This week: Coinbase v SEC, Mastercard Adoption, and More

Coinbase v SEC

There has been another wave of regulation buzz this week as Coinbase took the offensive and called out the SEC.  Coinbase CEO Brian Armstrong took to Twitter to identify a pattern of “sketchy” behavior he’s experienced directed toward Coinbase.  Here’s the story, according to Brian: the company was planning to roll out a feature called Lend, which would allow users to lend their cryptocurrency for a return.  This is a common feature in the crypto world, with most major wallets and exchanges offering it natively.  When Coinbase made the SEC aware that they will be releasing the feature, the SEC responded by declaring that crypto lending is considered a security.

Coinbase executives requested further explanation and in response, the SEC subpoenaed documents from Coinbase, demanded testimony from their employees, and informed the company they will be sued if Coinbase proceeds to launch their Lend feature.  Armstrong went on to explain that the new head of the SEC had previously dodged an attempt to introduce himself to regulators on a May trip to DC, being told “we’re not meeting with any crypto companies.”  In Coinbase’s official posted statement, they reveal that the SEC requested the name and contact information for everyone on their Lend waitlist, which the company refused to give.

Mark Cuban posted his take in response to Armstrong’s tweets, calling this “Regulation via Litigation”, stating that the SEC is struggling to set reasonable regulation and is instead planning to leave it to the lawyers.

TLDR: The SEC has officially stated it plans to sue Coinbase if they release their lending feature, a feature many other exchanges already offer.

Mastercard Acquires Crypto Forensics Firm CipherTrace

Credit card company Mastercard will acquire crypto forensics giant CipherTrace. CipherTrace provides transparency in crypto investments, identifying possible theft, fraud, and money laundering. The company's clients are governments and other companies that need to track crypto projects, and CipherTrace helps protect crypto companies and financial institutions from security and compliance risks. Currently, CipherTrace tracks and reports on over 7,000 crypto assets.

CipherTrace can help clients detect crime in the decentralized finance (DeFi) ecosystem, which is experiencing massive growth and attracting criminals. In mid-August, there was over $80 billion of value locked on DeFi platforms. DeFi crime this year has totaled almost $700 million.

The two main types of DeFi crimes are hacks and "rug pulls." According to CipherTrace, roughly three-quarters of DeFi crime this year has been protocol hacks, where hackers exploit the underlying code running an exchange and steal the money. About one-quarter of DeFi crime has been rug pulls, where the people running the project quit and take the money.

This is the latest move by Mastercard into the crypto space, following their announcement of crypto payment cards early this year, and the start of a crypto project launch pad this summer.

Bored Ape Yacht Club Auction Sells for $24 Million

The growing NFT art trend had yet another impressive showing this week when a collection of 101 Bored Ape Yacht Club NFTs sold for $24 Million, at an average price of $241,500 per NFT.  The average price per Bored Ape on secondary markets is roughly $160,000.  The Bored Ape project is one of the early generative art lines (projects where the NFT gets a number of random traits for the image at the time of minting) to gain major traction.  The auction was conducted by Sotheby’s, one of the world’s largest fine art brokers, which started auctioning NFTs earlier this year.

The sale crushed Sotheby’s target price range of $12M-$18M and included a total of 107 NFTs.  Bored Ape Yacht Club recently released an add-on NFT called mutant serums which “mutate” the original NFTs and yield a second Mutant Ape Yacht Club NFT.  This is one of several rewards granted to holders of the original NFT, alongside a free NFT from the Bored Ape Kennel Club line.  Kennel Club also recently had an auction of 101 NFTs, which sold for a total of $1.8M.

The project has been garnering attention from big name celebrities and athletes such as Stephen Curry, Dez Bryant, The Chainsmokers, and many more. This week also had the largest individual sale of a Bored Ape at $2.9M.

Should You Hold a Wrapped Token?

Wrapped tokens are cryptos pegged to the value of another asset. A wrapped token is like a stablecoin, except its value is pegged to an asset such as Bitcoin. Wrapped tokens are usually used for compatibility in cross-chain transactions, but they can also be held by investors.

Wrapped tokens work like stablecoins: a custodian holds the balance of the asset, keeping the same amount that is wrapped. The custodian can be a merchant, a DAO, or a smart contract.

Wrapped tokens are used to make cross-chain transactions, such as trading Bitcoin (BTC) on the Ethereum network. Since Bitcoin and Ethereum aren't compatible, the exchange could instead use Wrapped Bitcoin (WBTC), an Ethereum-compatible wrapped token pegged to Bitcoin. Wrapped tokens operate on-chain, so they incur gas fees. Investors have to pay gas fees to wrap and unwrap their assets.

Wrapped tokens are a good option for cross-chain transactions, but are they too risky to hold? Since the wrapped token software is operated by a custodian, there is additional risk compared to holding the native asset. The custodian could be hacked or rug pull the project.

Some assets, such as BTC and ETH, are easy to acquire and hold, so holding WBTC or WETH is likely an unnecessary risk. Other assets, such as Nexus Mutual (NXM) are more difficult to acquire due to KYC requirements, but there is a wrapped version available with no KYC requirements: Wrapped NXM (WNXM). Although there is considerably more risk to holding WNXM, investors may consider this acceptable due to the ease of swapping WNXM compared to the native NXM.

TLDR: A wrapped token gives you the option to more easily access assets (for example, avoiding Know Your Customer (KYC), though it adds more risk than directly holding an asset.

Project Spotlight: BitClout

BitClout (CLOUT) is a blockchain-based social media project that “mixes speculation and social media.”  People make short posts that show up in a cultivated timeline, much like Twitter.  Each account on the platform has a Creator Coin, a coin that you can buy or sell that works on a yield curve to determine its value.  Creators can set a percentage of their coin to keep from all transactions.  The goal of BitClout is to create an asset class which is tied to the reputation of an individual directly. Some of the features released, or planned for release, revolve around exclusive access to holders of coins; the company has considered Stakeholder Meetings, Premium Messages, Sponsored Posts, and Premium Content.  

One of the most exciting parts of BitClout is the community that has sprung up around it.  The home page has a list of major projects, all of which trade directly on BitClout and are available to invest in from the moment they launch.  The top project is BitClout Pulse, a BitClout analytics company describing themselves as “Bloomberg for BitClout.”

BitClout launched in March 2021 with much of the staff being entirely anonymous – the CEO is simply known as “Diamond Hands.”  The project has raised funding from many of the top tech investors, like Sequoia Capital, Andreessen Horowitz, Coinbase Ventures, and Winklevoss Capital, as well as from individuals such as Chamath Palihapitiya (a confirmed user on the site).