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NFT wash trading creates a phoney appearance of popularity to push up prices and rip collectors off. But you can learn how to spot the signs.

Wash trading on nonfungible token (NFT) marketplaces is back in the spotlight after critics claimed the fast-growing NFT marketplace Blur has incentivized the practice with its trading rewards scheme.

10% of Blurs total token supply was distributed to users based on their trading activity in its second token reward scheme from Feb. 14. The platform has seen a surge in trading volume in comparison to other leading NFT marketplaces.

Skeptics claim that wash trading played a significant role, with CryptoSlam reporting around $577 million worth of NFTs have been wash traded back and forth in recent months and that 80% of trades on the platform are inorganic. However, opinions vary. 

A new Dune Analytics deep-dive by Hildobby argues that the vast majority of the platforms trading volume is actually above board due to the way it has structured the rewards. But the analysis is far from a clean bill of health for the sector, with the same methodology suggesting that LooksRare and X2Y2, have 98% and 85%, respectively, of volume currently flagged as suspicious.

NFT marketplaces have accounted for a reported $73.8 billion worth of trading volume to date. However, Dune Analytics data suggests that more than 42% of the volume is fake, with $31.2 billion attributed to wash trading. 

The effects are wide-ranging. Inflated prices and manufactured popularity of certain collections have left inexperienced digital collectors as collateral damage. And in some cases, criminals have been using NFTs as a means of money laundering.

There is some good news for more educated collectors, however, in that most wash trading surrounds the type of NFT collections favored by inexperienced or low-information collectors. 

Sure, in absolute terms, there is a lot of wash trading, but it mostly is happening to NFT collections with a poor reputation anyways.

What is NFT wash trading?

Wash trading itself is not a new phenomenon. The term has its origins in the early 1900s, where the practice of wash sales in the United States was carried out by selling a security prior to the end of the tax year to claim a loss and then buying them back straight after. 

Wash trading in crypto is an offshoot of those early practices, whereby individuals or colluding parties buy and sell a particular financial asset among themselves to create the perception of higher trading volumes or liquidity. Exchanges and projects do it mainly to make themselves look more popular. 

Its important to note that wash trading is illegal in a number of jurisdictions around the world and is prohibited by major regulatory institutions. Considered a form of market manipulation, the practice is harmful to investors and is a threat to the integrity of financial markets.

Given that the cryptocurrency space is still fairly nascent, regulators are still coming to grips with the ins and outs. This leaves crypto and NFT wash trading in a gray area where the practice is unchecked and ungoverned. However, President Joe Biden has proposed closing the loophole that made the practice not illegal for crypto assets in the U.S. in the upcoming budget. 

Research carried out by analysts and insights provided by industry experts to Cointelegraph Magazine suggests wash trading is ongoing across a number of NFT marketplaces.

NFT wash trading and money laundering

Hildebert Mouli is one such expert, whose in-depth research brought NFT wash trading into the spotlight in late 2022. By day, Mouli is a data scientist working for cryptocurrency investment firm Dragonfly. In his spare time, Mouli built a data dashboard that has lifted the veil on wash trading in the NFT space.

His popular post on Dune late last year found that around 80% of the total NFT trading volume in January 2022 resulted from wash trading, and that figure averaged around 58% for the totality of 2022. Moulis method for routing out wash trading made use of four specific filters. 

Firstly, addresses that were both the buyer and seller of a specific NFT were flagged. The second filter identified back-and-forth trades between two different wallets. If an address had purchased the same NFT three or more times, it was also identified as potential wash trading. The final filter was used to identify addresses or trades that sidestep the above-mentioned methods by checking if the buyer and seller addresses were funded by the same wallet. 

After applying all these filters, Moulis data reveals that 42% of NFT trading volume is currently driven by wash trading across 29 major NFT marketplaces operating today.

Blockchain analytics firm Chainalysis also delved into NFT wash trading in two separate reports in 2022. A key takeaway from its research highlighted 110 profitable wash traders netting $8.9 million in profits last year. The company tells Magazine that government agencies have shown interest in learning about NFT wash trading while declining to provide any specifics.

Chainalysis also keeps tabs on illicit funds moving through the cryptocurrency ecosystem. Its tools identified a rise in funds sent from illicit addresses toward the end of 2021, with around $2.4 million flowing to NFT marketplaces in the final two quarters of the year.

The report concludes that the amount of illicit funds sent to NFT marketplaces associated with money laundering paled in comparison to the $8.6 billion worth of cryptocurrency-based money laundering that Chainalysis monitored in 2021. Nevertheless, the practice is an option for cybercriminals.

What NFT marketplace has the least wash trading?

Moulis research highlights LooksRare and X2Y2 as the two worst offenders, with 94.7% of LooksRares trading volume and 85% of X2Y2s trading volume allegedly attributed to wash trading. This is significant, given that the two platforms have processed $27.6 billion and $4.2 billion in total trading volume, respectively.

OpenSea still ranks as the largest NFT marketplace by volume, but it has a cleaner track record, with just 2.35% of the total $33.1 billion of trading volume attributed to the practice.

Blur (14%), Sudoswap (11%), Skillet (17%) and BitKeep (12.8%) all have wash trading percentages in the mid-teens, while NFT aggregator Element has the third-highest wash trading percentage, with 63% of its $94.3 million trading volume flagged as wash trading. 

DappRadar shares data with Cointelegraph that corroborates Moulis insights. LooksRare had 20,743 NFTs flagged as likely wash trade sales from January 2022 to March 2023, while X2Y2 had 11,289.

OpenSea had a total of 4,357 NFTs flagged as possible wash trade sales, while Blur has produced 2,285 over the past four months.

DappRadars data shows that the ratio of likely wash trading volume to total volume on LooksRare was 3,361.96%, while X2Y2s ratio was 210.99%.

