In this issue
- Coinbase: Demanding direction
- PEPE: Leapfrog effect
- e-CNY: Digital payday
From the Editor’s Desk
Hello from Austin this week, at Consensus 2023, where significant conversations are taking place. And in the dialogue, news this week that Coinbase is suing the U.S. Securities and Exchange Commission (SEC) is being cheered by many in the crypto community.
Apart from the reflexive support that the U.S. exchange giant is gaining as an underdog in a scrap with a regulator that’s viewed in crypto circles these days less as part of the solution and more as part of the problem, Coinbase’s demand for what it describes as regulatory clarity expresses a sentiment shared widely in the industry.
The SEC’s recent barrage of lawsuits and other moves against crypto companies has, to many insiders, acquired the characteristics of a punitive crusade rather than a coordinated approach to regulating a young industry that would foster its growth and success.
It’s noteworthy that Coinbase’s appeal for increased regulatory certainty pre-dates the SEC’s recent enforcement onslaught against the sector, harking back to a petition that the company filed nine months ago in which it argued that the U.S. market for digital asset securities was dysfunctional due to the lack of clarity in regulation. Coinbase’s petition asked the SEC to propose and adopt rules for the digital asset industry and ― crucially ― made the point that digital assets being traded in the current environment bore the characteristics of commodities, not securities.
That distinction is a critical one, particularly given that many of the SEC’s recent actions against crypto companies have been predicated on the definition of digital assets as securities. It’s also a pivotal definitional issue on which the SEC and the Commodity Futures Trading Commission have been unable to agree for years, and on which SEC Chair Gary Gensler memorably flubbed in relation to Ethereum in a congressional hearing just last week.
Coinbase’s demand for clarity deserves to be heard ― if for no other reason than the fact that the SEC has a duty to respond that it appears to have neglected since last July’s petition. And, let’s be honest. It would also be satisfying to see the machinery of justice in action as an energetic young industry gives a curmudgeonly old regulator a taste of its own medicine.
As the European Parliament approved its Markets in Crypto Assets regulatory framework last week, putting Europe at the forefront of digital asset regulation, it behooves the U.S. to move with more alacrity if it’s to keep up.
Until the next time,
Founder and Editor-in-Chief
1. Coinbase pushes back
Coinbase, the largest cryptocurrency exchange in the U.S., has sued the Securities and Exchange Commission, demanding that the regulator be required by a court to publicly respond to a petition it filed in July 2022 in which it asked for clearer crypto regulation.
- Coinbase filed its action under the Administrative Procedure Act, which requires the SEC to respond to its July 2022 petition within a reasonable period.
- Coinbase’s July 2022 petition asked that the SEC propose and adopt clearer regulatory guidelines for the cryptocurrency industry in the U.S. through its formal rulemaking process. More than 1,700 entities and individuals submitted comments on the petition, echoing its request for regulatory clarity, according to a Coinbase blog post by the company’s chief legal officer, Paul Grewal.
- Grewal wrote in his blog that Coinbase was not asking the court to tell the SEC how to respond. “We are simply requesting that the court order the SEC to respond at all, which they are legally obligated to do,” he said.
- The SEC did not offer a specific public response to the petition last year, according to Coinbase. However, in recent months, the regulator has doubled down on enforcement actions and warnings to cryptocurrency exchanges, including Bittrex, Gemini and Coinbase.
- Coinbase asked the SEC in its filing to formally clarify “which digital assets must be registered as securities or how the registration and other requirements designed decades ago for traditional securities apply to digital assets.”
- On the same day Coinbase filed its lawsuit, the exchange also launched a commemorative non-fungible token (NFT) collection named “Stand with Crypto,” which can be minted for free as “a symbol of unity for the crypto community seeking sensible crypto policy.” More than 43,500 NFTs have been minted so far, including one by Coinbase Chief Executive Brian Armstrong.
- Coinbase’s lawsuit against the SEC comes just over a month after the exchange received a Wells notice from the regulator, warning that the agency expected to bring enforcement actions against the exchange for possible violations of securities laws.
- During a congressional hearing last month, SEC Chair Gensler said: “regulations actually already exist” for crypto to be managed effectively under securities laws. But last week at a different congressional hearing, Gensler dodged the question of whether Ether was a commodity or a security.
- The SEC last week sued crypto exchange Bittrex for alleged violations of securities laws, and listed six cryptocurrencies ― Dash, Algorand, OMG, Monolith, Naga and IHTReal Estate Protocol ― as crypto asset securities in a civil complaint.
