This week, we covered reports in our newsletter that the U.S. Securities and Exchange Commission (SEC) is investigating the Ethereum Foundation, Blackrock building a tokenized product, and one of the world’s largest pension funds considering an allocation to Bitcoin.
SEC investigating Ethereum Foundation?
The U.S. Securities and Exchange Commission has reportedly issued subpoenas to cryptocurrency companies over their ties to the Ethereum Foundation. In what appears to be a separate legal services incident, the Ethereum Foundation removed Warrant Canary from its GitHub on February 26, revealing that it had "received voluntary inquiries from state authorities, which included confidentiality requirements." It’s unclear from which agency the Ethereum Foundation itself received services — EF is a Swiss-registered entity — or whether the “inquiry” it received was related to a subpoena issued by the SEC.
The substance of the legal services reportedly sent to cryptocurrency companies and EF is also currently unknown. Fortune described the SEC’s subpoena as “part of an aggressive campaign to classify Ethereum as a security.” The U.S. Securities and Exchange Commission has long considered Bitcoin a commodity, but in recent years, on various occasions, it has declined to make the same claim for the Ethereum network’s native currency, ether, despite the fact that U.S. Securities and Exchange Commission Former department head of the Exchange Commission. Bill Hinman of Corporate Finance said in a speech in June 2018, “Putting aside the fundraising that accompanied the creation of Ethereum, based on my experience with the current state of Ethereum, the Ethereum network and its decentralization structure, current quotes and sales of Ethereum, and is not a securities transaction."
The legal service’s report comes as several prominent ETF issuers are racing to list spot-based ETH ETFs. The SEC’s first final 19b-4 deadline for pending applications is May 23, when the commission must approve or deny VanEck’s application to list its spot ETH ETF. Market observers mostly believe that approval in May is less likely, with Bloomberg ETF analysts saying on March 20, "We now believe that this round of approval will ultimately be rejected on May 23."
Our take:
This is despite the fact that the Commodity Futures Trading Commission (CFTC), which regulates commodities and futures trading, has made it clear that Ethereum is a commodity and has allowed its regulated futures exchanges to list Ethereum futures. These continued refusals to acknowledge the commission’s views on Ethereum have led to theories that the SEC intends to launch some form of crackdown on the world’s second most valuable blockchain network, reports Fortune and CoinDesk The theories later gained widespread support this week. They also threaten to drive a wedge between the U.S.'s two main market regulators, the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC).
However, with regard to the reported subpoenas and legal services issued to EF, we are unable to understand the substance of these legal process services. If, as Fortune reports, the commission is seeking information about cryptocurrency companies’ interactions with the Ethereum Foundation, the SEC may consider whether the original Ethereum ICO was an unregistered securities offering rather than a Secondary transactions are classified today as securities transactions. If the SEC brought charges against the Ethereum Foundation over Ethereum's initial offering but allowed it to be traded secondary as a non-security, that would actually be somewhat consistent with Hinman's 2018 speech and the primary and secondary Some differences between sales in various court cases. (However, we should note that the Ethereum ICO took place from July to September 2014, almost 10 years ago, so taking enforcement action against EF at this time would be highly irregular).
The Fortune article also quoted an unnamed subpoena recipient saying that the SEC believes that Ethereum’s fall 2022 “merger” upgrade enhances Ethereum’s likelihood of being a security as the network moves away from proof-of-work Moved to Proof of Stake. It would be particularly confusing if the SEC believed that Proof-of-Stake made Ethereum a security given that in the fall of 2023, a full year after Ethereum transitioned to PoS, the Commission allowed the launch of multiple futures-based ETH ETFs. Claiming that PoS itself makes an asset a security would likely require the SEC to roll back or revoke approval of futures ETFs in some way, a stance that would have negative consequences for crypto as a whole given that the vast majority of layer 1 blockchains operate in the cryptocurrency market. have a wide-ranging impact on the market. PoS model. (It’s worth noting that the New York Attorney General claimed in a March 2023 civil lawsuit against KuCoin that Ethereum became a security in part because it relied on proof-of-stake, although we have yet to find an instance of this from the SEC) Similar cases exist in legal filings. KuCoin settled the case in December 2023).