NFT wash trading, explained

Mouli tells Magazine that NFT wash trading occurs when a particular NFT is traded between two addresses owned by the same individual, with the goal of it blending into organic trading activity.

There are two primary reasons for this kind of activity. Firstly, trading platforms like LooksRare and X2YX incentivize trading with token rewards. If carried out correctly, traders wash trade NFTs to make a profit by acquiring these token rewards to offset fees.

The second reason is more subversive, as a trader looks to drive up the appearance of high trading volumes of a particular NFT collection in order to attract attention and higher bids from other traders.

If undetected, wash trading could help increase the perceived value of an NFT collection to other traders, which may make them buy/trade it.

However, Mouli believes it is not possible to sustainably simulate organic trading over a long period of time and notes that any collection that is revealed to be heavily wash traded will end up being unattractive to potential collectors. 

Zhong Yang Chan, head of research at CoinGecko, agrees the intention is to manipulate trading volumes and NFT prices while adding that tax loss harvesting is another driver of the practice.

He says that NFT wash trading has diminished some trust and credibility in the market and also played a part in fueling the NFT bubble of 2021 by enabling projects and participants to play the numbers only go up game. 

Chan believes that wash trading undermines the ability to verify NFT ownership history, which is meant to contribute to their value and differentiate collections from other physical and virtual collectibles. The result is collections that experience price distortions and wild fluctuations:

While this does not affect NFT authenticity, it may impact the perceived value and create doubt for an NFT collection that is trying to build a strong community.

Andrew Thurman, an analyst at blockchain analytics platform Nansen, echoes the sentiments of Mouli and highlights the scams connected to wash trading and the negative impact on real users.

Wash trading low-volume collections could potentially help scammers defraud users in a variety of ways. Thurman points to research from Nansen that uncovered instances of scammers creating and wash trading collections to coax users into minting new NFTs.

The scammers either change the mint price mid-mint or lead users to trade against themselves in order to generate trading fees or sell the worthless NFTs.

These NFTs would have no organic value and are briefly made to appear as if they do.

Thurman also notes wash trading also has a detrimental impact on real users of NFT marketplaces or platforms, as it lowers the number of rewards an organic user would earn. 

How to prevent NFT wash trading

So, how can the industry combat wash trading? 

Mouli notes that different NFT marketplaces already have varying approaches to reducing wash trading, with fees being a prominent point. Fees hinder wash traders ability to maximize profits by creating an additional cost to trading. 

Marketplace fees and creator royalties are two fee mechanisms that take a share of a traders profits, with Mouli highlighting OpenSea as an example. The platform enforced royalty fees, which other marketplaces have emulated as a result. 

Cutting out the type of rewards that incentivize trading is another means of curbing the practice according to Mouli: 

While platforms airdropping tokens to users such as LooksRare and X2Y2 see plenty of wash trading, Blur found a new solution, rewarding listings and not trading.

The lack of regulation or perceived enforcement around NFT marketplaces is another point to consider according to Chan. Market manipulation and tax loss harvesting are illegal for traditional financial assets, and this looks set to be enforced by regulators in the future as Bidens budget proposals suggest. However, applying the existing standards to the nascent Web3 and NFT space might not be so clear-cut.

DappRadar head of research Pedro Herrera notes that NFT wash trading is a growing concern for regulators and law enforcement around the world, but they have bigger fish to fry right now.

The regulatory focus is in crypto adoption, DeFi and security tokens, he says. There is a major need to first establish the rules for the Web3-based financial layer.

Thurman tells Magazine that platforms, including OpenSea and Blur, have introduced trading throttles as a preventative measure. This inhibits an NFT from being listed if it recently changed addresses but does not completely combat the prevalence of the practice.

Aside from that, preventing wash trading on platforms like LooksRare and Blur is difficult its a subset of the sybil problem, he says.

Sybil attacks pose a particular threat to blockchain and decentralized networks. An attacker looks to gain control or influence of a system by creating and controlling a large number of pseudonymous wallets, addresses or identities.

As Thurman suggests, sybil attacks in the case of NFT marketplaces would allow an attacker to create fake trading volumes of various NFTs by trading using a number of different addresses that they anonymously control.

NFT data providers exclude wash trading

Apart from the obvious impacts of artificially inflating prices or astroturfing popularity, wash trading also distorts the ability to analyze and monitor cryptocurrency markets. Mouli says when he set out to provide in-depth insights about NFT trading, he first needed to remove the wash trading activity to work out what was actually going on.

Any good analyst will tell you that when you want to start studying a data set, the first step is to clean it up, he says, adding that many NFT data providers now filter for wash trading activity.

Many of the major analytics platforms have wash trading filters, and the way theyre constructed is often industry secret, he says.

Thurman shares Nansens NFT Trends and Indexes section by way of example, with the wash trading filter both on and off. The first image shows marketplace NFT trading volumes with wash trading removed:

The second screenshot includes wash trading and highlights the market distortions created by platforms rewarding trading volume. The likes of LooksRare and Blur have between 10 and 20 times the volume with the wash trading filter turned off:

Chan says analytics platforms are getting better at identifying and filtering out wash trading. The activity shows up as specific transaction patterns, allowing algorithms to detect and filter disingenuous trades from genuine transactions: 

While wash traders are becoming more sophisticated, analytics platforms are also improving their algorithms to detect new wash trading patterns.

Despite their best efforts, Thurman agrees that wash trading invariably still distorts analytical insights to some extent.

How to identify NFT wash trading

A key takeaway is that collectors and NFT traders need to be aware of wash trading and its effect on prices and trading volumes of collections and collectibles. As Thurman says:Actual collectors, meanwhile, simply need to be wary of classic scam vectors.

Vlad Hategan, a cryptocurrency expert at dappGambl, highlights useful tips to spot potential NFT wash trading.

