July 2023

Judge Jed Rakoff gave a detailed interpretation of the Howey test that was at odds with the decision in the Securities and Exchange’s case against Ripple.

A United States Securities and Exchange Commission lawsuit against Terraform Labs is set to go ahead after a U.S. judge overseeing the case denied the firm’s motion to dismiss on July 31. 

In handing down the order, the judge also rejected a July 13 decision from U.S. District Judge Analisa Torres, who ruled that Ripple did not violate securities laws by selling its XRP (XRP) token on public exchanges.

The SEC first filed a suit against Terraform Labs and its founder, Do Kwon, on Feb. 16, alleging them of “orchestrating a multi-billion dollar crypto asset securities fraud."

In April, Terraform Labs’ legal representatives filed a motion for the dismissal of the suit, with supplemental materials for the motion provided in June. 

In rejecting the defendants’ motion to dismiss, Judge Jed Rakoff of the Southern District Court of New York found that:

“For purposes of this motion, all well-plead allegations must be taken as true, and all reasonable inferences therefrom must be drawn in the SEC’s favor.”

In its previous dismissal motion, Terraform Labs’ representatives argued that the SEC lacks jurisdiction over both the company and its founder. It also pushed back against the agency’s position that tokens including Mirror Protocol (MIR), Terra Classic (LUNC) and TerraUSD Classic (USTC) are securities.

It also argued that “Congress is not only engaging in robust debate over how crypto should be regulated, it is asking the SEC to wait for Congress to act.”

However, Judge Rakoff rejected the argument that the SEC lacked the authority to regulate crypto tokens without Congressional authorization, rejecting Terraform's objection that cited the “Major Questions Doctrine."

Newsflash: Ripple Decision Already in (Big) Trouble

SDNY District Judge Jed Rakoff today allowed the SEC to go forward with its case against Terraform Labs and founder Do Kwon. In doing so, Judge Rakoff specifically rejected the distinction made in the Ripple case between public… pic.twitter.com/JZZ8vukfFt

— John Reed Stark (@JohnReedStark) July 31, 2023

The judge also devoted several pages to an analysis of the Howey test. The judge noted that no formal contract is necessary to meet the test, and tokens themselves may be considered tokens in arguments before the court, Rakoff wrote.

Related: SEC appeal could amplify Ripple win, says Ripple Labs legal chief

The court also declined to “draw a distinction between these coins [MIR and LUNA] based on their manner of sale.” Therefore:

“The Court rejects the approach recently adopted by another judge of this District in a similar case, SEC v. Ripple Labs Inc. […] Howey makes no such distinction between [primary and secondary] purchasers.”

That approach — that XRP was a commodity when sold on the secondary market — was a partial win for Ripple. Its rejection here could bode well for the SEC, if other judges follow Rakoff’s example.

Magazine: Terra collapsed because it used hubris for collateral — Knifefight

Smart contracts should be viewed as “proof-of-concept” rather than as critical for universal adoption. That may mean exploring alternatives.

Smart contracts have reshaped the possibilities of what blockchain and crypto can achieve, and we can all acknowledge that. That doesn’t mean they’re the be-all-end-all solution to widespread adoption.

Being overzealous about any kind of innovation can also contribute to its stalling, or even failure if other factors don’t align. The mentality of assuming new technology is perfect and wondering why everyone hasn’t caught up to its genius is outdated. Not only does it create an adversarial relationship when inevitabilities, such as regulation, arise, but it also diminishes the motivation to improve on new applications to maximize their value.

Smart contracts and companies building their products around their implementation are now nearing this impasse. So, what can be done to close these gaps and potentially set the stage for an alternative?

The gaps

Mainstream smart contract adoption is already kneecapped by a lack of Bitcoin (BTC) support. Sure, the Ethereum network has become an industry heavyweight that hosts many of the world’s blockchain applications, but Bitcoin is still seen as being in a league of its own by practically every metric. And as BlackRock, the top dog of traditional institutions, looks to break the Securities and Exchange Commission’s Bitcoin exchange-traded fund (ETF) glass ceiling, that glaring gap will only become more apparent as others follow suit.

Related: Don’t be naive — BlackRock’s ETF won’t be bullish for Bitcoin

We can’t ignore ETF filings or recent developments in Bitcoin-driven finance, so saying smart contract aversion stalls Bitcoin’s interoperable potential or decentralized app integration is short-sighted.

