In this Newsletter
DeFi Regulation
Non-Fungible Tokens
Payments and Commerce
Digital Lending
DeFi Regulation
The Commodity Futures Trading Commission (CFTC) has fined decentralized betting platform Polymarket $1.4 million for facilitating illegal trading and wagers, according to Bloomberg. Polymarket offers an array of options to bet on outcomes across music, politics, finance, and sports, allowing users to make yes or no predictions on questions like “Will annual inflation in the USA be 7.0 percent or more in December 2021?” Polymarket differs from traditional betting platforms by utilizing a decentralized model that doesn’t take custody of any bettor’s stablecoins or extract any profit from the betting options it aggregates. Polymarket also utilizes Ethereum’s smart contract capabilities to automate settlement with the help of oracles, which bring off-chain data onto the blockchain. This is an attractive feature for bettors who do not trust centralized platforms to properly settle bets, as smart contracts are often marketed as meaningful mechanisms to avoid human intervention.
However, this model could now be posing problems. After several months of investigation, the CFTC has classified Polymarket’s offerings as unregistered binary options that failed to comply with the Commodity Exchange Act, according to Coindesk. In addition to instituting a fine, the CFTC has ordered Polymarket to close all of its existing markets and offer refunds to users, but it did not completely shutter the platform’s ability to operate in the future. The CFTC’s decision seemingly follows Commissioner Dan Berkovitz’s push toward banning or disrupting decentralized finance (DeFi) derivatives markets. As Coindesk reported, Berkovitz targeted DeFi in a speech at the Asset Management Derivatives Forum in June 2021, stating that new technologies like blockchains and cryptocurrencies didn’t exempt markets from abiding by the Commodity Exchange Act. As Securities and Exchange Commission Chairman Gary Gensler continues to express similar sentiments, the message from financial authorities is clear: DeFi will not go unregulated, and financial conduct rules will still exist in the digital assets ecosystem.
Non-Fungible Tokens
After announcing a new capital raise of about $300 million, leading NFT marketplace OpenSea is now reported to be valued at $13.3 billion, according to The New York Times. OpenSea’s lofty valuation further confirms the immense private interest in NFT projects and its sizable lead in the space, given that most of its competitors have been valued at less than a fourth of its own valuation. However, OpenSea has impressive figures to justify its new valuation, averaging daily transaction volumes of almost $195 million, with 57,000 unique users. According to TechCrunch, OpenSea’s last funding round valued the company at a much tamer $1.5 billion, but in the six months since the Series B funding led by Andreessen Horowitz, the platform has seen its transaction volumes grow 600 percent.
Amidst its Series C funding round, OpenSea has found itself firmly at the center of discussions around wallet security on the blockchain. When a user was scammed out of his Bored Ape Yacht Club NFT collection (valued at several million dollars), OpenSea jumped into action and restricted trading on the stolen apes but ultimately couldn’t return the assets to their rightful owner, according to Coindesk. This is the one of the major flaws with the shift toward a blockchain-based economy without much oversight; once your assets are gone, they truly are gone. There is no overarching consumer protection agency like the Consumer Financial Protection Bureau or centralized corporation that can exert unilateral power to restore assets.
On the surface level, it seems as if OpenSea handled the situation as best as it could given its capabilities. However, some NFT enthusiasts have responded negatively to OpenSea’s action to halt trading on the assets, as they claim the move shows how the marketplace is not decentralized at its core. On its YCombinator page, OpenSea describes itself as “the largest decentralized marketplace for NFTs,” but as The Generalist notes, the company takes a 2.5 percent cut on all transactions, in addition to the significant gas fees users already have to pay for network facilitation. A truly decentralized marketplace wouldn’t feature a profit-taking central entity with the power to intervene between buyers and sellers, which has influenced competitors like Rarible to charge zero fees and issue governance tokens that place the platform’s control in the hands of the community.
Payments and Commerce
As its competitors continue to fund new cryptocurrency projects, payments giant PayPal has begun exploring issuance of “PayPal Coin,” a stablecoin pegged to the US dollar, according to Bloomberg. It’s no secret Silicon Valley firms are starting to feel the pressure to foray into the digital assets space as more economic opportunities are being built onto blockchains. Visa now settles transactions using stablecoins on the back end, Meta is rolling out its own digital currency pegged to international currencies, Block is establishing dedicated DeFi teams, and it appears PayPal is the next big company hungry for this digital innovation.
News of the company’s stablecoin project comes as the Internal Revenue Service has updated tax reporting guidelines for peer-to-peer (P2P) payments platforms like Venmo, which is owned and operated by PayPal. According to CNET, individuals and businesses will now be required to report any payments over $600 for a good or service, much lower than the previous threshold of $20,000. While this isn’t a tax change, it does add a degree of accountability and transparency to the payments space, as P2P platforms may now have to request tax information, and small businesses will have to be more diligent about documenting transactions.
In international news, end-to-end payments platform CHAI has raised $45 million in its most recent funding round, with plans to expand beyond South Korea, according to Entrepreneur. As I wrote last July, CHAI is powered by the Terra blockchain and its native stablecoin UST on the back end. In an interview with the Tokenist, Terraform Labs Founder Do Kwon notes that the payments app has been successful because of its ability to offer both fast settlement in stablecoins and over 20 payment options at the point of sale, providing merchants and customers with a more seamless transaction experience.
Digital commerce company Rezolve has merged with special purpose acquisition company Armada Acquisition Corporation to go public at an estimated valuation of $2 billion, according to The Wall Street Journal. Rezolve is bridging the divide between physical advertisements and the rising dominance of e-commerce by leveraging scannable marketing materials that automatically direct customers to merchants’ offerings. For example, a merchant using Rezolve’s mobile app infrastructure could redirect a customer’s photo of a shoe advertisement to an opportunity to purchase the shoes in just one swipe, creating a nearly frictionless transition from advertising to sales.
Digital Lending
The boom in digital lending during the pandemic is beginning to have serious implications for developing economies as default rates rise and borrowers experience serious consequences for missing payments. According to Bloomberg, the Reserve Bank of India has found that almost half of the 1,100 digital lenders in India have been operating illegally, leading to coordination with Google to shut down exploitative lenders that often use abusive collection tactics. Shadow lenders account for over 30 percent of total distributed loans in India, demonstrating the severe risks that unlicensed lenders pose for lower-income borrowers. Much of the demand for such loans comes from poor access to formal credit in India; many shadow digital lenders don’t require credit checks but instead charge higher interest rates with smaller repayment windows. For many, these lenders are unfortunately the most convenient way to get a much-needed cash infusion, but a lot of these so-called “alternative lending” schemes become violent and dangerous in the case of default.