The first port of call is research. Look up an artist or artwork and inspect market demand. Sudden spikes in trading volume or price are potential red flags. Patterns that seem out of the ordinary, including spikes or consistently low trading volumes over an extended period, bear the hallmarks of manipulative trading action. There are a variety of wash trading dashboards on Dune that may help.

Stick to reputable marketplaces that enforce robust vetting processes for sellers and listings and avoid platforms that allow anonymous or unverified users to trade NFTs.

Low or discounted prices are another potential sign of a wash trading scheme to lure in unwitting traders.

Lastly, ask for help if youre in doubt. Financial advisers and traders who are well-acquainted with NFT markets can provide good guidance to identify dodgy-looking NFTs or trading data.

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Do the developers of legal bots have sufficient knowledge and experience of the law? Is the data used to “train” their algorithms timely? Will critical evidence be filtered out?

Earlier this year, Joshua Browder, CEO of AI startup DoNotPay, attempted to bring a robot lawyer into a California courtroom, despite almost certainly knowing that it was illegal in almost all 50 states to bring automated assistance like this into a courtroom.

DoNotPay bills itself as the worlds first robot lawyer whose goal is to level the playing field and make legal information and self-help accessible to everyone. It helps to serve societys lower-income segment to lower medical bills, appeal bank fees, and dispute credit reports. It claims to have helped more than 160,000 people successfully contest parking tickets in London and New York.

It was denied entry to the California courthouse, however, because under current rules in every state except Utah, nobody except a bar-licensed lawyer is allowed to give any kind of legal help, Gillian Hadfield, professor of law and director of the Schwartz Reisman Institute for Technology and Society at the University of Toronto, tells Magazine.

Still, in the age of ChatGPT and other stunning artificial intelligence devices, Browders attempt could be a foretaste of the future.

The DoNotPay effort is a sign of what is to come, Andrew Perlman, dean and professor of law at Suffolk University Law School, tells Magazine. Certain legal services, including many routine legal matters, can and will be delivered through automated tools. In fact, it is already happening at the consumer level in numerous ways, such as via LegalZoom.

Such help is urgently needed in the view of many. In the U.S., low-income Americans do not receive any or enough legal help for 92% of their civil legal problems, according to a Legal Services Corporation study (2022). Almost half surveyed dont seek help because of high legal costs, and more than half (53%) doubt their ability to find a lawyer they could afford if they needed one, according to the LSC survey.

This access-to-justice gap is a serious problem, and automated tools can be an important part of the solution, comments Perlman. 

Can AI democratize legal services?

It may only be a matter of time before AI reaches the courtroom. If so, it could help to wring human bias out of the legal system. In a legal setting, AI will usher in a new, fairer form of digital justice whereby human emotion, bias and error will become a thing of the past, says British AI expert Terence Mauri, author and founder of the Hack Future Lab. 

Will it advance the day when legal services are truly democratized? Absolutely, says Hadfield. This is the most exciting thing about AI now. Not only can it reduce the cost of legal services in the corporate sector and I think thats coming but the huge payoff will be in addressing the complete crisis we face in access to justice.

But more work may still be needed before AI becomes common in the courthouse. The law does not have much tolerance for technical errors. The stakes are simply too high. Ive used ChatGPT, and it often summarizes the law correctly. But sometimes, it makes mistakes, John McGinnis, a law professor at Northwestern University told USA Today. And (thats) not a surprise. Itll get better. But at the moment, I think going into the courtroom was something of a bridge too far.

Hadfield herself has been working in Utah and elsewhere to establish regimes for licensing providers other than lawyers to provide some legal services. Consumer access to legal services is necessary for the interests of fairness and is increasingly doable, given the rapid evolution of technology. As Hadfield explains to Magazine:

I dont think a fully unregulated/unvetted DoNotPay should be out there, but there should be an easy way to license it against the standard: Does this make the user better off than they are now?

Most people engaging with the law today including the people DoNotPay is aiming to help get zero legal assistance, so that bar may not be high, adds Hadfield. 

A global need

AIs promise of delivering accessible, reasonably priced legal services could soon gain traction beyond the United States, too. Indeed, AI-driven solutions may be even more welcome in the developing world. A Boston Consulting Group study on The Use of AI in Government, for example, found that people in less developed economies where perceived levels of corruption are higher also tended to be more supportive of the use of AI. Those surveyed in India, China and Indonesia indicated the strongest support for government applications of AI, while those in Switzerland, Estonia and Austria offered the weakest support.

Basic services such as drafting wills or simple contracts, or challenging government decisions, should not require the services of a lawyer, Simon Chesterman, a David Marshall professor and vice provost at the National University of Singapore, tells Magazine, acknowledging that the emergence of chatbot lawyers offers some short-term gains in terms of access to justice. 

More sophisticated legal questions will continue to require human lawyers and judges for the foreseeable future, however, Chesterman adds. Indeed, the BCG survey found that the majority of those surveyed globally did not support AI for sensitive decisions associated with the justice system, such as parole board and sentencing recommendations.

A role for blockchain?

Is there a place for blockchain technology when it comes to bringing legal services to the under-served perhaps working in tandem with artificial intelligence? Some think so. A legal system is built on a foundation of trust. People must believe that decisions are made in accordance with principles of fairness. This is where black-box AI solutions like ChatGPT can come up short. One cant easily see how decisions are being made. 

Public blockchains, by contrast, are famously transparent. They provide a clear, tamper-free ledger of transactions or interactions from a projects beginning. It is evident that the deployment of digital technologies, such as blockchain, is key to the development of AI, writes Antonio Merchn Murillo, a professor at Spains Pablo Olavide University. 

Blockchains strengths transparency, traceability, decentralization and authentication can complement AI, whose opaque algorithms can often confound. Blockchain has the mission of generating trust, transparency, and acting as a mediator, explains Murillo, and it can enable AI projects to act and connect with each other as well as provide valuable information about origin and history. 