The other elephant in the room is fiat. Hundreds of projects are working to make cross-ecosystem compatibility a reality, but there is no streamlined way to connect crypto and fiat through a smart contract framework.

Yes, you can introduce centralized intermediaries to foster fiat-to-crypto exchanges, but that opaque, trust-maximized, expensive solution defeats crypto’s intended purpose altogether. And that’s before touching on the security issues that inherently follow their implementation.

Smart contracts may be (and usually are) controlled by the team that develops them. The inspiring, deceptively logical mottos of “verify, don’t trust” and “code is the law” are great in theory, but no one really reads the code before executing a smart contract.

Creating an implicit trust assumption is where hackers commonly emerge and exploit loopholes, code vulnerabilities and improper key management to crack smart contracts and steal funds.

Regulators are already well aware of smart contract vulnerabilities. Part of the reason why the European Union’s Data Act garnered such divisive reactions stemmed from its “kill switch” mandate for any company using smart contracts. While the mandate may seem harsh, it illustrates an inherent technological risk that regulators aren’t likely to ignore as more international blockchain regulation moves forward.

Necessary changes

If companies and institutions actually want an alternative to smart contracts, making that a reality requires a few major steps. Or, if an alternative seems out of reach at this point, smart contracts need severe alterations to seal up attack vectors when it comes to holding funds.

Again, smart contracts are great to enrich an application layer and amplify generic functionality, but they’re not necessarily needed or well-suited to hold funds indefinitely. This is why beloved comparisons likening smart contracts to vending machines fall a bit flat.

Related: Experiments show AI could help audit smart contracts, but not yet

To the average person, using a smart contract could make it seem like the equivalent of a stranger watching over you every time you access an ATM. And just because you might trust a smart contract doesn’t mean you can necessarily trust the team that made it. In this case, it’s imperative to code smart contracts correctly to maximize security, with some developers even proposing new smart contract languages or implementing a “fact check” software into the code.

“Right to be forgotten” data privacy regulations, such as those in the European Union’s General Data Protection Regulation, also complicate things. In countries where citizens have the legal right to demand their personal data be erased, that can’t exactly happen if they’re bound to a digital legal agreement.

Getting smart contracts to cooperate with traditional financial institutions and fiat requires fundamentally altering how they operate. But since that kind of seismic change is impractical and completely unnecessary to consider at this stage, institutional onboarding requires urgently mitigating the security and privacy risks.

Smart contracts have many practical uses, but they may need to be viewed as a “proof-of-concept” rather than the key to universal adoption. Crypto’s future requires a consistent dialogue with traditional finance in terms of fiat interoperability and ease of access. This can only happen by prioritizing that kind of development and addressing the obstacles preventing it from happening. If that involves steering away from complete reliance on smart contracts and exploring other options or primitives, so be it.

The opinions expressed are the author’s alone and do not necessarily reflect the views of Cointelegraph. This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice.

Bitcoin is currently still stalling just above $29,000, making this one of the longest stretches that the digital asset has spent at this level. This constricted price range usually means that there is muted interest in the digital asset right now; however, the daily trading volume for Bitcoin suggests that this may not be the […]

One of Germany’s top privacy regulators began investigating Worldcoin’s data collection practices in November 2022, and the probe is still ongoing, Reuters reported on July 31. The Bavarian State Office for Data Protection Supervision President Michael Will told the newswire that the regulator had concerns over the project’s aim to process “sensitive data at a […]

The post German privacy watchdog has been investigating Worldcoin since November 2022 appeared first on CryptoSlate.

Quick Take As July comes to a close, Bitcoin’s performance offers a nuanced view, closing the month with a slight dip of about 3.5%. This is the second month this year where Bitcoin has declined, but despite this, the cryptocurrency has seen a remarkable yearly increase of 77%, Moving into the final month of summer, […]

The post Analyzing Bitcoin’s summer performance with a cautionary eye on September appeared first on CryptoSlate.

Stablecoin issuer Tether’s (USDT) second-quarter attestation revealed a significant increase in its Bitcoin (BTC) reserves by more than $170 million, raising the total to $1.67 billion from the $1.5 billion posted during the first quarter The increase aligns with the company’s goal of strengthening and diversifying its reserves with BTC purchases. In May, Tether revealed […]

The post Tether reports Bitcoin reserves up by $170M alongside drawdown in precious metals allocation appeared first on CryptoSlate.

