Three Days Since Last Accident…

The U.S. Securities and Exchange Commission is coming for degens and crypto maxis. All of them.

A fairly ominous new press release made by the agency on May 3 indicates that the controversial agency has “double[d] …. the size of [its] … crypto assets and cyber unit.” That might sound really intimidating until you realize that means that they made 20 new hires. 

Those folks might come with good intentions. SEC Chair Gary Gensler indicated in the press release that the move was designed to help “dedicate more resources to protecting” investors in the U.S. He added that “the SEC will be better equipped to police wrongdoing in the crypto markets while continuing to identify disclosure and controls issues with respect to cybersecurity.”

The press release goes on to flex on ICO scammers and aspirational criminals. They talk about the $2 billion in monetary relief they’ve pulled in from 80 enforcement actions since the unit was launched in 2017. 

After they flex a little bit, they detail some of the things they’ll be investigating. It’s a short but meaningful list that includes crypto asset offerings, exchanges, lending and staking products, the entire world of DeFi and NFTs, and stablecoins.  (The last constituent of the list probably made Elizabeth Warren smile.)

On the whole, this press release rubs many crypto investors and companies the wrong way for two reasons: 1) there’s very little legalese or regulatory guidance for crypto and 2) it feels adversarial in nature. While that might not be the agency’s purpose (they’re likely trying to go after cybercriminals using crypto as a medium of theft), the crypto industry has a complicated — and perhaps even well-earned — perception of the SEC because of its history with large crypto players.

In recent memory, the agency has sued Ripple Labs and threatened to sue Coinbase for reasons the company claims it doesn’t fully understand.

The regulator’s expansion also comes amid a bipartisan effort to wrestle away the agency’s jurisdiction over cryptocurrency and digital assets. If such a bill passed, the Commodity Futures Trading Commission would be the industry’s watchdog instead, which would be a win for the crypto industry.

At least at this stage in the game, the effort has yet to come before either house of Congress. In the meantime, SEC Chair Gary Gensler has made known his desire to share jurisdiction with the CFTC according to Coindesk. 

Two recently-published articles offer a glimpse at two sides of a debate about the health of non-fungible tokens (NFTs) as an asset class.

The first of these pieces, “NFT Sales Are Flatlining”, was published in the Wall Street Journal yesterday. It represents an alarmist take on the health of the marketplace. A response piece published hours later in Cointelegraph offers a more optimistic take with different data.

Both pieces make excellent points about the state of the market, so we wanted to boil their conclusions down for you — the reader:

What does the WSJ’s article say?

Paul Vigna from the Wall Street Journal looks at data from the website NonFungible, which shows that the number of NFT sales are down more than 92% since September 2021. He also points out that the “number of active wallets” are down 88% since November 2021.

Those are hard figures to argue against, assuming that they’re true. Vigna suggests, using anecdotal examples from the Journal, that NFT buyers are becoming NFT bagholders. Wedged between his research are graphs which put into perspective the decline of NFTs in different categories — which again draws on data from NonFungible.com.

In truth, little of Vigna’s piece reads as an editorial or opinion piece. A lot of it is hard facts about the health of the market, and based on how the story ends — where it’s going too. The conclusions? That not all NFT projects will survive and that utility will be king in v2.

How does Cointelegraph respond?

Like we said, the CoinTelegraph piece is a direct response to Vigna’s piece for WSJ. We also said that Vigna’s research would be hard to argue against “assuming that they’re true.”

A healthy portion of Jeese Coghlan’s piece for Cointelegraph is spent refuting the authenticity and completeness of Vigna’s star source: NonFungible.com. Coghlan pulls on data from Dune Analytics instead, which is considered among many crypto natives to be one of the best web3/blockchain-centric data aggregators and analytics platforms. 

The Dune query that Coghlan indexes market volume from some of the largest NFT marketplaces across chains. It also looks like the opposite of the WSJ’s graphs. This is reiterated in the article using a tweet from Tom Schmidt, a crypto-facing venture capitalist.

However, Coghlan’s piece offers one concession: indexes created by third-parties which track the top art and gaming NFT collections are down pretty significantly. The flip side of that coin is that many of the “blue chip” collections are up and to the right.

Who’s right?

It’s hard to dispute data because the dots we plot on charts are there for a reason. In this case, it looks like Cointelegraph’s data is more complete than the Wall Street Journal’s. Sure, a healthy portion of the article touched on how some people have been unable to flip or sell their NFTs, but the narrative here appears to support the “up and to the right case” for digital collectables, especially ones which command considerable clout.

We dispatched a request for comment to NonFungible.com to better understand how they track NFT transactions so that we can better understand the disconnect between these two sources. We’ll report any findings in our two cents section in a future issue if they do or don’t respond.

According to a Bloomberg report, a Virginia pension fund in Fairfax County is reportedly mulling deploying money into DeFi. The announcement came within hours of Jane Street, a Wall Street giant, indicating  that it would deploy funds in DeFi too.

The basis of the report were comments made by the fund’s chief investment officer, Katherine Molnar. Molnar is the CIO at the Fairfax County Police Retirement System and made the comments at a conference held in Los Angeles on May 3.

Fairfax pensions have been early bettors on the future of crypto. In 2019, they deployed pension funds in “crypto-linked investments.” Last year, the Fairfax County Police Retirement System and the country’s broader Employees’ Retirement System invested $50 million into a fund which buys tokens and derivatives in the crypto market.

Molnar said during the talk that she is expecting investments to “offer a yield of at least 9%.” In terms of allocation, the fund could allocate up to 8% of its AUM to yield farming. 

The Fairfax and Jane Street news are relatively unprecedented moves from traditional finance companies, but one which spells increased confidence in decentralized protocols. It might simply be the first wave of traditional investment money to enter the nascent DeFi ecosystem, but it certainly won’t be the last wave.

What does this mean for you, lay reader? Well, if you’re not involved in the world of DeFi, it might not mean a whole lot. However, if you are involved in any form of staking, yield farming, liquidity mining, or on-chain activities? You might want to sit up and lean in.

Increased capital inflows to blockchain stands to increase TVLs, which certainly legitimizes the space on paper. However, it reduces the overall reward to people engaged in staking and DeFi activities, which are inherently risky in nature. 

Tl;dr: More capital = lower returns/yield = more risk for less returns. There is one contingency which might come with that, which is: if DeFi protocols and web3 technology becomes more utilized, the attractive rates might remain.

However, in the life of DeFi, lending costs have been down and to the right. As of today, Ethereum-based protocols are offering scraps for stablecoins. $USDC on Ethereum’s Aave protocol is sitting at a base rate of 1.82%. On Compound, it’s 1.65%. A “bonus rate”, which is often paid in the governance token of the protocol, may vary from platform-to-platform (and varies on price.)

In order to unlock higher yields in this environment, investors generally have to gamble with riskier protocols and structured strategies. Or, alternatively, they’d have to seek returns on other chains with different assets. All of these elements can affect the risk/reward of engaging in DeFi, but also affect the broader market’s health and prevailing rates.