Smart contracts in particular could play a role in an evolving legal system. In the near future, many commercial contracts will be written as smart contracts, Joseph Raczynski, a futurist and technology consultant, tells Magazine. Both technologies will be transformative for the law, he says:

Unquestionably, the legal industry is primed to be significantly impacted by both AI and blockchain in the not-too-distant future. 

Smart contracts are really just snippets of computer code, however, so it bears asking: Are they enforceable? Perhaps. It depends on the jurisdiction. In the U.S., smart contracts are a type of contract, and therefore theyre enforced like all contracts in state and federal court systems, attorney Isaac Marcushamer told LegalZoom. One drawback is that smart contracts cant easily be changed, and at present, they are used mainly for simple transactions. As the technology evolves, however, many think they will perform more complex tasks. 

Recent years have seen a proliferation of decentralized justice systems. Prominent among them is Kleros, a decentralized blockchain-based arbitration solution that relies on smart contracts and crowdsourced jurors, according to a recent law journal article. Kleros is mainly used in business contract disputes e.g., car insurer did not pay for the repair or the airline did not reimburse the canceled flight. When a dispute arises, Kleros selects a panel of jurors and sends back a decision. According to Kleros white paper, it relies on game theoretic incentives to have jurors rule cases correctly.

Importantly, Kleros doesnt charge user fees. It makes money indirectly through the appreciation of its PNK tokens that are needed to access the platform. In this way, its decentralized sheriff contributes to the public good by filling a regulatory hole with respect to the crypto market, according to the law journal article. The platform faces major obstacles before it can go mainstream, however, among them finding regulatory acceptance, the authors add.

A risk-averse industry

Overall, legal systems will not be disrupted immediately. Despite the fact that AI has hit an inflection point recently, its unlikely that we will see AI assistance directly interacting in the next year, predicts Raczynski. However, in the next two or three years, I think it is highly possible select jurisdictions will test it.

The reason is that lawyers and the legal industry generally tend to be extraordinarily risk averse, Raczynski adds. The idea that AI will act as a lawyer in the courtroom imminently is doubtful.

Michael Livermore, a professor at the University of Virginias School of Law, stated last year that a computer-written legal opinion is at least 10 years away. Asked if more recent advances in natural language processing (NLP) and other forms of AI had changed his timetable, Livermore tells Magazine:

There is no doubt that current NLP is quite impressive, and its easy to foresee a tool coming online soon that could write a pseudo-legal opinion i.e., a document thats written in the style of a legal opinion. But writing a convincing and sustained argument, that is grounded in a reasonable interpretation of existing law I think well still have to wait a few years for that.

It is hard to predict how the involvement of robot lawyers may shape the dynamics of trial hearings and other judicial proceedings, Zhiyu Li, an assistant professor in law and policy at Durham University, tells Magazine, for example, whether and how litigants can communicate with their robot lawyers during the trial. 

Also, what if robot lawyers are suddenly sidelined by technical difficulties? More procedural rules may be needed to ensure the rights of litigants assisted by machines during proceedings, says Li. For the time being, I have reservations about AIs readiness to function like a human lawyer in trials, she adds.

Lives are at stake

Another concern: Do the developers of legal bots have sufficient knowledge and experience of the law? Is the data that they are using to train their algorithms relevant and up to date? Will they inadvertently omit data that could cause key evidence or elements to be filtered out or overlooked by a robot judge or AI software? asks Li. The decision-making of criminal cases deserves so much attention because oftentimes criminal defendants freedom and even their lives are at stake.

Others draw a line between lawyers using AI to conduct research and robo-judges rendering decisions in criminal cases. Replacing human judges entails a serious raising of the AI ante. 

There is something critical about being judged by another human, says Hadfield. On the other hand, vast numbers of people [already] get no or very little human judgement in their cases think small claims courts where 50 cases can be decided in a day.

Human judges supported by technology could represent a sensible middle ground. AI algorithms could be used to ensure bias (racial, gender, age, etc.) isnt occurring. This could reassure everyone that they are getting fair, neutral, accurate and unbiased judgement, says Hadfield. 

Using AI to strategize

AI will play a significant role in the preparation work that litigators engage in behind the scenes today in their research and, increasingly, strategy, says Raczynski. Legal outcomes can now be empirically weighed via prediction models using similar, previously litigated cases, and their docket information by judge and jurisdiction. Judges exhibit patterns that can be revealed by machine learning algorithms, and attorneys may increasingly use AI to discern those patterns. 

Does all this portend an upending of the worlds legal systems? Are lawyers an endangered species?

As basic legal services are outsourced to machines, the demand for junior lawyers will diminish, said Chesterman. That raises the question of how we will find the next generation of senior lawyers if they cant cut their teeth as juniors. Moreover, in many jurisdictions, this is leading to a broadening of the scope of work for lawyers as well as the emergence of allied legal professionals to support the industry, he adds.

AI search, workflow and automation tools combined with NLP and natural language generation models will vastly reduce the need for routine lawyerly work, says Raczynski, while in litigation, it is conceivable that a Kleros decentralized alternative dispute resolution system could be a model to resolve conflict rather than leveraging the courts.

I think we are about to see major disruption in our legal systems, adds Hadfield. 

Still, even with significant automation, lawyers will play an essential role in society and the delivery of legal services, predicts Perlman. AI does not mean the end of lawyers, but it might mean the end of legal services as we know it.

Large law firms will survive by handling highly complex issues, says Raczynski. Small and medium-sized firms may not fare so well. Across the industry, its the cookie-cutter work that most firms do now that will implode.

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AI for capital cases

But surely not all legal decisions can be entrusted to algorithms? What about capital cases where an individual is charged with first-degree murder? Can one really depend on an algorithm when a human life is on the line?