According to the report, nearly half of the month’s losses were caused by the Multichain exploit, which resulted in $231 million in losses alone.

The cryptocurrency market is having its worst month of 2023, according to a report from Web3 outlet De.Fi shared with Cointelegraph.

Losses for July totaled $486 million, more than six times the total from 2022:

The report comes on the heels of several high-profile hacks and exploits in the month of July and a flurry of legislative activity surrounding the nature of cryptocurrency and digital assets.

With a current reported recovery total of only $6.15 million, nearly 99% of all cryptocurrency and digital assets stolen in the month of July remain unrecovered.

According to a document shared with Cointelegraph, the researchers at De.Fi believe not enough is being done to recover lost funds quickly:

“Regrettably, the recovery efforts in July 2023 were woefully inadequate, with only $6,796,915 recouped from the vast $486.35 million lost.”

The researchers went on to describe the cryptocurrency sector’s ability to recover stolen or lost funds as “a pivotal element in alleviating the impact of these unfortunate incidents.”

Per the report, the vast majority of losses occurred on the Ethereum network, with $447 million lost across 36 cases — including the Multichain hack, which involved $231 million, and the Alphapo exploit, which cost around $100 million.

The next-closest network was Base, which saw $23 million lost in a single case. Binance took third with a reported loss of nearly $11 million over 18 cases.

Related: Memecoin mania hits Base: Obscure tokens skyrocket amid rug pulls and FOMO

“Access control issues” accounted for the majority of the funds lost in July with $364 million. Rugpulls, with over 38 reported cases, resulted in losses in the amount of about $36 million, and reentrancy attacks led to about $78 million in losses.

The De.Fi team’s report did contain one bright note, however: There were no reports of exit scams for the month of July.

“As president, on day one, CBDC goes into the trash can — we’re not going to allow it," said Ron DeSantis at a New Hampshire campaign event.

Florida Gov. Ron DeSantis has pushed a platform based partly on “economic independence” in his 2024 presidential campaign, specifically taking a stance on digital currencies. 

Speaking at a campaign event in New Hampshire on July 31, DeSantis reiterated his plans of banning central bank digital currencies, or CBDCs, should he win the Republican nomination and presidential race and take office in 2025. The Florida governor added he planned to end U.S. President Joe Biden’s “war on Bitcoin and cryptocurrency” should he win the presidency.

It’s unclear to which specific policies DeSantis was referring, but he suggested they were coming through the Federal Reserve. President Biden signed an executive order establishing plans for a regulatory framework for digital currencies in March 2022. The Securities and Exchange Commission has also filed several lawsuits against crypto firms while Biden has been in office, and the Department of Justice has overseen criminal charges for former FTX CEO Sam Bankman-Fried and former Celsius CEO Alex Mashinsky.

DeSantis went on to compare the United States government’s plans for a CBDC to those in China, where the central bank is currently conducting trials of a digital yuan. He claimed that “unaccountable elites” in the government could not be trusted to handle the potential rollout of a digital dollar.

“[The Fed wants] to go to a cashless society. They want to eliminate cryptocurrency,” claimed DeSantis. “As president, on day one, CBDC goes into the trash can — we’re not going to allow it.”

New Hampshire is widely considered a suitable testing ground for U.S. presidential candidates due to the state holding the first primary in the national race. DeSantis has had a rocky start to his official campaign since announcing it on Twitter — now X — in May but is still considered the second most viable Republican candidate, according to several different polls.

Related: Rep. Patrick McHenry blames White House for lack of urgency on stablecoin bill negotiations

Nearly all polls show DeSantis trailing well behind twice-impeached former president and federally indicted candidate Donald Trump. Both candidates are expected to face elections in state primaries starting in January, leading to a final vote to determine the party candidate at the Republican National Convention in July 2024.

Both Democratic and Republican candidates vying for a place in the 2024 presidential election have voiced opinions on cryptocurrencies like Bitcoin (BTC) and CBDCs. Robert F. Kennedy Jr., a Democratic party candidate polling roughly 40-50 points behind Biden, has made several pro-crypto statements in his campaign and revealed several BTC purchases. Miami Mayor Francis Suarez, who accepted a BTC salary for his position and helped launch the "MiamiCoin" project, announced his candidacy for the Republican nomination in June.

