SWIFT explores blockchain interoperability
This week, our blockchain experts assessed the following topics:
- SWIFT explores blockchain interoperability
- SEC against crypto: The fight is on
- DeFi darling Arbitrum goes down
- CFTC wins – DAO’s precedent
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SWIFT explores blockchain interoperability
SWIFT has partnered with Chainlink in a new set of experiments to assess how financial institutions can leverage the existing SWIFT infrastructure to effectively dictate the transfer of tokenised value across various private and public blockchain networks. Chainlink, a Web3 platform, will offer connectivity across private and public blockchains for the experiments. In addition, SWIFT will work with a few large institutions like Euroclear, BNY Mellon, Australia and New Zealand Banking Group Limited (ANZ), Citi, and SIX Digital Exchange (SDX), among others, in these trail projects.
SWIFT’s announcement follows a wave of successful pilots it had in 2022 that were geared towards demonstrating how the firm’s current infrastructure could be utilised as a single access point to several tokenisation platforms managed by financial institutions operating private blockchains. Besides testing the interoperability function, the new round of experimentation will see the global financial messaging network address possible regulatory and operational drawbacks facing financial institutions while functioning in the blockchain environment.
SWIFT will showcase how its infrastructure can be used to ease blockchain interoperability with this new set of experiments. The first example will entail the movement of tokenised assets across two wallets on a designated public blockchain network. The second example will encompass the transfer of tokenised assets from a public blockchain to a permissioned one. The third example will involve transferring tokenised assets from one public blockchain to another.
Chainlink will be used in the experiments as an enterprise abstraction layer that will securely link the SWIFT system to the Ethereum network, whilst the former’s Cross-Chain Interoperability Protocol (CCIP) will permit complete interoperability between the source and target blockchain. SWIFT also plans to delve into non-technological elements that are crucial for regulated bodies to interrelate with public blockchains and participate in cross-network transactions. These will cover compliance, operational, and regulatory challenges. SWIFT plans to publish the findings of its experiments later this year.
SEC against crypto: The fight is on
The Securities and Exchange Commission (SEC) in the U.S., on June 5, filed 13 charges against Binance and its founder, Changpeng Zhao (CZ). Some of the charges filed against Binance include deceiving investors and regulators, disregarding KYC rules, mismanaging customer funds, and operating an unregistered exchange. The charges against Binance are incriminatory and make it hard to envision how the crypto exchange will continue running its U.S. subsidiary. Fiat on- and off-ramps have already been stopped with the US entity.
On June 6, the SEC was at it again, filing charges against Coinbase. Coinbase is being sued for operating as an unregistered broker, clearing agency, and securities exchange. The exchange is also charged with operating an unregistered staking program. In Coinbase’s lawsuit, the SEC stated that various assets like Axie Infinity, Cardano, Chilliz, Dash, Dfinity, Filecoin, Flow, Near, Nexo, Polygon, Sandbox, Solana, and VGX are securities. Interestingly, neither Bitcoin nor Ethereum appeared in the document
The SEC's recent witch hunt on crypto exchanges operating in the U.S. has attracted criticism from several politicians who disapprove of its actions. For instance, Rep. Ritchie Torres, an N.Y. Democrat, believes the SEC’s actions are a complete contempt for Congress, which is in the process of developing a crypto regulatory framework. “The latest enforcement action against Coinbase is an egregious example of regulation by enforcement,” Torres said. “His view of the law has been constantly changing,” Torres added. “Mr. Gensler has gone from a crypto cheerleader to a crypto skeptic. He’s portraying crypto as the villain in order to portray himself as a political hero.” That means Torres reckons this change is politically motivated.
Furthermore, Senator Cynthia Lummis from Wyoming called the regulator out for not providing enough guidance on what differentiates a commodity and security in a tweet shared on June 6 in response to the charges against Coinbase. She also emphasised that real consumer protection necessitates establishing a legal framework for exchanges to follow, rather than pushing them offshore. This is what seems to be happening with several US crypto companies eyeing to other jurisdictions. In the meantime, Binance and Coinbase are fighting the SEC charges in court, and only time will tell how each case unfolds.
Amidst this tumult, a new draft bill on how crypto assets that start out as securities could, in the end, be regulated as commodities was released by the Republican chairs of the House Agriculture and Financial Services committees. The Digital Asset Market Structure Bill addresses critical issues facing the crypto industry, such as whether tokens are commodities or securities, clarification on what a decentralised blockchain network really is, and how the spot market should operate. For now, however, it remains unclear how much democratic support the bill will garner in Congress.
A tweet thread shared by Justin Slaughter, a former Senior Adviser at the SEC, details the bill’s content. Slaughter observes that the bill touches on jurisdictional matters, registration, and stablecoins. He also points out that it’s rare to see two chairs collaborating on any legislation. “The fact that these two members decided to work together on this bill is very significant. It shows they want to get this passed, [...] and everyone should take this legislation seriously,” Slaughter wrote.
DeFi darling Arbitrum goes down
Arbitrum, a layer-2 blockchain that has grown to become a DeFi darling, briefly halted operations on June 7 due to a software bug in its sequencer. The bug caused Arbitrum’s centrally-controlled sequencer — the piece of software that bundles user transactions together and posts them on-chain on the Ethereum blockchain — to revert transactions, causing delayed network operations. The network currently holds over $2 billion in crypto asset deposits.
According to the Arbitrum Developers, the blockchain’s funding mechanism consists of two wallets — the sequencer and the gas-refunder wallet. The sequencer wallet typically has a low ETH balance, programmed to post transactions on-chain. The gas-refunder wallet, however, is a smart contract with a high ETH balance. It is set to automatically refill the sequencer wallet only if it posts successful transaction batches. In addition, it has an inbuilt fail-safe protection that ensures it cannot be automatically refilled when the sequencer malfunctions, and this is what the Arbitrum team claimed caused the issues it experienced.
However, other observers reported that Arbitrum’s sequencer stopped working because the blockchain ran out of funds used to pay for gas fees on Ethereum and had to be manually topped up, claims which Arbitrum Developers vehemently refuted in a tweet thread shared on their page. Nonetheless, they didn’t provide further details regarding the bug and stated that a full post-mortem would be shared in due time. Be that as it may, the incident has once more called the question of layer-2 blockchain solutions into question.
CFTC wins – DAO’s precedent
In September 2022, The U.S. Commodity Futures Trading Commission (CFTC) filed a complaint against Ooki DAO for flouting CFTC regulations, operating an illegal trading platform, and unlawfully acting as a futures commission merchant (FCM). Ooki DAO failed to respond to the CFTC complaint, which led the regulator to request the judge to rule in its favour since the DAO had breached federal commodities laws for failing to respond to an ongoing suit.
The judge ruled in favour of the CFTC and ordered the exchange to cease all its operations. Moreover, the court ordered a permanent ban on its websites and the removal of any online content. The DAO was also fined a sum of $643,542, payable as a civil monetary penalty. This judgment sets an example for other DAOs that they could be legally held accountable as a ‘person’ under the CFTC Act for their actions. From now on, this precedent could open doors for governing bodies to take legal action against decentralised exchanges and DAOs. DAO founders and its members certainly will have to pay more attention to how exactly they set up their decentralised autonomous organisation.