Taken together, if the report is accurate and indicates that the Commission is indeed preparing to bring securities law charges against Ethereum or the Ethereum Foundation, the SEC is on a tricky path in terms of law, regulatory precedent, and implications. An old industry with a history of more than ten years. If the SEC were to try to take action against Ethereum or even the Ethereum Foundation's original presale 10 years ago, it would represent a dramatic escalation in an enforcement-driven war the commission increasingly seems to be facing. Resistance and censorship. Courts and Capitol Hill. It’s difficult to know what direct impact everything the SEC does in this investigation will have on ETH ETF approval, but Bloomberg’s ETF analyst James Seyffart said that just two months before the first deadline, the SEC Issuers have not been actively engaged and approval in May now looks highly unlikely. - Alex Thorne
BlackRock begins building its tokenized offering
BlackRock this week unveiled its first tokenized fund on a public blockchain. The BlackRock USD Institutional Digital Liquidity Fund (BUIDL) offers accredited investors the opportunity to earn tokenized USD yields on the Ethereum blockchain.
BUIDL invests 100% of its total assets in cash, U.S. Treasury bills, and repurchase agreements, aiming to maintain a stable value of $1 per token. BUIDL holders receive accrued dividends as new tokens directly into their wallets each month. The fund also enables holders to transfer their tokens to other pre-approved investors “24/7/365” and have the flexibility to choose how their BUIDL tokens (shares) are managed. Other advantages include instant and transparent settlement.
BlackRock filed a Form D, a notice of their intention to launch an exempt token securities offering, alerting onlookers to the launch of the fund. Securitize will act as a tokenization platform, having previously tokenized assets for large companies such as KKR. BNY Mellon, Coinbase, Anchorage, BitGo and Fireblocks will serve as various infrastructure providers.
Our take:
BlackRock’s foray into digital assets is just beginning, and it’s a boon for the entire crypto industry. Just as BlackRock's Bitcoin ETF filing signaled to many the inevitability of ETF approval, BUIDL could signal the beginning of a larger shift toward tokenization. “The next step is tokenization,” BlackRock CEO Larry Fink told Bloomberg in January.
While some types of tokenization efforts, such as stablecoins and tokenized gold, have been around for a few years, others, such as tokenized Treasuries, have emerged more recently against the backdrop of rising interest rates. Lending protocols like Maker and Frax have devised new ways to capture off-chain yields, often setting up off-chain entities to invest protocol assets into Treasury bonds and other money market products and return these revenues to token holders By. In December last year, Galaxy announced that it would cooperate with DWS to issue fully collateralized euro-denominated stablecoins in the future.
There is also interest from traditional financial firms such as Franklin Templeton and Wisdom Tree, whose main businesses have nothing to do with cryptocurrency and blockchain technology. There are currently nearly $800 million in on-chain tokenized Treasury bill products, 50% of which are offered through Franklin Templeton’s Benji platform . However, this represents only a small portion of global assets, with the money market fund industry alone recently estimated at $6 trillion. The addition of BlackRock could help change that. The world's largest asset manager has been vocal about the inevitability of tokenization, with CEO Larry Fink saying it represents the "next generation of markets" and envisioning "every financial asset will be tokenized." change". Clearly, their foray into this space is part of a larger long-term strategy and not just a small-scale experiment.
BlackRock’s use of the public blockchain Ethereum also highlights an important design choice. The exact details are not public, but it is clear that the actual distribution and transfer of tokens will include a trusted/permissioned element. BUIDL should open the door for a new class of ultra-high net worth investors (the minimum investment size for BUIDL is $5 million) to start feeling more comfortable with on-chain products. This may better incentivize teams to start building institutional products that align with BlackRock’s regulatory positioning, while demonstrating the advantages of tokenized products issued on public blockchains. ——Lucas Cheyon
Japan’s National Pension Fund Asks for Information About Bitcoin
On Tuesday, Japan’s Government Pension Investment Fund (GPIF) announced that it was seeking research information on a range of “illiquid assets,” including but not limited to farmland, gold, forests, and cryptoassets such as Bitcoin. GPIF's request for information (RFI) states that their study of these assets is consistent with its "annual plan."