Forkast.Insights | What does it mean?
The SEC’s hard line against cryptocurrencies has ruffled feathers. But those feathers needed ruffling because the crypto industry hasn’t done enough to show regulators that it’s capable of regulating itself.
A case in point is that Coinbase has been embroiled in a number of legal cases since its 2012 founding. In 2022 alone, it was sued for selling unregistered securities, copyright infringement (on more than one occasion), theft and insider trading.
Within the industry, Coinbase likely has done more than most to adhere to the rules, but the SEC is clearly not satisfied. Money laundering, theft and scams involving crypto reached record levels last year, leading to a tougher stance among regulatory officials in Washington.
The White House sent a letter to Congress earlier this year urging lawmakers to make sure cryptocurrencies would not undermine the stability of the broader financial system, and calling on them to protect investors and hold bad actors accountable. Although the behavior of crypto exchanges is by no means the only reason for that letter, in the decentralized world of crypto, centralized operations such as Coinbase represent an obvious first point of contact.
Coinbase’s legal case against the SEC is little more than a plea to force the regulator to share its thinking. While it’s uncertain whether a judge will side with the company, it’s certain that crypto’s Wild West days are numbered.
PEPE, a memecoin launched on April 16 with no presales, reached a market cap of more than US$99 million within nine days, catapulting memecoins back into the limelight despite the bearish mood that has gripped the cryptocurrency market since late 2021. But after hitting an all-time high last week, PEPE prices have since fallen by more than 40%.
- The price of PEPE was holding steady in the 24 hours before press time, but it is down by 40.9% since reaching its all-time high of US$0.0000004036 on April 20, just four days after its launch, according to data from CoinMarketCap.
- PEPE, whose founders are anonymous, is an Ethereum-native ERC-20 memecoin based on Pepe the Frog, a cartoon character created by cartoonist Matt Furie in 2005. Pepe became a popular internet meme known as the “sad frog meme” and was co-opted by far-right political agitators in the run-up to the election of U.S. President Donald Trump. The memecoin itself is not authorized by Furie and could be liable for potential copyright infringement issues.
- Memecoins are cryptocurrencies based on jokes or memes that became popular with retail investors as tokens such as Dogecoin and the Shiba Inu token grew into multibillion-dollar assets.
- PEPE’s popularity may be behind a recent surge in Ethereum gas fees. The Ethereum average gas price reached 81.94 Gwei on April 19, its highest level since March 11. It more than doubled from 30.46 Gwei on April 16, when the memecoin went live, according to data from Etherscan.io. The average gas price at press time was 38 Gwei.
- PEPE has inspired a wave of meme-inspired tokens. At press time, four of the top five meme tokens by percentage price increase over the past seven days were based on Pepe the Frog, according to CoinMarketCap. One memecoin named “Good Gensler” (GENSLR), lampoons Securities and Exchange Commission Gary Gensler, who has recently been at the center of conflict over U.S. crypto regulations.
- The popularity of memecoins has also generated attention among hackers. SeaLaunch, an on-chain data services provider, reported on Monday an Ethereum wallet named “jaredfromsubway.eth” that was said to have paid 285 ETH in gas fees that day ― about 5% of all Ethereum gas fees at the time ― to launch “sandwich attacks” amid the memecoin frenzy.
- A sandwich attack is a malicious blockchain attack that traps a user’s transaction between two other transactions to generate a profit. The attacker front-runs the victim’s trade by purchasing the same asset and selling it to the victim at a higher price, usually with the assistance of bots.
- PEPE announced its first token airdrop on Monday to celebrate reaching 50,000 holders. But according to data from Etherscan, PEPE holders totaled only around 45,700 at press time. PEPE’s developers aim to list the memecoin on major centralized crypto exchanges when it reaches 100,000 holders, according to the token’s website.
Forkast.Insights | What does it mean?
History doesn’t repeat itself, but it rhymes. U.S. humorist Mark Twain’s adage about the peculiarities of time is a useful lens through which to explore PEPE’s sudden rise.
The crypto market’s fondness for memecoins ― projects with no discernible value ― has ebbed and flowed amid broader market forces, but often in more volatile ways. Take Dogecoin as an example. During the previous crypto winter in 2018, it lost 88.5% of its value from peak to trough. But during the bull market of 2021, it outperformed nearly everything else by quite some margin. Its market cap was similarly impressive. It hovered around US$20 million at the beginning of 2017, reaching a high of US$85 billion in May 2021.
