The Year in Crypto, 2022 Part 2: Ethereum Merges, Feds Sanction Tornado Cash, FTX Collapses
- EU Regulation
- December 29, 2022
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It’s a weird world when a developer is arrested for writing code, while an alleged fraudster who allegedly commingled $8 billion in user funds enjoys the holidays with his family. But that’s where the crypto industry stands at the close of 2022.
The second half of 2022 was a rocky time in this industry, to say the least, with most optimism eviscerated by the collapse of multiple crypto firms, Coinbase’s stock hitting new low after new low, the Grayscale Bitcoin Trust de-pegging by nearly 50% from its underlying asset, and a whole lot more crypto contagion.
But it wasn’t all bad.
Ethereum executed one of its most highly-anticipated upgrades since the network’s launch. Crypto is taking center stage in regulatory discussions in Europe and the United Kingdom. And major brands and corporations keep announcing news that show mainstream adoption. Here’s our recap of July through December in cryptoland in 2022.
Ethereum completes the merge
Ethereum, the market’s second-largest cryptocurrency by market capitalization, successfully transitioned from its proof-of-work (PoW) consensus mechanism to proof-of-stake (PoS) mechanism on August 15, with the landmark update bringing major changes to the network, including a reported 99.95% reduction in energy consumption and a 90% cut in ETH issuance.
The upgrade, also known as the merge, has been years in the making and suffered from several delays until the Ethereum Foundation committed to a 2022 launch.
“Proof-of-Stake has been a dream for the Ethereum ecosystem since pretty much the beginning,” said Buterin during the Ethereum Foundation’s viewing party, which was simultaneously viewed by more than 40,000 people.
The upgrade has forever changed both how ETH is created and how transactions on the Ethereum network are validated. Up until the moment of the merge, ETH was generated by mining, an energy-intensive process where mining machines directed heaps of computer power to solve complex mathematical puzzles.
Since the merge, which some described as “the most important event in crypto history,” the network relies on validators staking ETH to achieve consensus and secure the network.
3AC, Voyager, and Celsius file for bankruptcy
As the crypto contagion triggered by the collapse of the Terra ecosystem spread further, three big companies fell within a two-week period at the beginning of July.
The Singapore-based crypto investment firm Three Arrows Capital, also known as 3AC, was the first to file for Chapter 15 bankruptcy on July 2. The hedge fund, founded in 2012 and managed an estimated $10 billion, had positions in many of crypto’s largest projects and companies, including Bitcoin, Ethereum, Solana, Axie Infinity, and BlockFi.
Shortly before the bankruptcy, 3AC co-founders Kyle Davies and Su Zhu confirmed they took a $200 million loss from their UST and LUNA positions. Court documents published later in July revealed that 3AC owed a whopping $3.5 billion to 27 different companies, including Blockchain.com, Voyager Digital, and Genesis Global Trading.
Voyager Digital, which earlier revealed it had a $661 million exposure to 3AC, became the next high-profile crypto firm to file for bankruptcy on July 6, followed by crypto lending platform Celsius, which officially announced its Chapter 11 filing on July 14.
The filing showed Celsius made “certain poor asset deployment decisions” as the company grew faster than it anticipated, leaving a $1.2 billion hole in its balance sheet.
Celsius’ CEO Alex Mashinsky resigned in September, saying that he’ll continue “working to help the community unite behind a plan that will provide the best outcome for all creditors.”
SEC claims Coinbase lists unregistered securities
In a new court filing submitted on July 21, the U.S. Securities and Exchange Commission (SEC) claimed that at least nine cryptocurrencies listed on Coinbase are unregistered securities.
According to the Commission, those tokens contain the “hallmarks of the definition of a security,” including continuing representations by issuers and their management teams regarding the investment value of the tokens, the managerial efforts that contribute to the tokens’ value, and the availability of secondary markets for trading the tokens.
The nine assets in question were AMP (AMP), Rally (RLY), DerivaDEX (DDX), XYO (XYO), Rari Governance Token (RGT), LCX (LCX), Powerledger (POWR), DFX Finance (DFX), and Kromatika (KROM).
While certain rival exchanges, such as Binance’s U.S. subsidiary, were quick to delist some of those assets to avoid similar issues with the financial regulator, Coinbase—despite reports of a SEC probe—denied any wrongdoing.
“We are confident that our rigorous diligence process―a process the SEC has already reviewed―keeps securities off our platform, and we look forward to engaging with the SEC on the matter,” the company’s chief legal officer Paul Grewal said in response to the SEC’s probe.