In the early phases of any technology, especially in the legal industry, mistakes are not acceptable, Raczynski tells Magazine. Still, I firmly believe, in 1520 years, we will trust algorithms to adjudicate the most complex legal cases. At that time, many more contracts will rely on code and increasingly become more universal. Code will be more trustworthy, defined and clear.

The digital database of legal cases that permit algorithms to learn will also be vast, Raczynski adds. At the very least, these algorithms will be a sort of augmented intelligence for judges to help them make a decision. 

Thus, the legal community will probably begin by applying AI to less significant use cases, such as contesting parking tickets. More consequential AI-aided cases will come later, probably after some kind of track record has been established. 

And all this still doesnt mean that all legal services should be delivered in an automated way, either as with the aforementioned capital cases. We will need to harness these new tools in ways that give the public greater access to legal services while ensuring appropriate protections for the legal system and society, says Perlman.

One will also need to remember that law is a social and political process, not just a set of fancy calculations, adds Livermore. 

Are blockchain-based legal agreements coming?

Smart contracts hosted on blockchains might in the future streamline traditional lawyers work product, reducing billing hours. Futurist Joseph Raczynski illustrates for Magazine how a smart contract with its conditional i.e., if/then statements can be used to create a trust for estate planning. 

This (fictitious) trust stipulates the transfer of an estates assets upon certain conditions: First, both parents must be dead. Second, the two children the beneficiaries must be married in order for them to split the estate equally. If one child is married and the other is not, the child that is married gets the entire estate, Raczynski explains.

The trust is written as a smart contract saved on a blockchain with code that identifies parameters that are contingencies or possibly subject to change. Saved as a smart contract on a blockchain, it is now in an immutable state but has actionable items embedded in it. The only people that have access to this document are the attorney that drew it up and her client.

The smart contract is checked regularly by a trusted source i.e., an oracle to determine if both parents are still alive, explains Raczynski. One day, the computer identifies that the parents have passed. It now has to determine the marital status of both children:

Through another API computer call to that oracle, it finds out that one child is married, and the other child is not, and subsequently sends 100% of the liquid assets to the kid that is married into their digital wallet, continues Raczynski. This is a self-executing smart contract on a blockchain where, in the future state, no human (lawyer) intervention is needed.

The importance of oracles 

It should be noted that the effectiveness of the above scenario assumes the availability and accuracy of blockchain oracles to determine the aliveness of the parents and the marital status of the children. This could be problematic in the real world. Not all deaths may be recorded electronically in some jurisdictions. Fragmentation could be a problem. In the U.S., for example, the 50 states manage their own death registration systems. 

In other words, in this scenario, as in so many others, one may have to wait for real-life blockchain oracles to catch up before blockchain-based legal agreements can be fully realized.

OKX reimburses $3M to users after alleged market manipulation incident, Binance unveils AI generated NFTs and FTX Japan users made whole.

Our weekly roundup of news from East Asia curates the industrys most important developments.

OKX airdrop after token trading fiasco

OKXwill airdrop 3,014,381 Tether (USDT) to users who suffered losses as a result of the Celestial (CELT) token trading incident, the cryptocurrency exchange announced on March 1. On Feb. 26, Celestial revealed the development of a novel blockchain game, followed by extensive social media campaigns promoting the projects alleged backing by OKX. Shortly afterward, the price of CELT pumped nearly 100% in two days before plummeting over 60% after OKX clarified it had no affiliation with the project other than a $100,000 investment from OKX Ventures in November 2021.

“On Feb. 27, many influencers on social media promoted the [CELT] project by claiming that it was the Son of OKX, such actions were not authorized by the OKX exchange.”

After an investigation, OKX concluded that there was evidence of malicious market manipulation associated with the incident. The exchange explained shortly afterward that it froze 714,381 USDT held in five accounts suspected in the market manipulation and clawed back 1.3 million USDT from Celestial developers.

Combined with 1 million USDT of its own money, OKX will airdrop a total of 3 million USDT to users who purchased CELT between Feb. 25, 12:00 pm Hong Kong time and Feb. 28, 12:00 pm Hong Kong time and suffered losses. The airdrop will be delivered to affected users within the next 48 hours.

Although experts disagree on its supposed transparency, OKX has also decided to double down on its proof-of-reserves (PoR) model. On March 2, the exchange stated that its upcoming PoR report would enhance transparency by allowing anyone to download the full liability Merkle tree and that users can verify all client deposits are accounted for and claims it guarantees solvency by comparing net equity,” via novel zero-proof methods.

In its most recent update, OKX claimed that it held $8.6 billion worth of Bitcoin (BTC), Ether (ETH) and Tether on the exchange. OKXs next monthly PoR publication will take place on or around March 20.

Binance and AI NFTs

On March 1, cryptocurrency exchange Binance launched a novel AI product dubbed Bicasso. Binance CEO Changpeng Zhao (CZ) said you can turn your creative visions into NFTs with AI by uploading an image with a limit of 50MB and a description of the uploaded picture.

There is currently a waitlist as AI NFT minting was limited to a maximum of 10,000 collectibles. CZ has apparently taken an interest in exploring AI after the popular chatbot ChatGPT reached 100 million users just two months after its launch.

FTX Japan nearly completes withdrawals 

FTX Japan users have withdrawn almost all of their assets since withdrawals reopened on Feb. 21, the Japanese subsidiary of bankrupt cryptocurrency exchange FTX revealed in a Feb. 28 update. According to FTX Japan, the exchange had 80 Ethereum and 28.48 Bitcoin left unclaimed, worth $793,000 at the time of publication, among other residual assets.

