DeFi: Court rules against SEC, tokens are distinct from investment contracts about them; Aave's GHO stablecoin gets only $4MM post launch
DeFi: Court rules against SEC, tokens are distinct from investment contracts about them; Aave's GHO stablecoin gets only $4MM post launch
Do not expect Gensler to have a change of heart and soften his harsh approach to crypto regulation and enforcement.
Gm Fintech Futurists —
Today we highlight the following:
PROTOCOLS: Ripple, Crypto Industry Score Partial Win In SEC Court Fight Over XRP (link here)
DEFI & DIGITAL ASSETS: Aave’s Dollar-Pegged GHO Stablecoin Hits $2.5M Market Cap After Just 2 Days (link here)
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DeFi Short Takes
POLICY: Ripple, Crypto Industry Score Partial Win In SEC Court Fight Over XRP (link here)
On July 13, 2023, Judge Analisa Torres from the US District Court for the Southern District of New York published a long-awaited decision in the SEC v. Ripple Labs court case. The anticipation surrounding this headline has been a source of narrative drama and price speculation for years, and carries far reaching implications. Back in 2018, the Securities and Exchange Commission (SEC) sued Ripple, claiming that its activities involving sales and distributions of its native token, XRP, broke the rules because Ripple didn't register the asset as a security under Section 5 of the Securities Act of 1933.
The court examined three methods of Ripple's XRP sales to determine if an investment contract existed: (1) Ripple directly sold XRP to institutional buyers with written contracts (Institutional Sales); (2) Ripple sold XRP on digital asset trading platforms using trading algorithms (Programmatic Sales); and (3) Ripple distributed XRP as payment for services to individuals, employees, and third parties (Other Distributions). Ripple did not file registration statements or financial reports for these sales/distributions with the SEC.
In the end, the court ruled that the institutional sales were indeed securities transactions, specifically "investment contracts" under the Howey test, which defines an investment contract as involving the investment of money in a common enterprise with the expectation of profits from the efforts of a third party. Institutional investors paid Ripple, linking their money to the enterprise's success and expecting profits, thereby satisfying the Howey test's prongs.
However, programmatic sales on digital platforms didn't need registration and weren't unregistered offerings. Other distributions didn't meet the "investment of money" prong. And hence, the court also determined that the XRP token itself did not meet the definition of a security, leading Binance, Coinbase, Kraken, and other platforms to quickly relist XRP. To read more about the legal aspects, see here for Skadden’s analysis and here for Davis Polk’s.
SEC Chair Gary Gensler had a mixed reaction to the judge's decision — satisfied with “protecting” institutional investors and dismissing Ripple's fair notice argument, but not thrilled about the judge's stance on retail investor use of exchanges and lack of expectations of profits. However, do not expect Gensler to have a change of heart and soften his approach to crypto enforcement. Bill Hughes, the director of global regulatory matters at ConsenSys, mentioned that Gensler's tough cop routine is central to his persona and won't be abandoned because any signs of weakness would be politically untenable — more regulatory pressure is already in play.
Critics argue that the SEC lacks clear guidance for the crypto industry, yet discussions continually revolve around the subjective Howey Test. We've observed various alternatives, like the 2018 framework by Peter Van Valkenburgh, Research Director at CoinCenter. It considers variables within the cryptocurrency's software and community, aligning them with the prongs of the Howey test to determine if a cryptocurrency resembles a security. The framework suggests that more prominent decentralized cryptocurrencies like Bitcoin, pegged cryptocurrencies, and distributed computing platforms like Ethereum don't easily fit the security definition or pose significant consumer risks. However, smaller, questionably marketed or designed cryptocurrencies may fall within that definition.
In summary, the Torres decision was a strong blow to the SEC’s efforts to regulate by enforcement — in particular showing the world that just because a regulatory agency, or its boss, has a view does not mean that this view is correct or will be upheld in court. Some thing really are questions of law, and we expect legislation to be the best sensible way to solve this deadlock between industry and securities regulators. Other geographies, like Europe, are well on their way, while the US plays politics with its future economy.
👑Related Coverage👑
DEFI & DIGITAL ASSETS: Aave’s Dollar-Pegged GHO Stablecoin Hits $2.5M Market Cap After Just 2 Days (link here)
DeFi lending protocol Aave has launched the GHO token, an algorithmic stablecoin, on the Ethereum network. This milestone comes as a result of near-unanimous approval of a governance proposal from the community on July 14.
