The Weekly Wrap – SEC investigation of Circle, Axie Infinity staking and exchange launch

1. SEC investigates USDC backer Circle

The Facts:

• Circle, one of the two companies behind stablecoin USDC, faces an investigation by the U.S. Securities and Exchange Commission.
• While it is not clear as to what the investigation relates to, SEC Chairman Gary Gensler has previously expressed the view that stablecoins “may well be securities”.
• Circle is preparing to go public through a special purpose acquisition company (SPAC), valuing the company at $4.5b.

Why it’s important:

• With USDC being the second largest stablecoin by circulating supply, the outcome of the investigation could spark an asset migration to other stablecoins.
• Coinbase, the other member of the Centre Consortium behind USDC, has faced regulatory scrutiny connected to their stablecoin yield product, which could indicate that this investigation is related to Circle Yield, a similar high interest rate yield product.
• It remains to be seen whether these are individual concerns (cf. USDT investigations) or if the SEC has fundamental concerns with regard to stablecoins.

2. Stakewise-discovered Rocket Pool vulnerability puts largest ETH2 staker Lido at risk

The Facts:

• After the discovery of a possible exploit in their protocol code, upcoming Eth2 staking provider Rocket Pool has postponed its mainnet launch.
• Upon discovery of the bug by their competitor Stakewise, the projects notified Lido, the largest staking pool for Ethereum’s Beacon Chain, as the vulnerability also posed a risk to their staking contracts.
• While the potential impact of the exploit was estimated as “low”, the bug could have been exploited by whitelisted staking node operators in Lido’s registry.

Why it’s important:

• As Lido currently operates the largest number of validators on Ethereum’s Beacon Chain, a smart contract vulnerability could have significant implications on the users of the service.
• The discovery of the bug highlights the importance of the bug bounty programs offered by both Lido and Rocket Pool, incentivizing the reporting of vulnerabilities by users and security researchers.

3. Axie Infinity kicks off staking and decentralized exchange

The Facts:

• Popular play-to-earn game Axie Infinity has announced the option to stake the in-game currency Axie Infinity Shards (AXS).
• Additionally, Sky Mavis, the company behind Axie Infinity, has revealed the launch of a decentralized exchange for Axies and other in-game items powered by Ronin, an Ethereum sidechain.
• The announcement also confirmed an AXS token airdrop to users of Axie Infinity before October 26, 2020.

Why it’s important:

• With staking, Axie Infinity brings in a new economic opportunity for token holders not yet seen in the gaming industry.
• The global gaming market had a size of ca. $192b in 2019 and is expected to reach $399b by 2026, indicating the potential for blockchain gaming to grow substantially upon mainstream adoption.

4. Brazil’s congress to discuss cryptocurrency bill

The Facts:

• Brazil’s congress is to discuss a bill regulating cryptocurrency companies and increasing penalties for crypto-related crime.
• The bill introduces record-keeping and identification requirements for cryptocurrency transactions, in line with the rules for non-crypto financial transactions.
• Upon implementation, companies would be given 180 days to meet the requirements, including the need for authorization by the Central Bank of Brazil.

Why it’s important:

• Regulation of the cryptocurrency sector is essential for users and investors to have regulatory clarity, while this bill would align the legislation to existing financial regulations.
• As the biggest economy in South America, Brazil’s move to additional regulation could influence the lawmaking process in other South American countries when it comes to crypto assets.

5. Fed to launch CBDC Review

The Facts:

• According to a report, the U.S. Federal Reserve is initiating a review of risks and opportunities related to a possible central bank digital currency.
• Fed Officials are expected to publish a paper, asking for the public to comment on the topic.
• A decision on the matter is however unlikely to happen anytime soon, as the launch of a CBDC would require “clear and tangible benefits that outweigh any costs and risks”, according to Fed Chair Jerome Powell.

Why it’s important:

• With many other central banks already reviewing or even implementing digital currencies, the U.S. Fed’s move is a reaction to the pressure of potentially being left behind in the digitization of national currencies.
• The ongoing debate on stablecoin regulation in U.S. politics has fueled the calls for a central bank issued digital currency, which could aim to cover some of the use cases provided by the stablecoins currently in circulation.

Other news

• Aave and Curve Finance launch on Avalanche (via CryptoSlate)
• Polygon flips Ethereum on Active User Addresses (via CoinDesk)
• Liquid Network experiences 22-hour interruption (via Cointelegraph)