Previously, FTX had disclosed that it held 6.672 billion Japanese yen ($48.83 million) in users assets before regulators halted exchange in November as part of international bankruptcy proceedings. As Japanese law required exchanges to segregate client assets from their own, many users reported being able to withdraw their FTX Japan balance in full, albeit first transferring their account to Liquid Japan, a related entity.

“We would like to sincerely apologize for causing great concern to our customers in connection with the bankruptcy of our parent company, FTX Trading Limited. We have resumed withdrawal and withdrawal services from Liquid Japan from Feb. 21, but services related to normal transactions have been suspended. Thank you for your understanding.”

Russia and Chinas blockchain friendship

The Credit Bank of Moscow (MCB) has issued the first blockchain letter of credit for more than 100 billion Chinese yuan ($14.5 billion).

In international commerce, sellers in one country typically ship purchased goods to buyers in another country and present a letter of credit to the intermediary bank for payment. According to the bank, the advantage of a digital bank guarantee is that the beneficiary does not need to wait for the paper version and make a separate request to the bank to confirm the authenticity of the issued document.”

The letter of credit is minted on MCBs Masterchain blockchain network and is displayed to all three parties of international commerce. It cannot be altered or falsified.

This is the first digital letter of credit in the market which was issued in yuan, through the Masterchain system, said Natalya Bahova, director of the international and structured finance department at MCB. Most foreign trade contracts are serviced in Chinese currency, and the demand for payments in yuan is only growing.

The decision will be especially relevant for large groups of companies that have many subsidiaries that accept letters of credits in large quantities and on a regular basis.

BitFlyer CEO wants to reinstate himself 

Yuzo Kano, the co-founder of BitFlyer Holdings, wants to return as CEO and take Japans largest cryptocurrency exchange public, according to a Feb. 26 Bloomberg report. Kano, who owns 40% of BitFlyer, stepped down in 2019 after the exchange was ordered to adopt stronger Anti-Money Laundering measures. Since then, the exchange has been embroiled in a drama culminating in a proposed sale to Singaporean fund ACA Partners in 2022, which Kano derailed.

The blockchain executive alleges that ACA and current management worked together to sell the exchange on the cheap, which is why he quashed the sale. BitFlyer currently has three million accounts and handles more Bitcoin transactions than any other exchange in Japan. If he returns, Kano aims to introduce stablecoins, build a token-issuance operation, and potentially open up its Miyabi blockchain technology to the public. He plans to bring forth a reinstatement proposal at a shareholder meeting next month.

Voyagers 1-hour due diligence on 3AC

According to bankruptcy court documents published on Feb. 28, now-broke cryptocurrency broker Voyager Digital barely verified the now-also-broke Three Arrows Capitals operations and financial standing before extending it a line of credit in early 2022. The Mr Brosnahan mentioned is the chief commercial officer of Voyager and Mr Whooley is Voyagers Treasury director:

“On February 28, 2022, the first and only diligence call was held between Voyager and 3AC. Mr. Brosnahan recollected that call lasting 30 minutes, while Mr. Whooley recollected it lasted an hour.”

Executives who attended the call said 3ACs co-founder Kyle Davies and employee Tim Lo both participated. During the questions and answers session, Brosnahan concluded that 3AC only managed its founders assets, was involved in some venture projects,” and, among other items, would not take a position larger than 1-3% of circulation of any given altcoin, to protect its liquidity. In a subsequent follow-up, 3AC provided a one-page document with the firms logo stating the firms net asset value was $3.729 billion. No other evidence or accompanying financial statements were presented:

We all know how that ended: 3AC filed for bankruptcy in June and Voyager Digital made a similar filing in July. Voyager lent a total of $654 million to 3AC that it has yet to recoup after the former suffered severe trading losses as a result of the ongoing crypto winter. The loan accounted for nearly 60% of Voyagers lending portfolio.

Ethereum’s just-launched ERC-4337 ‘account abstraction’ standard is a game changer for user-friendly crypto payments and mainstream adoption.

For years, Bitcoiners have repeated the mantra be your own bank. But in truth, storing any type of crypto in a wallet has been a lot closer to stuffing cash under your mattress than to a complex financial institution like a bank.

Admittedly, its an improvement in that crypto can be transferred across the globe in minutes and it’s secured with cryptography but its also a lot less user-friendly than a bank and doesnt offer anywhere near as many features. 

Your crypto could be stolen in a $5 wrench attack. You could lose the seed phrase and your funds forever. And thats if you were technically minded enough to even figure out the complicated process of setting up a wallet in the first place.

That’s all set to change with the surprise announcement at WalletCon in Denver this week of smart accounts, also known as account abstraction, on Ethereum and every other chain compatible with the Ethereum Virtual Machine (the EVM is the software responsible for executing Ethereum-based smart contracts).

Chains that can now take advantage of smart accounts include Polygon, Optimism, Arbitrum, BNB Smart Chain, Avalanche and Gnosis Chain.

Years in the making, the new ERC-4337 standard transforms a crypto wallet into something with all the features of a real bank.

It gives you the same features a bank would without having to trust a bank, says Ethereum Foundation security researcher Yoav Weiss, who was one of the co-authors of the Ethereum Improvement Proposal (EIP) alongside Vitalik Buterin.

Account abstraction is a way to appeal to the next billion users.

The benefits include two-factor authentication, signing transactions on your phone, the setting of monthly spending limits on an account, the use of session keys to play blockchain games without constantly having to approve transactions, decentralized recovery of wallets; smart accounts can be configured to autopay bills and subscriptions the list goes on.

Ledger co-founder Nicolas Bacca tells Magazine hes hugely impressed with the technologys potential.

Account abstraction will completely change the crypto user experience, he says. 

What does account abstraction mean?

Account abstraction is a complicated technical term for something that is actually incredibly user-friendly. Weiss and zkSync hope to replace it with the more descriptive term smart accounts.