The lure of being able to time such booms and busts — and make a lot of money quickly, before your holdings go bust — is part of memecoins’ enduring appeal. PEPE is simply another example of this buzz. But what distinguishes PEPE and memecoins in general from historical rhyme is the novel phenomenon of which they are an expression.
Memecoins form part of an unusual sub-genre known as financial entertainment. The rise of FinTok on the social media network TikTok and the endless supply of memes about market losses on the sub-Reddit wallstreetbets points to the emergence of a generation of younger investors who see winning and losing as an expression of community.
“Dogecoin is best thought of as a cultural product, rather than a financial asset,” writes Jason Potts, a professor of economics at Australia’s RMIT University. “The reality is few cryptocurrency users hold it as a serious investment or to use in regular transactions. Instead, to own Dogecoin is to participate in a culture.”
PEPE and the rest of the memecoin fraternity are not rhyming, but writing their own history as they go along.
3. Payday payoff
Government employees in Changshu, a city in China’s Jiangsu Province, will receive their salaries in digital yuan from next month as China’s central bank digital currency (CBDC) progresses toward day-to-day use, according to a report by Communist Party mouthpiece People’s Daily.
- The move will affect employees of government agencies, state-owned enterprises and public institutions such as state-run schools, hospitals and media outlets.
- Digital yuan — also known as e-CNY — has been trialed in at least 26 Chinese provinces and cities. The CBDC is also now integrated into Alipay and WeChat Pay, China’s two dominant third-party payment platforms, and can be used for payment on at least 105 mobile apps, covering services from online shopping to buying gasoline and natural gas.
- Changshu is a city with a population of more than 1.5 million that is under the jurisdiction of Suzhou, the capital of Jiangsu Province. Changshu was among the first areas in which the digital yuan was trialed, and authorities there started to issue digital yuan subsidies to state employees last October.
- Changshu is not the first Chinese city to pay salaries in digital yuan. Last June, Taicang, another city under Suzhou’s jurisdiction, started to pay public employees in digital yuan, the first time it had been done in China, according to a local government report.
- In a plan published in February for digital yuan testing, Jiangsu Province said the government would expand the use of the CBDC in public expenditures and payments for services, and form a “relatively complete digital yuan ecosystem” by the end of 2025.
- Chinese authorities have embarked upon a series of initiatives to promote the country’s CBDC. Shenzhen, a southern city abutting Hong Kong with a population of more than 17 million, saw over 28 million digital yuan wallets set up by the end of 2022, and it gave out more than 570 million yuan (US$82.58 million) of digital yuan in consumer subsidies last year, according to a local media report.
- The digital yuan still has a ways to go before mass adoption in China. According to People’s Daily, the value of digital yuan in circulation totaled 13.61 billion yuan by the end of 2022, representing around 0.13% of the yuan in circulation at the time. The response to an attempt by Shenzhen to promote China’s CBDC to visitors from Hong Kong last month was also less enthusiastic than had been expected.
Forkast.Insights | What does it mean?
Paying salaries in e-CNY may be one of the most efficient ways to distribute China’s new digital currency and promote its use. However, that doesn’t mean the public sector employees who receive it will be able to spend it as they please, as e-CNY payments are not yet widely accepted in everyday life in the country.
Reuters reported this week that a doctor working at a hospital in Suzhou almost always immediately converted her e-CNY salary into traditional yuan because it was difficult to find merchants that accepted the CBDC.
China’s central bank, however, isn’t necessarily in a rush to push mass adoption of the digital yuan, experts told Forkast earlier this year. They suggested that the People’s Bank of China should work even more closely with e-payment giants Alipay and WeChat Pay to create more possibilities for spending e-CNY over time.
This week, WeChat announced that it had started to support e-CNY payments on its in-app short-video platform and mini-programs, where many influencers and merchants tout their products.
The Chinese tech world is known for cut-throat competition and fast-paced development. Despite Beijing’s worries about Chinese tech companies’ size and power that led to clampdowns on the industry in 2020, the government has realized that it would be to its own benefit to work with tech giants when it comes to popularizing the e-CNY.
Although the digital yuan is still far from attaining mass adoption, China is at the forefront of CBDC development for an economy of its size. In the meanwhile, the U.S. is still debating whether to pursue a CBDC amid persistent concerns about privacy, and the House Financial Services Committee last week discussed a draft bill that would direct the Federal Reserve Board to study the impact of a digital dollar.
It likely will only be a matter of time before China successfully achieves widespread adoption of e-CNY domestically. The question that remains is, how soon will it be when China’s trading partners will be expected to accept the e-CNY for settlement in lieu of the U.S. dollar?