Arbitrum’s AIP-1 proposal to be split after community backlash

From the Editor’s Desk

Dear Reader,

“Two steps forward, one step back” is arguably an accurate characterization of the cryptocurrency industry at the moment, particularly in the U.S., where recent collapses of crypto-focused banks and a series of regulatory actions have left the industry with much to ponder.

We’ll get to the two steps forward momentarily, but first let’s look at the step back. In the past few months, U.S. authorities have shut down access to crypto services, targeted banks providing services to the crypto industry, filed charges against crypto exchanges, sued celebrities for endorsing cryptocurrencies, taken legal action against Binance, the world’s biggest exchange, and made fresh accusations against disgraced FTX founder Sam Bankman-Fried.

Some might say these companies and individuals had it coming, given the disregard shown in certain parts of the sector for laws and regulations, and the dire consequences many investors have suffered as a result. Others, however, note the chilling effect this clampdown appears to be having on the industry stateside, and the Securities and Exchange Commission, in particular, is gaining a reputation for hostility to crypto.

Whether such a reputation is deserved or not will become clearer during the remainder of the year, during which we hope to see the regulatory scales tip in favor of enablement rather than only enforcement. However, it’s apparent that U.S. authorities’ actions may be having at least one unintended consequence: two steps forward for crypto businesses looking to take advantage of other jurisdictions’ more outwardly friendly stance on the industry.

One place that seems to be benefiting is our own back yard, Hong Kong, where, following the unveiling of a planned regulatory framework for digital assets and amid a push to make the city a crypto hub, digital asset companies from around the world are planning to set up. Even Chinese state-owned banks are getting in on the action.

Of course, the U.S. won’t cease to matter for the crypto industry, and it’s unlikely that Chinese authorities will extend the scope of their Hong Kong crypto experiment within the country’s borders, but Beijing’s blessing of Hong Kong’s plans, and its own ambitions in the Web3 space more broadly, are getting attention.

That, if nothing else, ought to spur U.S. authorities into action when it comes to honing a regulatory environment that fosters the industry’s growth and development. The industry has suffered enough backward steps. Regulators there and elsewhere need to ensure it can keep moving forward.

Until the next time,

Angie Lau,
Founder and Editor-in-Chief
Forkast

Forkast.Insights | What does it mean?

Governance is hard, and in crypto it’s particularly hard. That’s because foundations are trying to deliver on roadmaps, but communities want the ability to take projects in their own direction. Arbitrum has now experienced that first-hand, and it’s not the first foundation to struggle. 

Ethereum Classic and Bitcoin Cash were the result of governance clashes between core community members, and most projects have suffered such issues in one form or another. Although DAOs were designed to organize communities and open up decision-making, research suggests the reality is less democratized. 

When Chainalysis analyzed the workings of 10 major DAO projects, it found on average that less than 1% of all holders have 90% of voting power. The same report found that as few as one in 10,000 governance token holders had enough tokens to create a proposal. When it came to passing a proposal, only one in 30,000 holders had enough tokens to do so. 

In Arbitrum’s case, the company came up against a community that had been airdropped more than 1 billion ARB tokens across more than 550,000 digital wallets little more than a few weeks ago. The community’s resistance to the proposal was focused on the foundation’s decision to flood the market with vast sums of tokens to raise funds, upsetting the price. 

Arbitrum has agreed to try again, but the damage may already have been done.  

Forkast.Insights | What does it mean?

In a stubborn bear market, blockchains are fighting to lure projects away from rivals, and projects are relocating to what they perceive to be greener blockchain shores. DeGods and its sister project y00ts’ departure from Solana to Ethereum is part of a growing number of such moves. 

Doodles, a blue-chip NFT project, moved from Ethereum to Flow, and some bored Ape holders have been migrating their NFTs from Ethereum to Bitcoin’s burgeoning Ordinals NFT format. Yuga Labs meanwhile, has released an entire collection on Ordinals, ignoring Ethereum in the process.

While many see Polygon’s offer of a US$3 million grant as the key reason for the project’s departure, it appears that the long-term commercial opportunities of being on Ethereum and Polygon were what lured the projects to leave Solana, a network that has become increasingly plagued by difficulties. 

In an interview, DeLabs founder Rohun “Frank” Vora said the offer of being able to work more closely with corporate giants such as Reddit, Disney and Nike was more compelling than Polygon’s cash incentives to y00ts alone. With user numbers flat, NFT projects are eyeing partnerships beyond crypto as a path to grow. 

As Solana struggles to find its feet, this could be the start of a broader trend of projects aligning with healthier ecosystems to ride out the bear market.  

Forkast.Insights | What does it mean?

Although Xuan Channeng was careful not to point the finger too directly at the United States, his words reflected broader tensions between Washington and Beijing. 

Xuan said the lack of regulation in the crypto industry was part of the reason for the implosion of FTX and the many episodes of wrongdoing endured by investors. He also blamed the ultra-loose monetary policies that Western central banks had adopted prior to their more recent hawkish turn for devaluing currencies and fueling the rapid growth of digital assets. 

His solution, and indeed Beijing’s, is regulation and state oversight. This perspective was echoed by Julia Leung, head of Hong Kong’s Securities and Futures Commission. Yet both Leung and Xuan appeared optimistic about the role stablecoins could play in the future digital economy, mirroring a broader change of tune on the stablecoin segment. Recent sightings of Chinese officials reportedly mingling at Hong Kong crypto events, and Chinese state-owned banks offering services to crypto firms in the city seem to confirm that shift.

While authorities in the U.S. appear to have gone lukewarm on digital assets, China is taking the opportunity to offer an alternative vision, one of clarity and constant surveillance. Hong Kong’s proposed regulatory framework for the industry offers similar clarity, albeit with rather less intrusive surveillance. It’s a model that clearly appeals to many companies in the space, hinting at a potential shift in the sector’s center of gravity.