Shortly before that, SEC chair Gary Gensler argued that cryptocurrency exchanges should be regulated in the same manner as traditional securities exchanges.
Feds sanction Ethereum mixer Tornado Cash
In one of the most high-profile cases of the year, the U.S. Treasury Department on August 8 announced sanctions against Tornado Cash, a privacy-focused Ethereum mixing service that helps users obfuscate transactions.
Citing the illicit use of the tumbler by money launderers, including Lazarus Group, a North Korean state-sponsored hacking group, the body added the Tornado Cash website and a long list of Ethereum addresses to its Specially Designated Nationals list, banning American citizens from using the tool or transacting with these addresses.
The source code for the mixer was also removed from Github, followed by a Tornado Cash suspected developer’s arrest in the Netherlands.
The crypto community erupted following the news, with privacy advocates decrying the move as a declaration of war on those who simply write code. Ethereum co-founder Vitalik Buterin launched a stinging criticism of the move, identifying himself as someone who used the service to make donations to Ukraine’s cause.
Still, Dutch officials insisted at the time that it “may be punishable” if a developer writes code “for the sole purpose of committing criminal acts.”
SEC claims all Ethereum transactions fall under US jurisdiction
On September 19, the SEC filed charges against crypto influencer Ian Balina, alleging the Uganda-born entrepreneur failed to file a registration statement for his offering and sale of Sparkster’s SPRK tokens in July 2018, while no exemption from registration was applicable.
Balina also allegedly failed to disclose the compensation he received while promoting Sparkster’s initial coin offering (ICO) on social media, according to the SEC.
However, the devil is in the details. In a bold move buried in the lawsuit’s 69th paragraph, the SEC also claimed it had the right to sue Balina not only because his case concerns transactions made in the United States but also because, according to the Commission, the entire Ethereum network falls under the U.S. government’s purview.
According to the SEC, the ETH sent to Balina was “validated by a network of nodes on the Ethereum blockchain, which are clustered more densely in the United States than in any other country.”
Which, in the SEC’s logic, means that “as a result, those transactions took place in the United States.”
Tesla dumps 75% of its Bitcoin holdings
Tesla made headlines in February 2021, when it plowed $1.5 billion into Bitcoin after changing its investment policy in January to allow the firm to hold crypto.
In July 2022, the electric car manufacturer founded by Elon Musk revealed it sold 75% of its BTC holdings, worth approximately $936 million, with the shareholder letter stating that Bitcoin impairment had a negative impact on the firm’s profitability during the second quarter, when it posted $2.5 billion in operating income.
Despite dumping most of its Bitcoin, Tesla was still holding $222 million worth of “digital assets” on its balance sheet as of the end of June.
Kraken CEO Jesse Powell steps down
On September 21, industry veteran Jesse Powell announced he’d be stepping down as CEO of Kraken, the popular crypto exchange.
“I look forward to spending more of my time on the company’s products, user experience and broader industry advocacy,” said Powell, who founded Kraken in 2011.
Powell, 42, who is being succeeded by Chief Operating Officer Dave Ripley, 45, will become chairman of the board. The transition is expected to take place over the next few months once a new COO is selected.
COIN keeps going lower
Amid the bear market, Coinbase’s stock has hit its lowest price since the company went public last year, with COIN falling 87.04% to $35.00, compared to $268.15 on December 21.
The stock hit a new low roughly a week later, dropping down to $32.40.
Coinbase’s troubles are a result of a downturn in the broader macroeconomic environment, which has brought the crypto industry into a biting winter. Naturally, revenues at the firm have tumbled. The company reported net revenue of $576 million for the third quarter of 2022, a 28% decline from $803 million in the previous quarter.
If there is one person bullish on Coinbase, though, that would be Ark Invest’s chief Cathie Wood, who’s been buying the firm’s shares throughout the year.
The great Grayscale Bitcoin discount
Grayscale’s Bitcoin Trust (GBTC)—a financial vehicle that lets investors gain exposure to Bitcoin without needing to buy and hold the asset—has seen dismal performance as well, with the discount from the underlying Bitcoin value reaching almost 50% by the end of December.
Grayscale’s attempts to convert GBTC into a Bitcoin ETF, which the firm believes “is the best long-term product structure for GBTC and its shareholders,” have been blocked by the Securities and Exchange Commission (SEC), with the firm even suing the regulator over its refusal to greenlight the move.
The ongoing crisis has also put crypto broker Genesis on liquidity watch, with many eyes now focusing on Barry Silbert’s Digital Currency Group, which owns both Grayscale and Genesis.