Account abstraction is a confusing term, says Weiss. The accounts are abstracted from the network; they are not abstracted from the user. The user is using a very concrete wallet that does very specific things. From the users perspective, its not account abstraction its more like using a smart account.

Alex Jupiter, senior product manager at MetaMask, says account abstraction means different things to different developers.

In part, thats due to the fact that non-EVM scaling solutions, including StarkWare and zkSync, have implemented a modified version of ERC-4337 in the protocol itself, while Ethereum implements the standard on top of it.

“I would’t say Ethereum came up with a workaround that’s not quite as good,” Weiss explains. “We came up with a standard that can work everywhere, focusing on interoperability and defragmentation, and it can be implemented more efficiently at the protocol level, for example, by rollups.”

A variety of EIPs to add smart accounts to the protocol have been suggested but would have required a hard fork and did not get enough support, as theyd take attention away from more important upgrades, such as the Merge.

The native implementations upgrade all user accounts to smart accounts, while Ethereums new standard requires users to set up a new account. Weiss explains there will inevitably be a hard fork in future to enable the upgrading of all accounts, but itll take a long time to get there.

What are the benefits of smart accounts?

One of the biggest benefits for adoption is that it allows new users to onboard into the decentralized world of crypto without ever having to worry about complicated seed phrases or understand the technical process of setting up a wallet.

They can simply open a smart account via a smartphone app using a fingerprint or face scanner. 

While there are plenty of crypto wallets currently available as smartphone apps, they come with numerous security risks and are unsuitable for holding larger amounts of cryptocurrency due to the risk of hacks. But because smart accounts enable the cryptographic keys to be stored on the phones hardware security module, phone wallets can now be almost as safe as a hardware wallet.

Magazine tries out the onboarding process for noobs at StarkWare Sessions in Tel Aviv, Israel where gaming wallet Cartridge is handing out limited edition Briq NFTs.

The whole process takes less than 30 seconds and is completely intuitive. Users scan a QR code, choose a username, and then create a passkey using the phones fingerprint scanner.

Existing crypto users will need to reconceptualize what they thought a crypto wallet was and how to access it. The noncustodial Cartridge Controller is actually a web-based wallet that interacts with StarkNet. Instead of private keys, it makes use of Android or Apple Passkeys, which are both based on the WebAuthn standard, an intiative to standardize user authentication for web apps using public-key crytography. 

While a web wallet sounds like a scary proposition to long-term crypto users, Bacca is impressed with Cartridges implementation and says Ledger is building a similar web-based wallet that he says is secure thanks to WebAuthn.

Using a smartphone as a hardware wallet

There are a couple of catches to using a smartphone as a hardware wallet. The larger screen on a smartphone still presents a security risk, as it can be hacked to trick users into approving transactions.

However, this risk can be mitigated, as smart accounts enable users to set permissions requiring two-factor authentication for higher value transactions (using a hardware wallet, for example) or to set a daily, monthly or yearly spending limit from the account.

Bacca says Ledger is experimenting with this functionality now. So, for example, you could use your phone when you only want to do a small purchase or you could use your hardware wallet when you want to do a bigger purchase, and this can be scripted in the account, he says. We are prototyping a web application for that.

A bigger problem for using a smartphone wallet on Ethereum is that the security module uses a different cryptographic signing system (elliptic curve) than crypto. With smart accounts, the two systems can finally talk to each other, but it requires a lot of work and a lot of gas.

Motty Lavie, founder of StarkNets smartphone-based Braavos Wallet, explains it takes 240,000 computational steps to take advantage of the smartphone security module:

On Ethereum, to implement that, each transaction would be very, very costly. On StarkNet, this is a marginal cost thatll add a few cents to the transaction, which makes it viable.

Ludicrously high gas fees are a problem unique to Ethereum, however, and gas costs are more than low enough on all the other EVM blockchains and layer 2s for smartphone wallets to work just fine. Various teams are also working on gas-optimized versions of the process and, longer term, a precompile could be added to Ethereum, making the process a cheap EVM operation rather than a smart contract. (A precompiled contract carries out common cryptographic functions without using a lot of bandwidth.)

When these wallets gain traction and users get used to this great usability, itll be easier to promote this change in Ethereum itself, says Weiss. If we can add this precompile, itll be a game-changer for the ecosystem.

How to recover your account

For crypto users who dont trust the cloud, smart accounts also provide other recovery options than a seed phrase.

If a user loses their phone, time-locked social recovery means a group of trusted friends or even a commercial service can help them recover it without putting the enclosed funds at risk.

You dont ever expect to lose access [to a bank account] because if you lose your password you can always call your bank, they will verify your identity and reset your password, Weiss explains.

So, you can actually use a recovery service that lets you reset the password for your mobile phone your wallet but they cannot steal your wallet; they can only help you recover it.

Braavos employs a version of a time-locked recovery process that involves creating a seed phrase. Unlike normal seed phrases, this one can only put in a request to regain access to the account after four days.

Now the benefit here is that if your phone indeed gets lost or wrecked or whatever, then, you can get control on your account back in four days. 

But if an attacker stole your seed, then you would automatically get notified that someone has got control over your account, he adds, noting thats plenty of time to withdraw the funds before the hacker can get them.

Braavos is also working toward using zero-knowledge proofs to put the seed phrase under the hood so that the user can just interact with a decentralized forgot password-style prompt.

I think that will be a major move in terms of UX [user experience], he says.

Blockchain gaming smart wallet

Bacca explains that Ledger is already working along with Argent and Cartridge on plugins that enable gamers in StarkWare to set a session key, enabling numerous low-value transactions to go through automatically so they dont have to painstakingly approve each one.

You could load a small piece of code to your account so it will modify the way its acting with a specific game. So, you could say, If I am going to play that game… actions can be signed automatically for one hour, he says.

Thats why Im thinking that account abstraction will completely change the crypto user experience.

