Developments in Future of Money

Our biweekly survey of notable happenings in the world of digital assets

September 12, 2022
Inside a data center for cryptocurrency mining with endless racks of CPU and motherboards. Processing the exchange of digital coins.

Compiled by the Oliver Wyman Forum

The stablecoin market sees some business jockeying, firms look for opportunity in the long-awaited Ethereum Merge, and US policymakers and regulators hint at potential restrictions on digital assets, including some driven by climate change. Here is our review of significant developments during the last two weeks.

Business Moves

Conversion Stirs Stablecoin Market

Binance, the largest cryptocurrency exchange by trading volume, announced on Sept. 5, that it would cease spot trading in three stablecoins and automatically convert customers’ balances in those coins into its own dollar-pegged stablecoin, Binance USD (BUSD).

The move, scheduled to take effect Sept. 29, is designed to improve liquidity and capital efficiency for users, Binance said. After the swap users will continue to be able to withdraw their funds in any of the three coins – USD Coin (USDC), TrueUSD (TUSD), or Pax Dollar (USDP).

The change is likely to boost the use of USDC, the second-largest stablecoin in the $155 billion sector behind Tether (USDT), by making it a more-attractive vehicle for investors moving funds onto and off of Binance’s trading platform, said Jeremy Allaire, chief executive of USDC creator Circle, in a Twitter thread. Some industry observers speculated that the move could negatively impact liquidity in Tether because it is not included in the conversion. 

Competition Emerges in Ether Staking

Firms have begun offering staking products in ether (ETH) ahead of the Ethereum blockchain’s so-called merge, which will transition the network to a proof-of-stake consensus mechanism from proof of work.

Binance.US, the American arm of the cryptocurrency exchange, announced on Sept. 7 it would offer 6% annual percentage returns to customers who stake as little as 0.001 ETH on its platform. On the same day, Switzerland’s Seba Bank said it would offer staking services to institutional investors that provide undisclosed rewards.

Ethereum initiated a hard fork on Sept. 5, to prepare for the change in its consensus mechanism, which is expected to take place by Sept. 15. After the shift, transactions on Ethereum will be validated by players based on the amount of ETH they stake in the system rather than miners who solve complex computational puzzles through proof of work. The change is designed to slash the blockchain’s carbon footprint by 99% and enable future upgrades in network capacity. 

Meta Opens Facebook to NFTs

Social media company Meta Platforms announced on August 29, that it would allow users of Facebook to post non-fungible tokens (NFTs) on the site. The company initially opened its Instagram platform to NFTs in May. The addition of Facebook, with nearly 2 billion daily average users around the world, marks a significant expansion and will enable users to connect their digital wallets to either app and share NFTs across both.

Policy Front

Climate Goals May Require Curbs on Crypto, US Says

The US government may need to prohibit the proof-of-work consensus mechanism that underpins Bitcoin and some other cryptocurrencies to reduce greenhouse gas emissions and achieve its goal of a net-zero economy by 2050, according to a White House report released on Sept. 8. 

The report called on the federal government to work with the crypto-asset industry and state and local governments to provide technical assistance and set standards for reducing emissions and other environmental impacts. If those efforts aren’t sufficient, though, the government should explore actions or legislation to “limit or eliminate the use of high energy intensity consensus mechanisms for crypto-asset mining,” it added.  

The report cited estimates that crypto-assets activity account for as much as 0.9% of global electricity usage, comparable to the consumption of all conventional data centers, and 1.7% of usage in the United States, which hosts more than a third of global Bitcoin mining operations. Bitcoin mining also produces an estimated 35,000 tons of electronic waste per year, equivalent to all electronic waste annually generated by the Netherlands.

US Regulators Pledge Oversight of Crypto Activities

Crypto-asset activity inside and outside of supervised banks requires regulatory oversight “so that people are aware of the risks they face,” Michael Barr, the US Federal Reserve’s new vice chair for supervision, said on Sept. 8 in his first speech in that role.

The Fed will work with other banking regulators to ensure that banks’ crypto activity is well regulated on the principle of “same risk, same activity, same regulation,” Barr said in a Washington speech. He also called on Congress to pass legislation extending the regulatory perimeter to include stablecoins because, as unregulated private money, they “could pose financial stability risks.”

In a separate speech on the same day, the chair of the US Securities and Exchange Commission said the “vast majority” of tokens in crypto markets are securities, and thus subject to American securities laws. 

The official, Gary Gensler, noted that some in the crypto industry have called for greater guidance from regulators but added that the SEC has made its stance clear in actions that go back to his predecessor, Jay Clayton. “Not liking the message isn’t the same thing as not receiving it,” he said.

Korea Pursues Rules for Security Tokens

South Korea’s financial regulators are developing plans to bring tokenized forms of conventional securities within the scope of the country’s capital markets laws, Coindesk reported.

Officials from Korea’s Financial Services Commission and Financial Supervisory Service met with industry representatives on Sept. 6, to get feedback on regulatory approaches, and the FSC intends to publish guidelines for the issuance of security tokens by the end of the year. The government and regulatory agencies have stepped up efforts to establish rules for digital assets since the collapse of crypto firm Terra in May.

Legal Briefs

US Recovers Funds From North Korean Hack

US authorities have seized more than $30 million in cryptocurrency stolen earlier this year from play-to-earn gaming platform Axie Infinity by North Korean-linked hackers, The Wall Street Journal reported on Sept. 8.

American officials have blamed the March theft, which stole cryptocurrency then worth over $600 million, on the Lazarus Group, a North Korean state-sponsored hacking group. The seized funds represent about 10% of the cryptocurrency stolen after accounting for price declines since the attack.   Treasury also has sanctioned two crypto mixing services it says were used to help launder the money, a move that has attracted criticism from some crypto firms.

Celsius Accused of Misleading Investors

Crypto lender Celsius Network misled investors about its financial condition before it filed for bankruptcy in July, the Vermont Department of Financial Regulation claimed in a bankruptcy court filing on Sept. 7. The filing, made in support of a request for an independent examiner to investigate the firm’s collapse, claimed that Celsius was unable to repay investors as far back as July 2021, well before the 2022 downturn in the crypto market that Celsius cited in its bankruptcy filing.  

Notable Views

Crypto and the Constitution

Web3 developers worried about the potential ramifications for their business of the US Treasury’s recent sanctions move against cryptocurrency mixer Tornado Cash may find greater protection in the US Constitution’s Fourth Amendment, which prohibits unreasonable searches and seizures, than the First Amendment’s right to freedom of speech, venture capitalist Kathryn Haun wrote in a Sept. 6 blogpost.

Legal issues around privacy-preserving technologies in the cryptocurrency space will likely take years to iron out but developers need to start making their voices heard to legislators and the judiciary, Haun said.

Separately, crypto exchange Coinbase announced on Sept. 8, that it was financing a lawsuit brought by six people challenging the Treasury sanctions on Tornado Cash. Chief Executive Brian Armstrong said the company believed Treasury had exceeded its authority “by sanctioning a technology,” and that the action “threatens the future of decentralized finance (DeFi) and web3 specifically.”