Stablecoins are digital cash equivalents whose value is typically pegged to a fiat currency. They were developed to allow investors to reduce volatility in their crypto portfolios and preserve value without having to offramp entirely from the crypto capital markets. Algorithmic stablecoins generally refer to pegged currencies that attempt to tranche risk and function like a structured product, where the top tranche is pegged, and the other tranches work like equity buffers.
Aave v3 users on the Ethereum network now can generate the GHO stablecoin using their assets deposited within the Aave protocol. GHO is designed with a fixed interest rate of 1.5%, which was determined by Aave DAO. Unlike centralized stablecoins, which are backed by corporate entities, GHO is issued and managed by AaveDAO, a respected decentralized autonomous organization with multiple product. Fees generated from GHO are channeled into Aave DAO's treasury, and of course add leverage into a leverage protocol.
One of the leading stablecoins, DAI, developed and managed by MakerDAO, requires users to keep separate vaults for each collateral type that is swapped for DAI tokens. GHO stands out from stablecoins like DAI by allowing multiple collateral types to be deposited in a single transaction for minting.
The value of GHO is intended to remain stable through market participant behaviors. According to Aave, if the value of GHO were to exceed $1, the market participants would engage in arbitrage to bring the value back to $1, as swapping GHO for other stablecoins would be profitable. On the other hand, if the value of GHO were to drop below $1, it would become profitable to repay the debt, leading to a decrease in GHO's total supply and aiding in restoring the peg. This is a standard approach for stablecoins. However, algorithmic stablecoins are inherently fragile, facing challenges in maintaining stability and relying on price-stabilizing arbitrage from independent actors — both of which can be unreliable during extreme market volatility. Think LUNA & UST.
Despite Aave's substantial Total Value Locked (TVL) of $5.8B, the launch of GHO has experienced a slow start to date — $4.6MM borrowed. For context, crvUSD, another similar collateralized stable from an early DeFi protocol looking to issue loans, has a TVL of $145MM. But both GHO and crvUSD pale in comparison to DAI, with whom they are effectively competing, with assets of $4.6B. One possible reason for the low adoption of GHO could be its 1.5% interest rate. In contrast, crvUSD offers a higher average interest rate, and DAI provides a savings rate of 3.5%. That is still peanuts compared to the 5%+ interest rates on just USD in a bank account.
Regardless of the cause, the launch numbers do not present a favorable outlook for the idea of proprietary stablecoins within every DeFi protocol. Perhaps we have enough stablecoin lenders out there already.
👑Related Coverage👑
Curated Updates
Here are the rest of the updates hitting our radar.
Financial Institutions and Adoption
⭐ Crypto VC Firm Polychain Capital Raises $200MM For Fourth Fund - CoinDesk
Crypto Wallet Provider Gnosis Launches Self-Custodial Visa Debit Card - Decrypt
FalconX and CF Benchmarks Partner To Provide Regulated Access To Crypto Derivative Markets - The Block
DeFi and Digital Assets
⭐ Uniswap Releases DEX Aggregator Protocol - The Defiant
⭐ Lens Protocol Releases Version 2, Integrating 'Open Actions' And ERC-6551 - The Block
Arkham’s ‘Dox-to-Earn’ Platform Offers Bounty On $415MM FTX Mystery - Decrypt
Coinbase Wallet Adds Chat And USDC Payment Features - The Defiant
Synthetix To Go Head-To-Head With dYdX, Aevo With New DEX Proposal - Blockworks
Blockchain Protocols
⭐ Chainlink's Interoperability Protocol, Connecting Blockchains To ‘Bank Chains,’ Goes Live - CoinDesk
⭐ Polygon Introduces New POL Token To Replace MATIC - The Defiant
Crypto Exchange Binance Finalizes Bitcoin Lightning Network Integration - Decrypt
Oasis Launches Ethereum-Compatible Privacy Blockchain Sapphire - Cointelegraph
NFTs, DAOs and the Metaverse
⭐ Digital Art Platform Prohibition Taps Arbitrum To Democratize Generative Art - CoinDesk
OpenSea Suspends Trading Of EtherFi NFTs - The Defiant
NFT Music Service Backed By Snoop Dogg Leads With $20MM - Blockworks
Yuga Labs’ Intensifying IP Takedowns Spur CryptoPunk Backlash - Blockworks
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