As an added bonus, smart accounts mean the game developer could decide to become the paymaster and cover the cost of the transaction fees to encourage use.

Transactions can also be bundled together to save on gas fees, explains Jupiter. Like a shopping cart scenario, Im going to reserve these 10 items and then pay for them all at once, he says.

MetaMask is building a new addition called Snaps that will crowdsource development of new features for the wallet. This will likely enable innovative uses of smart accounts that nobodys even thought of yet. A Snap that enables smart accounts was built at ETH India where it won Best ERC-4337 Tool. 

Smart accounts make crypto subscriptions possible

Back in December, Visas crypto research team published a paper demonstrating how smart accounts on StarkWare can be used to pay mortgage, TV subscription and utility bills automatically from self-custodial crypto wallets.

They gave a hypothetical example of someone who wants to go on holidays and have their bills paid automatically from their crypto wallet, after they get paid in two weeks time.

You can already do this from bank accounts of course, or via a custodial wallet, but both require trusting a centralized service. The paper explains that the difficulty doing it on Ethereum is because it has two types of accounts: user accounts (also known as externally owned accounts, or EOAs) and smart contract accounts.

A user account, controlled by a private key, can send transactions, explains Visa Crypto. A smart contract has associated code that can be executed, however, a smart contract cannot initiate transactions on its own. Transactions must always originate from a user account and be signed by the user.

So, if you get paid in crypto every two weeks, you have to manually initiate push transactions to pay each bill after funds are deposited into your wallet.

Smart accounts make pull payments, initiated by a biller, possible. So, for example, an electricity company could set up an auto payment smart contract on its website and list out its functions e.g., it will only initiate one transaction per month and set a maximum amount that it will charge. The user can then approve these conditional pull payments via their smart account, enabling automated bill payments after their bi-weekly pay comes in.

Suddenly, crypto becomes useful for a whole host of new payment applications.

Bacca created the worlds first Bitcoin wallet and argues that Bitcoin already lets you be your own bank. But he adds, The problem is the lack of things you can do with your money. Thats one reason hes excited about recurring payments.

Basically, saying Okay, so I am buying a subscription for a service, and then the wallet will start sending money directly matching the subscription for a given period of time, he says.

If you can script your account, there are a lot more use cases that come to mind and that are similar to what we do in Web2.

How ERC-4337 works

Some of the functionality that smart accounts enable was already available via smart contract wallets from Gnosis and Argent; however, these solutions require centralized components called relays to pay transaction fees for the operations. 

The new ERC-4337 standard on Ethereum decentralizes that part as well with new decentralized infrastructure called bundlers.

The process works like this: A smart wallet signs a user operation, which gets fired to a special mempool, which is basically just an organized queue of transactions (albeit a different queue to Ethereums normal mempool).

Bundlers are like miners or validators and take user operations from the mempool and deliver the desired result back to the wallet. The bundlers also pay for the gas (transaction fee) required and are compensated by the users contract account, or by a third party known as a paymaster. This could be a decentralized app or it could be a wallet provider.

The first production grade bundler to be deployed on mainnet is from wallet and infrastructure provider Stackup, but more will be available soon. As its decentralized and permissionless, anyone can run a bundler.

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Stablecoins are facing the wrath of regulators amid doubts over reserves and contagion fears. Could a bank run lead to a major depegging?

Stablecoins are entering a period of great uncertainty following the U.S. Securities and Exchange Commission labeling BUSD an unregistered security and ordering Paxos to stop minting new tokens.

Do these moves signal a wider war by U.S. regulators on stablecoins? Could the SEC declare all stablecoins securities, or is BUSD a special case?

Independent crypto reporter Amy Castor, who has been covering cryptocurrencies since 2016, believes the BUSD crackdown is aimed squarely at the worlds largest crypto exchange, Binance: 

Going after Paxos-issued BUSD is part of a much broader crackdown on crypto. They are going after the jugular, and they plan to cut off the blood supply.”

She continues, They want to kill BUSD because BUSD is critical to Binance, which is the largest offshore crypto casino. Binance auto-converts every U.S. dollar and stablecoin to BUSD (the pegged version). Now theyll have to find something else to auto-convert to probably Tether. So, maybe the authorities will target Tether next, something that has been a long time coming.

Even before these regulatory moves on BUSD, various indicators showed a large redemption of stablecoins between September 2022 and February 2023. Could a bank run on redemptions lead to a significant stablecoin depegging event? Some think so, pointing to convoluted cash reserves held by stablecoin treasuries, the need for third-party audits, and the uneasy relationship between stablecoins and the U.S. Treasury. 

So, how stable are stablecoins? 

Types of stablecoins

A stablecoin is just a token pegged to the value of an asset, an algorithm or a fiat currency. Theyre hugely popular as a de facto working capital for traders or as a safe haven to cash out, with the total value settled using stablecoins last year hitting $7 trillion thats more than Mastercard. 

As of Feb. 10, the three big dollar-denominated fiat-collateralized stablecoins (USDT, USDC and BUSD) represent almost 12% of the total crypto market cap and account for 91.58% of the entire stablecoin supply.

Given that the U.S. dollar is the global reserve currency, stablecoins gravitate toward it as a peg, but there are other categories. Asset-collateralized stablecoins use real-world assets, such as gold, for collateral to maintain stable price levels, like with Paxos PAXG.

Stablecoins collateralized by baskets of cryptocurrencies are backed by other cryptocurrencies and stablecoins, which might themselves be asset-collateralized or fiat-collateralized. MakerDAOs Dai invented this model. Dai is an algo-stablecoin backed by various other stablecoins, Ether and wrapped Bitcoin.

Most controversial, algorithmic stablecoins combine a decentralized minting mechanism with economic incentives to maintain their peg to a target value, usually the dollar. