Screening crypto projects: The regulators are on it

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Screening crypto projects: The regulators are on it

Regulators have had a tough time keeping up with the rapidly growing crypto space that is dominated by a wide range of financial products. Nonetheless, recent developments show that they may be gaining ground signalling that crypto companies need to evaluate their compliance status now more than ever. 

It may be too late, though, for Nexo. The crypto lender has recently gotten into the regulatory crosshairs for illegally selling securities. The California Department of Financial Protection and Innovation (DFPI) issued a cease and desist order against Nexo on September 26, 2022, joining seven state regulators that have brought legal actions against the crypto lender regarding its Earned Interest Product accounts. 

These states include Washington, Vermont, Maryland, Oklahoma, Kentucky, New York, and South Carolina. Based on California’s cease and desist filing, Nexo’s Earned Interest Product accounts are securities and should have never been offered or sold without the regulatory green light. Interestingly enough, earlier this year, the company stopped offering the Earned Interest Product to new US clients as it focused on restructuring and registering it with relevant regulators. "As of July 31, 2022, over 18,000 California residents have active Earn Interest Product flex- or fixed-term accounts; these accounts collectively hold investments totalling at least $174,800,000," the filing stated.

Like Celsius Network which went bankrupt a few months ago, Nexo is what is called a CeDeFi company, illustrating the fact that these crypto projects are centralised entities dealing with DeFi protocols. As such, their duty to be compliant with security law is undisputed.

In a recent interesting move, US regulators also sued Ooki DAO, a decentralised protocol that offers tokenised margin trading and lending on Ethereum, for failing to comply with regulatory requirements. The company behind this project, bZeroX LLC, made significant efforts to shield itself from regulators by transferring the protocol to the Ooki DAO in August. The goal was to become a DAO in the true sense of the world, thereby becoming exempt from falling under the current regulations.

In an ironic turn of events, this move may have attracted the attention of regulators because the Commodity Futures Trading Commission (CFTC) issued an order against the protocol and DAO participants. It now appears that decentralisation cannot keep regulators at bay and communities could be held accountable for any alleged illegal activities carried out by a DAO. The project’s founders Tom Bean and Kyle Kistner paid a fine of $250,000 for three charges, one of them being the illegal engagement in leveraged and margin retail commodity trading without a company designated contract market (DCM) registration. 

These two examples indicate that US regulators are coming for crypto projects structured in any form or shape. The crypto space hopes this regulatory interest is favourable and will provide clarity instead of impeding innovation further down the line.

Banks still have a long way to go when it comes to allocating to crypto

Some Wall Street banks and other traditional financial institutions have been dabbling in crypto assets despite the ongoing crypto bear market, a smart move if Nickel Digital’s survey results are anything to go by. According to the crypto company’s research, a section of wealth managers and institutional investors believe the bear market will cease in 6 months. That could mean getting into the crypto sector right now may greatly reward institutions in the future.

Interestingly, the world's largest banks' exposure to crypto is still very low as reported by a Basel Committee study. The research data indicates that the world’s largest banks are exposed to an estimated €9.4 billion ($9 billion) worth of crypto assets, mainly involving BTC and ETH. The exposure is “0.14% of the total exposure to risk from the 19 banks” that participated in the study.

Banks are hardly holding any digital assets because the capital requirements are massive. According to the Basel Committee on Banking Supervision (BCBS), a bank is advised to stick to a risk weighting of up to 1250% when holding BTC in its books. This means that under Basel III rules, capital of 1 USD is required for every $1 in bitcoin. The committee comprises the Federal Reserve and European Central Bank. Its mandate is to set global standards for banking regulations, which is why its suggestions are not taken lightly.

One of the Basel Committee’s greatest concerns is that crypto assets increase the risks that banks face. So, as long as cryptocurrencies remain volatile, it will be difficult for banks to hold more digital assets. Nevertheless, at some point, more and more banks will have to find a way around this because of rising client demand.

