DeFi Not Immune to Oversight, SEC Head Says

What you need to know today in crypto and beyond

August 19, 2021

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Today's must-reads

Top Shelf

DEFI IS DESIGNED BY ... SEC Chair Gary Gensler has warned that DeFi projects are not immune to oversight by the markets regulator. In an interview with The Wall Street Journal on Wednesday, Gensler said DeFi projects have features that make them look like the type of entities regulated by the SEC. Founders beware.

BIG IN JAPAN: Coinbase has named Mitsubishi UFJ Financial Group as the banking partner to launch Coinbase Japan, after getting a green light from the country’s financial regulators. Mitsubishi UFJ Financial Group (MUFG), a bank with more than 40 million Japanese customers, will provide “MUFG Quick Deposit” for Coinbase’s local users, according to a blog post on Wednesday.

BTC IS VOLUNTARY: Bitcoin use in El Salvador will be “totally optional,” and businesses that do not accept the cryptocurrency will not be sanctioned, the country’s finance minister, Alejandro Zelaya, said Tuesday. Zelaya said the U.S. dollar will remain as the main currency of reference in the country, contradicting Article 7 of the Bitcoin Law passed in June, which stipulated that bitcoin must be accepted as a form of payment by “every economic agent.”

ROBINHOOD’S SHARE: About 41% of Robinhood’s total revenue in Q2 derived from cryptocurrency trading commissions, up from 17% in the first quarter. Overall, the stock broker said that more than 60% of its customers traded cryptocurrencies last quarter. Crypto-based revenue for the second quarter was $233 million, versus just $5 million in the year-ago quarter.

LIQUID CRACKS: Japan’s Liquid Global exchange says it has been hacked, with expected losses of ~$90 million in bitcoin, ether, XRP and tron. In a tweet on Thursday, the exchange said its warm wallets were compromised and that it was consequently moving digital assets offline. It is now working with other exchanges to freeze the funds.

–Helene Braun

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Sound Bite

“You have a better chance of tracking stolen funds on the blockchain than you do with a fiat crime.”

–FMR U.S. Secret Service And Postal Investigator Joseph McGill, on CoinDesk TV’s “First Mover.”

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Putting the news in perspective

The Takeaway

In 2022, It'll Be Stablecoins Versus CBDCs

The world is locked in a power struggle to determine which – if any – currency will become the next global reserve. Many experts and pundits now think digital money when they think hegemony.

China has taken the lead in digitizing its renminbi, Europe is signaling a CBDC is imminent, while the U.S. is still taking a wait and see approach. Bitcoin is in the mix, as are other smaller national or regional digital currency projects.

Perhaps the most interesting battle is between CBDCs and stablecoins, or cryptocurrencies designed to hold their value – often relative to a fiat currency. It’s familiar territory, similar to debates over whether the public or private sectors should build a nation’s infrastructure: Slow and accountable versus efficient but unreliable.

On one side, there’s the argument that money is a public good and should be maintained by the State. On the other, money is whatever people use, and if private U.S. dollars confer benefits (like faster or more secure settlements) they will of course be adopted.

That certainly seems like the case. Today, people have the choice between a U.S. dollar from the Treasury Dept., a bank, an exchange, a payments processor or a stablecoin issuer like Circle. Increasingly, people are going for the latter. But that doesn’t always have to be the case.

“In 2022, I believe CBDC volume will overtake stablecoins,” Charles d'Haussy, who, when he’s not chowing down or writing, oversees ConsenSys’s efforts to develop a multinational CBDC bridge among Hong Kong, Thailand, China and the United Arab Emirates, called a m-CBDC. (ConsenSys, of course, is the powerhouse Ethereum studio based in Brooklyn, N.Y.) Sure, he’s biased. But he also has a front row seat.

“Usually, you see CBDCs in silos for single domestic markets,” he said. With m-CBDC, each central bank has its own monetary policies and regulations, reserve requirements and level of comfort with financial privacy. Those are hard problems to solve.

For him, the experiment speaks to the level of advancement and innovation happening in the sector, dispelling myths that innovation can’t happen at the state level.

Still, d'Haussy admits, “Innovation is going faster in the private sector than in central banks.” But when CBDCs come to market, they’ll be immediately adopted. CBDCs have a “built-in value proposition” of being totally tax and regulatory compliant and integrated with the global banking community. Plus, with stablecoins, you have counterparty risk.

“This head start for stablecoins – in terms of adoption and volumes – may not mean much when CBDCs become effective. They’ll just pop up in terms of users and spread into an existing financial system,” he said.

Notably, CBDCs can be programmed to be automatically KYC and AML compliant. That means government coins can move between banks or across borders while staying totally integrated within the unified banking sector, payments space and capital markets. And that’s all while offering lower operating and regulatory costs than the current settlement infrastructure.

“You cannot achieve this with stablecoins, you still need to do KYC and AML. That means you cannot automate tax payments or collection. Everything you can do with stablecoins – move money really fast across borders and have instant settlement – can be replicated in a CBDC,” d'Haussy said.

Yet, CBDCs aren’t yet completely trustworthy. The digital yuan, spurred into creation after Facebook announced its stablecoin concept libra (now diem), has raised legitimate concerns over user privacy and potential abuses, like China choking off democratic protesters. (Ironically, similar concerns were raised over the Facebook-driven Diem project.)

“You can’t get a shortcut around data privacy and privacy laws of your respective countries just because you’re using a CBDC,” d'Haussy said, noting that privacy is at least partially encoded by culture. The Chinese will develop whatever “they feel is in line with regulation for the domestic market.” So, too, will other countries.

Elsewhere, the market will decide if it's comfortable with an international renminbi. “But I think the Chinese are very pragmatic and they will shape things so that it's supportive of [international law],” he said.

So, in a sense, the market will still get to decide.

–D.K.

The CoinDesk DeFi Index (DFX), measuring the investable DeFi market, is now available for investors watching decentralized finance.

It is the latest index by CoinDesk Indexes, the market standard for crypto assets since 2014. The DFX provides a market-cap-weighted index for a representative basket of DeFi-sector cryptocurrencies that is designed to be investable and replicable for professional investors.

Find out more at coindesk.com/indexes/dfx, or email [email protected].

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