Magazine: US enforcement agencies are turning up the heat on crypto-related crime

The US Securities and Exchange Commission (SEC) has filed a complaint against Richard Schueler, also known as Richard Heart, alleging that he raised over $1 billion in unregistered securities offerings from retail investors in the United States and abroad.  The SEC claims that Heart operated through three unincorporated alter-ego entities, Hex, PulseChain, and PulseX, and […]

Analysts have called for a U.S. recession all year, but stocks continue to creep higher. Here are three metrics investors can watch to know if an economic downturn is coming.

Inflation came down a lot faster than most investors and analysts anticipated, reaching 3% in June. The recession that most analysts predicted is nowhere to be seen, according to the 3.6% unemployment rate nearing a 50-year low and the S&P 500 Index showing a 19% gain year-to-date.

While the current market performance may lead investors to believe that a recession has been avoided, there are three metrics that have been able to consistently predict recessions over time. These leading economic indicators are key economic variables that tend to move ahead of changes in overall economic activity, providing an early warning system for changes in the business cycle. Let’s dig into three of these indicators and explain how investors can interpret them.

Yield curve inversion

The yield curve represents the relationship between short-term and long-term interest rates on government bonds. Normally, long-term bonds have higher yields than short-term bonds to compensate investors for the risk of holding their money for a more extended period.

Historically, an inverted yield curve has often preceded recessions. This indicator suggests that investors are worried about the near future and expect interest rates to fall due to a potential economic slowdown.

The two-year Treasury yield is currently 3.25%, while the 10-year Treasury yield is 2.95%, typical of periods ahead of a recession. However, that has been the case since September 2022, and historically there’s a nine- to 24-month lag before the economic contraction takes place.

Leading economic indicators (LEI)

The Conference Board, a nonprofit research organization, compiles a set of economic indicators known as the leading economic indicators (LEI). These indicators include a variety of data points, such as building permits, stock prices, consumer expectations, average weekly hours worked and more.

When these indicators start to decline or show a pattern of negative movement, it can signal an impending recession. The consumer confidence index for July hit a reading of 117, the highest level in two years. Moreover, according to The Conference Board, the probability of a recession in the next six months is 25%, down from 30% in June.

Purchasing managers’ index (PMI)

The purchasing managers’ index (PMI) is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. A PMI of more than 50 represents an expansion, while readings under 50 represent a contraction. The PMI is seen as a very reliable tool, as it provides timely and accurate data on the manufacturing sector.

The S&P Global U.S. Manufacturing PMI fell to 46.0 in July 2023, down from 46.9 in June and 48.4 in May. This is the lowest reading since December 2022, and it indicates that the manufacturing sector is in a state of contraction. In short, the global economy is slowing down, and this is having a negative impact on demand for exports from the United States.

The Federal Reserve is in a tight spot

The U.S. economy is currently presenting mixed signals. Despite a robust consumer demand underpinned by rising wages and low unemployment, industrial growth indicators have remained weak throughout 2023. Moreover, bond markets suggest market reluctance to add risk-on positions.

This hesitancy is due to the Federal Reserve’s anticipated monetary policy tightening and further expected interest rate hikes for 2023. These different signals show the tricky situation for those in charge of the interest rates.

If the Fed tightens policy too much, it could slow down the economy too quickly, possibly leading to a recession. On the other hand, if the Fed is too lenient, it could trigger high inflation, which erodes purchasing power and can destabilize the currency.

Related: Bitcoin price is down, but data signals that $30K and above is the path of least resistance

For cryptocurrency investors, there’s an additional variable that further complicates the analysis. Despite the long-term high correlation between Bitcoin (BTC) and the stock market, the past eight months have displayed periods of inverse trend, meaning the assets moved in distinct directions.

Amid crypto market uncertainty, the Fed’s decisions are key to revealing economic confidence. Increasing interest rates signifies stability, potentially benefiting cryptocurrency markets in the short term, whereas rate cuts may indicate economic concerns, possibly affecting risk-on markets in general. Therefore, tracking the Fed provides timely investor guidance in uncertain economic times.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.