Crypto adoption: Between hype and reality

Despite the challenges banks face in adopting crypto, the wider banking industry is still looking for different ways to interact with the sector.  SWIFT, for example, has partnered with Chainlink in a proof-of-concept project, whose goal it is to allow the “communications and movement of tokens between” several institutions. The project also aims to help financial institutions adopt blockchain without paying high upfront costs. SWIFT is the world’s top financial messaging network connecting an estimated 11,000 banks. The proof-of-concept project will use Chainlink’s Cross-Chain Interoperability Protocol (CCIP).

As crypto’s history shows, partnerships between digital asset projects and traditional companies are common in the space. However, more than once have they been used to hype projects with no intention of implementing anything substantial. Yet another such example is an August press release saying the Scottish Central Bank was creating a cross-border settlement currency in partnership with a crypto start-up called ALBA. The start-up was supposedly going to build the central bank digital currency on the XRP ledger. As some have argued though, this proposition is fake news since the Scottish Central Bank doesn’t exist, at least not until Scotland leaves the United Kingdom. Even more concerning is the fact that the ALBA website doesn’t work, indicating that something might be indeed fishy about the project and the news accompanying it. 

Speaking of XRP (in a more positive light), a court in the US has yet again overruled the SEC’s attempt to withhold documents that are crucial in Ripple Labs’ defence. The project has been battling legal troubles of its own since regulators sued it in 2020.

The Macro trend for Web3 seems unabated

NFT trading volumes have slumped by around 99.6% since registering a record peak in January this year. Based on recent data, the total monthly trading volumes dropped from $17.1 billion on January 1st to $70.4 million on October 1st. The waning NFT mania coincides with sinking crypto prices in reaction to Federal interest rate hikes. As a result, the largest NFT trading platform, OpenSea, has also experienced a significant tumble in monthly volumes from $5.9 billion in January to $47.3 million on October 1st.

While NFTs are taking a beating, fan tokens are thriving. This is a new kind of crypto asset that gives membership perks like voting rights, exclusive content, and prizes to fans of sports teams. The most popular creator of these tokens,, is working with Formula 1 teams, top European football clubs, major US professional leagues, and esports clubs, among others. The platform has over 1.5 million users in 167 nations.

The popularity of fan tokens can also be seen when looking at the following metric: Their sales volume has outperformed NFT sales, according to data on Crypto Slam. For instance, the 30-day fan token sales volume was $7.1 billion compared to $514.4 million recorded in NFT sales. The top fan tokens by sales volumes at the time of writing were Santos FC, Lazio, and Paris Saint-Germain. These tokens could be seeing increased interest since the FIFA World Cup 2022 is just around the corner.

In that regard it is worth noting that FIFA plans to launch an NFT platform on Algorand called FIFA + Collect. It will highlight “affordable, inclusive, and accessible” non-fungible tokens (NFTs) portraying art, imagery, and remarkable soccer moments. Algorand is one of the few non-ETH layer-2 chains that have registered a positive total value locked (TVL) in the last few months. The TVL peaked in September surpassing over $260 million, probably due to FIFA’s NFT platform plans.

Although NFT trading volumes have plunged, FIFA’s plans to roll out an NFT platform indicate NFTs aren’t dead and the macro trend for Web3 and NFTs is unbroken. Apple’s entry into the NFT space also supports this notion. The tech giant recently allowed app developers to sell NFTs in-app. However, Apple will obtain a 30% cut from all NFT sales. This has sparked mixed reactions in Web3 communities, with some people bashing it and others seeing it as an opportunity to boost NFT adoption. For instance, Epic Games CEO Tim Sweeny criticised this move with a tweet saying: “Now Apple is killing all NFT app businesses it can’t tax, crushing another nascent technology that could rival its grotesquely overpriced in-app payment service. Apple must be stopped.”

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