Respondents to the RFI have until April 19 to submit submissions outlining how the GPIF will add these assets to its portfolio. According to Reuters, GPIF is the world's largest pension fund by assets under management, with assets held worth approximately $1.54 trillion as of December 2023. The fund currently invests in domestic and foreign bonds, stocks, real estate, infrastructure and private equity. GPIF’s RFI comes just days after Bitcoin hit an all-time high of $73,797 and weeks after news broke that Japan’s cabinet approved a bill that would allow venture capital and investment firms to hold crypto assets. The bill is currently being considered by Japan's parliament. Last year, Japan’s cabinet also approved a bill banning companies from paying taxes on unrealized gains from long-term holdings of cryptocurrencies. The bill is also under congressional review.
Our take:
To be clear, the RFI does not mean that the GPIF will invest in cryptoassets or even conduct research to evaluate cryptoassets as investments. The RFI recommends that GPIF be willing to receive “basic information” and then assess whether research into cryptoassets or any other asset class in which they are not currently invested or have considered investing is worthwhile. This is an early step that signals the fund's general openness to exploring new investment strategies and is a prudent step for any serious financial institution given changes in global economic, political and market trends. However, we believe it is only a matter of time before the GPIF recognizes the central role crypto-assets should play in a diversified portfolio.
Major institutions around the world are realizing the investment potential of crypto assets. Last year , South Korea’s National Pension Administration announced the purchase of more than 280,000 shares of cryptocurrency exchange Coinbase. Also in 2022 , the Houston Firefighters Pension Fund became the first public pension plan in the United States to invest in cryptoassets, BTC and ETH. This year , the U.S. Securities and Exchange Commission approved the first spot Bitcoin ETFs. As of March 21, these 10 funds collectively hold more than 4% of the total BTC supply, and their AUM is only expected to increase as more registered investment advisors, broker-dealers, and banks open up these investment vehicles.
Although it is early days, interest from GPIFs and other institutions looking to improve portfolio returns will continue to drive demand for cryptoassets and other investment vehicles that provide exposure to these assets in a major way. As the adoption of crypto-assets and blockchain technology continues to grow, it is increasingly difficult for institutions representing and protecting the interests of retail investors to ignore the powerful role crypto-assets play in investment portfolios. For more information on Bitcoin's role in an investment portfolio, read this Galaxy Research report. For more information on the projected market for spot Bitcoin ETFs, read this Galaxy Research report. -Kristen King
Chart of the week
Ethereum Layer 2 (L2) economics have improved in the first week since the Blob went live (to learn more about the Blob, see our March 15, 2024 newsletter). Most notably, sequencer profit margins have improved and transaction costs have fallen significantly.
In the three months prior to blob launch, zkSync, Optimism, Base and Arbitrum had an average profit margin of 24.2%. Since Blob's launch, their average combined profit margin is 80.4%.
The median transaction costs for these L2s have also been reduced by a total of 55%. Optimism dropped the most, exceeding 71%.
Base experienced transaction fee increases between March 20, 2024, and March 21, 2024, as users flocked to the network. Increased on-chain activity drives fees higher as users compete to execute transactions. This incident highlights a key point, which is that while EIP-4844 reduces the Ethereum Layer 1 (L1) costs of these L2s and reduces their transaction fees, it does not prevent them from growing as on-chain activity grows. upward pressure on costs.
Lower transaction costs come at the cost of lower revenue, except for Base, which had its most profitable day since its launch in July 2023. On March 20, 2024, Base had revenue of $1.55 million and a profit margin of 99.9%. Optimism, Arbitrum and zkSync maintained solid profit margins despite revenue declines. So while lower fees hurt their overall revenue, the chains have yet to show continued signs that their net income is less than in the era before the conglomerates.
See Galaxy Research’s EIP-4844 Dune Analytics dashboard for more details on the evolution of Ethereum L2 and the EIP-4844 economy.
Other news
- Base network daily trading volume surges 51% to $356 million
- CryptoPunk’s second highest selling price in history – for the second time
- SEC delays decision on VanEck Spot Ethereum ETF, seeking public comment
- Citrea releases open source two-way hook program based on BitVM
- Starknet’s 2024 Roadmap Includes Parallel Trade Execution in Q2
- Grayscale Ethereum Trust discount has widened to -20%, lowest level since November 2023, as May spot ETF hopes fade
- Following Fidelity’s lead, Grayscale looks to add staking to its proposed Ethereum ETF
- OP mainnettests “proof of failure” to strengthen network security
- Genesis agrees to pay $21 million fine to settle SEC charges
