Regular readers will fondly (or not) recall my three-month foray into Web3 and decentralized finance.
It started back in December, when I was increasingly uncomfortable with owning no Bitcoin and no Ethereum, not because I’d necessarily changed my mind about cryptocurrencies, but rather because they do represent a kind of insurance policy against a number of highly far-fetched outcomes, including a scenario in which, as Thomas Peterffy so eloquently put it, fiat money “goes to hell.”
Peterffy’s remarks from January echoed my own thinking. “I think it can go to zero, and I think it can go to a million dollars,” he told Bloomberg. “I have no idea.”
Maybe Peterffy has a better idea now, but I don’t. Or at least not when it comes to Bitcoin and Ethereum. Notwithstanding the egregious losses both incurred as the Fed ratcheted rates higher to the detriment of virtually every asset class on the planet, I still see plenty of scope for Bitcoin and Ethereum to survive, or even thrive.
What I don’t see much (if any) scope for, though, is the survival of sundry alt-coins or the wonderfully absurd world of DeFi, which I initially described as a cross between Las Vegas and Deadwood. After spending three months (and thousands upon thousands of actual, real dollars, around 70% of which I was lucky enough to escape with alive) inside DeFi, my assessment darkened considerably.
Despite my best efforts, I was unable to discern any real purpose for the existence of various DeFi casinos, other than so-called “staking,” “farming” and the facilitation of trading. Nothing was ever actually being accomplished. Or at least not that I could tell. That was the biggest red flag for me, and it’s why I exited substantially all of my positions in late March. If you haven’t read “Three Months In Web3,” I strongly encourage you to do so.
Like everyone else with even a passing interest in Web3, I was fascinated by the phenomenon which is Yuga Labs, the company behind Bored Ape Yacht Club, the most successful NFT project in the short history of the space.
In early March, Yuga acquired the brands, copyright and IP rights to the CryptoPunks and Meebits NFT collections from creator Larva Labs, a power move of epic proportions. For the NFT community, it was the equivalent of Google buying Apple. Just days later, Yuga launched its own cryptocurrency, ApeCoin.
15% of the available ApeCoin supply was airdropped (i.e., given away) to holders of Bored Ape Yacht Club NFTs. Many of those holders were already kinda, sorta rich thanks to the mind-bending appreciation of the NFTs themselves, which, at the highs, listed for a minimum of $400,000 (figure below).
The floor price has since declined to around $100,000, where it’s meandered for months. Suffice to say some skeptics (who wouldn’t know a bargain if it hit them in the face, apparently) still think that’s a little steep for a cartoon of a monkey.
On March 17, Twitter was alive with screenshots posted by bewildered NFT holders who woke up to as many as 10,950 free ApeCoins for each NFT they owned. A coordinated listing of ApeCoin by nearly every major centralized cryptocurrency exchange (I called that “an unprecedented event that raised serious questions”) created instantaneous demand and liquidity for the coins, which immediately traded for around $20.
Some holders owned dozens of eligible NFTs, and were thus handed tens upon tens of thousands of free coins, all redeemable in the open market for USD-pegged stable coins at an average price of around $10 each.
It was, to put it bluntly, a story too ridiculous to be true. It was also too much for me to politely countenance.
In May, I described a conversation with someone who’s much smarter than me. “You can’t issue unlicensed securities and use your friends as the underwriters,” I told him.
Do note: I wasn’t necessarily talking about ApeCoin, and I’m not a securities lawyer. Nothing in this article should be in any way construed as an accusation of wrongdoing.
Although I can’t offer an attorney’s take, I can speak in broad terms about questionable practices I observed across the DeFi community. That’s what I was attempting to convey to the quant acquaintance mentioned above: The issuance of pseudo-securities seemed pervasive to me, and it wasn’t obvious that the people involved were aware that they might be doing something questionable. In my (uninformed) opinion, intent will be among the hardest things for the SEC to establish in what I think it’s fair to describe as a widening crypto dragnet.
With all of the above in mind, Bloomberg on Tuesday reported that the SEC is in fact investigating Yuga Labs. The probe centers not just on “whether sales of its digital assets violate federal law,” but also on “the distribution of ApeCoin,” according to a source familiar with the matter.
Bloomberg included the obligatory language, and I will too: Yuga hasn’t been accused of any wrongdoing and the opening of an SEC investigation doesn’t mean the firm will be sued.
That said, this is a big deal. Yuga is the undisputed heavyweight champion in that space. I’ve dialed back my crypto coverage because most readers aren’t active in DeFi or Web3, but this is a general interest story. It’s front page news, even if it might not stay above the fold for long on mainstream outlets. Earlier this year, Yuga raised a $450 million round from Andreessen Horowitz at a $4 billion valuation.
Yuga was keen to point out that this is hardly a Yuga-specific story. “It’s well-known that policymakers and regulators have sought to learn more about the novel world of Web3,” the company said, in a statement, adding that as an industry “leader,” the firm is “committed to fully cooperating with any inquiries.”
That’s good, because inquiries there will be. And according to Bloomberg’s source, this one includes a probe into whether ApeCoin constitutes a security.
Panning back out away from ApeCoin itself and also away from Yuga, and thinking more broadly about DeFi, I’d reiterate that there’s typically an intellectual mismatch between interlocutors in conversations about the space. I’m not the smartest person in the world, although you wouldn’t know it by the way I sometimes self-aggrandize. As I put it in May, while documenting the collapse of the Luna ecosystem, I’m quite arrogant, but I’ve never pretended to be especially brilliant. I owe quite a bit of what I know about Web3 to people who are brilliant, and in that regard, I’m not so different from countless other “traditionalist” latecomers to crypto. Developers, programmers and quants built Web3, and if you want to learn about it, you need to talk to some of them and then immerse yourself in the experience. I did both.
But a respectable showing in undergraduate calculus won’t make you Einstein, and neither will one “semester” in Web3 make you a developer or a quant, so conversations between people like me and the friend I mentioned above typically end one of two ways, depending on who the more gracious person is. I’m never the more gracious person. “I’m sorry. I can’t,” I told him, despairingly, questioning the legality and viability of various DeFi practices as I observed them. He sighed. “Ok. I won’t try to explain it to you again.”
If Bloomberg’s reporting is accurate, someone at Yuga is going to have to explain it (all of it) to Gary Gensler. I wish them the best of luck.
In a past life I was a securities lawyers in big law before becoming an ISDA expert (believe it or not, much more fun and better job security). I think the SEC has enough ground to at least plausibility argue APE coin as well as other DeFi coins are securities subject to registration, that said I really wish they would focus enforcement action on fraudulent activities involving real fiat money and wall street actors, going after Kardasians and NFTs is a waste a legal resources that could be put to better use, this just makes the SEC and Gensler look opportunistic, lazy and petty. Go after the next Archegos, do something that will actually protect investors for a change.
Totally agree, just picking a scapegoat for a distraction from all the other crime on wall street.
So much more going on…
Maybe, but a lot of people have lost a lot of money in DeFi. This space needs to be reined in. I was certainly taken aback at the scope of it myself. I imagine regulators will be too once they get a look at it all.
H-Man, Investment of money, in a common enterprise, profits from the efforts of others = security. It would seem the shoe fits.
As I read about this stuff I can’t help thinking that underneath everything we will find the shade of Salvador Dali, laughing at us.