New York passes moratorium on Bitcoin mining
On November 23, New York Governor Kathy Hochul signed a controversial two-year moratorium on new permits for proof-of-work cryptocurrency mining operators that rely on carbon-based fuel to power their activities.
“The law will prohibit Environmental Conservation Law permits from being issued for two years to proof-of-work cryptocurrency mining operations that are operated through electric generating facilities that use a carbon-based fuel,” reads a memo for the bill.
Approved by the New York State Assembly in April, Senate Bill S6486D was passed by the New York State Senate in June this year.
The new legislation would still allow the issuance of permits for electric energy facilities that use alternatives to carbon-based fuel, such as hydropower.
The measure has been fiercely criticized by the crypto industry since it was first proposed in May 2021. It also earned ire of business groups concerned that the new legislation would curb the industry’s growth in the Empire State.
The proof-of-work mechanism underpins Bitcoin (BTC) and several other popular cryptocurrencies, including Dogecoin (DOGE), Litecoin (LTC), Zcash (ZEC), Monero (XMR), and Ethereum Classic (ETC).
Ethereum (ETH), the industry’s second-largest cryptocurrency, used proof of work until its transition earlier this year.
Tether eliminates commercial paper from reserves
Tether, the issuer of USDT, has been repeatedly criticized for either failing to provide adequate attestations for the reserves backing the stablecoin or for failing to have such attestations executed by a Big Four accounting firm.
The company moved to help address that concern on October 13, announcing it had completely eliminated commercial paper from its reserves, replacing those investments with U.S. Treasury Bills.
Commercial paper is unsecured, short-term debt issued by a corporation. Tether had previously said it would reduce its commercial paper holdings and has gradually done so this year.
Earlier, rumors circulated that a portion of Tether’s commercial paper portfolio was “85% backed by Chinese or Asian commercial papers and being traded at a 30% discount.”
But Tether denied this, claiming the rumors were fabricated to “induce further panic in order to generate additional profits from an already stressed market.”
Previously, Tether claimed all its tokens were backed one-to-one by dollars stored in a bank. However, after a $18.5 million settlement with the New York attorney general, the company revealed it relied on a range of other assets, including commercial paper, to support its token.
UK includes crypto in new reform package
On December 9, the UK government announced a package of more than 30 reforms to financial regulations, including the extension of tax breaks for investment managers to cover crypto assets.
Dubbed the “Edinburgh Reforms,” the measures are designed to replace EU regulation covering areas such as disclosure for financial products and include easing capital rules for smaller banks.
More specifically, the measures will facilitate the inclusion of crypto in the portfolios of overseas funds managed in Great Britain without creating a risk of UK taxation, with the changes expected to be implemented thorough HM Revenue & Customs regulations before the end of the year.
The UK government is also planning to bring forward a consultation on the case for a central bank digital currency (CBDC), with the Bank of England releasing a paper that will set out technology considerations informing the potential build of a digital pound.
EU passes landmark crypto bill
The beginning of October saw European Union lawmakers sign off on the Markets in Crypto Assets Regulation (MiCA)—the landmark legislation aimed at regulating the digital asset space within the union.
The regulation, in its current form, will require anyone seeking to issue cryptocurrencies to publish a “crypto-asset white paper” containing information about their project.
It also asks stablecoin companies to meet capital requirements: entities will be restricted on how many tokens they can issue if they are not denominated in euros or other currencies used by EU member states.
On top of that, the MiCA looks to regulate crypto mining, asking big “crypto-assets service providers” to disclose their energy consumption.
The legal text is now in the European Parliament, where, subject to approval, it will likely be published in the Official Journal of the European Union early next year, with the rules set to come into force in 2024.
FTX goes down in flames
The sudden collapse of FTX, once a top-five exchange, along with the rest of Sam Bankman-Fried’s empire, sent waves of shock across the industry, with consequences likely to be felt for months, if not years.
The devastating effect of the FTX meltdown not only crashed the markets, sending the price of Bitcoin below $17,000 as of December 21, it also resulted in still-ongoing crypto contagion.
More companies going bust, hefty job cuts, the community demanding exchanges to share their proof of reserves, and investors putting deals on hold—all that has been the talk of the town for the past two months, overshadowing any other developments in the industry, however significant they might have been.
As for SBF himself, after his arrest in the Bahamas, the disgraced FTX founder is now on American soil, facing criminal charges from the Department of Justice, as well as from the SEC and the CFTC.