending pools, but they only garnered ~$8mm TVL before the product was determined to be a failure and ended. More recently, permissioned money market funds and yield-bearing stablecoins, such as Blackrock’s BUIDL, have seen a decent uptake with several billion dollars in TVL, but a highly concentrated userbase (BUIDL has >$1bn TVL but only 51 holders of the token).

Making DeFi a useful tool for TradFi players involves being compliant with regulations but also having enough liquidity to support viable, economic products. The pseudonymous nature of public blockchains precludes most TradFi interaction because of their KYC/AML and BSA requirements, so it makes sense to extend exchange KYC on-chain in this context to lower one of the barriers to entry. But does it work? Compared to the userbase of BUIDL, Coinbase’s wallet verification program has seen ~600k verified since its launch in 2023, and Binance garnered more than a million holders of their KYC NFTs. While the number of users in these wallet verification programs is high, the on-chain economic activity related to the wallets is unfortunately low. Coinbase’s verified pools have a paltry TVL of ~650k across all five thus far. This lack of TVL will make swaps of any material size uneconomic to execute due to the slippage incurred, but at the same time the pools are protected from front-running & sandwich MEV, and the wallet addresses are directly connected to end-users via the attestations. To grow the economic activity inside these verified pools, asset issuers need to figure out how to bring more traditional, high-quality assets onchain. One such target is U.S. listed equity securities, and Coinbase themselves have announced they want to eventually create a tokenized version of their own listed equity. Regulators are working through how to allow such tokenization to occur within existing or new regulatory frameworks, with SEC Commissioner Hester Peirce writing about this in February. While it remains unclear whether permissioned DeFi in such a form will be a success, innovation in the regulatory-compliant DeFi sub-sector is a welcome addition to the on-chain ecosystem and potentially the next big source of users and fees for protocols weathering a broad on-chain recession. – Thaddeus Pinakiewicz

BUIDL, Superstate, Centrifuge Win Spark’s $1 Billion Tokenization Grand Prix

BlackRock-Securitize tokenized Treasury fund (BUIDL), Superstate (USTB), and Centrifuge (JTRSY) were named the winners of Spark’s (a Sky subDAO) $1 billion Tokenization Grand Prix. The grand prix was an eight-month-long initiative enacted by Sky to accelerate the adoption of real-world asset (RWA) tokenization in the Spark subDAO. The selection process saw 39 applicants evaluated by advisory firm Steakhouse Financial, a key player in Spark’s ecosystem specializing in RWAs. Winners were chosen based on criteria including liquidity and capital efficiency. The final allocation decision will be market-driven through governance and capped at $1 billion, Spark said in a press release. BUIDL is set to receive a $500 million allocation, Superstate $300 million, and Centrifuge $200 million pending a passing vote, which is set to take place on April 3, 2025.

OUR TAKE:

Sky (formerly MakerDAO) was the first DeFi protocol to adopt RWAs into its framework at scale, with the DAO’s first vote to onboard such assets passing in November 2020. Over the years it has incorporated a spectrum of RWAs ranging from private credit funds and mortgages to U.S. Treasury bills and adjacent assets. A key detail in the Tokenization Grand Prix initiative is its focus on “reinforcing Spark's positioning to conservative, liquid instruments,” with each of the winning products being comprised of combinations of short-dated U.S. Treasury bills, repurchase agreements, and cash. After experimenting with several assets, the initiative’s focus illustrates how onchain products are increasingly favoring high-quality, liquid RWAs. In turn, it may suggest a broader shift away from incorporating less liquid, opaque assets in stablecoin applications, paving the way for more robust and efficient financial products.

Another notable difference between the collateral RWA assets selected through the Tokenization Grand Prix and other RWA initiatives previously executed by MakerDAO, and DeFi applications broadly, is the use of already tokenized RWAs that live onchain. In the past, most DeFi applications applied a stablecoin wrapper around RWAs that were housed in offchain accounts, often with little to no transparency or frequent updates on their status. This lack of transparency is counter to the purpose of DeFi as transparent finance and led to products that were effectively unauditable by end users. By using tokenized collateral assets a newfound facet of transparency of RWA-inclusive DeFi products is unlocked, as these assets are, at least partially, auditable onchain. The issue of the primary assets living offchain still exists, however, the tokenized layer makes it possible to lessen the gap between offchain custody and onchain transparency. While it does not entirely eliminate the risks associated with offchain asset management, it enables regular verification and real-time updates of the underlying assets’ status through onchain means. – Zack Pokorny

Charts of the Week

USDC and USDT supply rates have crossed below the Fed Funds Rate for the first time since June 2024 in the case of USDC and August 2024 in the case of USDT. As of March 19, 2025, USDC is yielding 2.19% and USDT 3.05% for liquidity providers (LPs) on the Aave v3 main market on Ethereum mainnet, the largest onchain lending market. The Fed Funds Rate and stablecoin supply yields are often viewed as competing opportunities for dollar yield. Stablecoin rates dropping below that of the benchmark offchain rate makes the onchain opportunity relatively less attractive.

The sharp decline seen in supply rates has been a result of increasing supply and declining demand. As crypto asset prices have come meaningfully off the December 2024/ January 2025 highs and activity onchain has slowed users have begun paying down or closing their loans, with signs that they are also topping up their collateral (noted by increasing ETH, cbBTC, and WBTC supplies on the app). This is a signal that, while users are closing up some of their frothy activity, there isn’t a rush for the exit by paying down loans and withdrawing collateral.

Other News

• Uniswap Foundation gets $177 Million in funding as Ethereum DeFi users await fee-sharing

• Kraken to acquire futures broker NinjaTrader in $1.5 billion crypto-TradFi deal

• EOS rebrands to Vaulta as it shifts focus to Web3 banking

• BitClout founder dodges fraud charge as Justice Department scraps case

• Robinhood launches March Madness prediction market with Kalshi