UK Orders Crypto ATMs to Shut Down

The biggest crypto news and ideas of the day

Mar. 11, 2022

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Welcome to The Node.

In today's newsletter: U.K.'s Financial Conduct Authority orders shutdown of crypto ATMs. Israel's central bank drafts crypto regulation for banks. And London-based content company OnlyFans donates 500 ETH to UkraineDAO.

Questions? Feedback? We'd love to hear from you – simply reply to this email.

–Daniel Kuhn

Today's must-reads

Top Shelf

CRYPTO REGULATION: The U.K.'s Financial Conduct Authority (FCA) is ordering crypto ATMs to shut down. The statement made Friday alleged none of the crypto ATMs operating today are licensed or compliant with money laundering regulations, but they can register with the FCA to reopen. Meanwhile, Israel's central bank has published draft guidelines that will potentially open the country's financial system to crypto companies. Among the regulation requirements banks will need to examine companies on their own, clarify the source of money used to purchase crypto and track the path of its movement. The new rules would help banks onboard crypto users more easily.

TRADFI DENIES: Fir Tree Capital Management, a hedge fund with $4 billion in assets under management, has put together a sizable short of tether (USDT), according to a Bloomberg report. The hedge fund cites the U.S. dollar stablecoin's lack of transparency about its reserves, and thinks its bearish bet could pay off within 12 months and may open a separate fund for the tether short, if there's enough client interest. Elsewhere, the SEC has rejected NYDIG's and Global X's spot bitcoin ETF applications. (Talk about being bearish.

CRYPTO DONATIONS: London-based content company OnlyFans has donated 500 ETH, roughly $1.3 million, to UkraineDAO, a leading crypto contributor to Ukraine's government during the ongoing war. The company's donation catapulted the DAO's ETH reserve amount, which had stalled at about 1,000 ETH before the donation. So far, the Ukrainian government has raised about $100 million worth of crypto – a process that the nation's deputy minister at the Ministry of Digital Transformation has called more "convenient" than traditional means.

LENIENCY: Ethereum co-founder Vitalik Buterin is asking a federal court in New York for leniency in the upcoming sentencing of former Ethereum developer Virgil Griffith, who was arrested and charged for violating U.S. sanctions law in November 2019 and pleaded guilty in September of last year. Buterin detailed in a letter to U.S. District Judge Kevin Castel about Griffith's kind and peaceful nature and his curiosity for other cultures. The two reportedly met in 2013 and began collaborating on research in 2016. Griffith could serve up to 6.5 years in prison, but his lawyers are advocating for a two-year sentence, citing his previous time served.

LOCKED: Over 10 million ether (ETH), worth about $26 billion, is now locked on Ethereum's Eth 2.0 staking contract ahead of a planned upgrade to its proof-of-stake blockchain. The upgrade is an effort to improve the network's efficiency, which has been costly and slower during periods of congestion, and has led to exorbitant fee prices of $250 or more.

–Fran Velasquez

Overheard on CoinDesk TV...

Sound Bites

"I wouldn't expect any relaxation of regulation to come out of [Biden's crypto executive order]."

–Timothy Massad, former CFTC chairman, on CoinDesk TV's "First Mover."

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What others are writing...

Off-Chain Signals

U.S. Authorities Seize $28M in Crypto Related NetWalker Ransomware (Decrypt)
SEC shoots down spot bitcoin ETF proposals from NYDIG, Global X (The Block)
Citi Director Leaves to Start Own Crypto Company (Blockworks)
The CFTC is gunning for a bigger role in regulating crypto (Protocol)
Bitfinex refuses to freeze crypto belonging to non-sanctioned Russians (Cointelegraph)
Early Adopters of Jamaican CBDC to Get Incentives from Central Bank (Yahoo Finance)

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Putting the news into perspective

The Takeaway

We Can Vote Away Your Money for Free

A layer 1 blockchain called Juno is on the verge of doing something radical: taking away tens of millions of dollars' worth of a holder's tokens using an on-chain vote by other users.

Juno, a smart-contract layer 1 in the Cosmos ecosystem, was allegedly the victim of a Sybil-like attack in which one user faked multiple wallets to receive a disproportionate share of a recent airdrop. The wallet alleged to belong to the airdrop gamer now contains more than 3.1 million Juno tokens with a market value of just over $122 million.

A new Juno proposal, Proposal 16, would draw down the "Whale Wallet" to 50,000 JUNO tokens, which the proposal describes as a "fair share" of the airdrop. The proposal argues that, beyond a matter of simple fairness, the reversal is an existential necessity for Juno, because the whale now has a huge share of the network's voting and economic power ("half of quorum," according to the proposal).

Proposal 16 is open for voting between March 10 and March 15. Though it's hard to be certain, it appears this would be the first major instance of a blockchain community voting tokens out of the hands of a fellow holder. (The closest precedent may be the removal of voting rights from some tokens during Justin Sun's attempted takeover of STEEM. Sun is the founder of the Tron blockchain.)

There are immense implications to discuss here, but they're also discussions we're going to continue having for a long time, so I'll keep it short.

First, it's useful to compare this to the fallout from the hack of The DAO in 2016. In that case, a contract bug allowed the draining of an Ethereum-based investment fund that at the time contained 15% of all the ETH in existence. The core leadership of Ethereum blockchain decided that the scale of the hack would threaten the long-term health of the ecosystem, and so they campaigned for a fork of Ethereum that took the hacker's money away. That's the fork that most people consider "Ethereum" today (This definition of Ethereum is even hard-coded into wallets like MetaMask).

The fork that let the DAO hacker keep the money is now known as Ethereum Classic, and it has a relatively small but significant community to this day. Those allegiances are philosophical as much as anything: Sticking with ETHClassic after the DAO recovery fork was at the time a rallying cry for the "code is law" crowd that saw the heavy hand of founders including Vitalik Buterin in pushing for the fork as a betrayal of blockchain neutrality. Most users at the time instead saw the incident and its correction as mere growing pains (Ethereum had barely launched), and most current users have probably never even heard of the DAO hack.

However you view it, the debate about such deep intervention changes considerably when it's happening via on-chain voting, rather than through a fork. A fork is a fundamentally social and nebulous process, often initiated by people with power and influence, but requiring public persuasion to make sure miners continue extending the "correct" chain. On-chain voting, by contrast, is both more rigorous and more opaque: Proposals lay out clear outcomes, but as Buterin himself has pointed out, it's quite easy to buy votes or manipulate the process in various ways.

Whether it winds up being manipulated (the hacker certainly has the funds to buy votes), the scary part about Juno's Proposal 16 is something more fundamental. In a very loose sense, it undermines the core cryptocurrency value proposition that if you control your own private cryptographic keys, you have total control over your tokens.

Instead, it shows that blockchains, too, involve social as well as technical consensus. The airdrop Sybil attacker, after all, didn't break any obvious government laws; he or she just abused an open system so badly that other users had to take action to defend it. For some, this response will be seen as an upside and even an evolutionary path – a significant step, in particular, toward decentralized autonomous organizations (DAOs) that have real enforcement power and are willing to flex it.

But even if you're focused on the upside here, it will be important and difficult to create a stronger distinction between systems with this sort of on-chain capability, and those that offer true irreversibility. Bitcoin, Ethereum and most other major chains don't have on-chain proposals or governance mechanisms that would make this possible. Unfortunately, that's a distinction likely to be lost on the general public and even on most crypto speculators.

–David Z. Morris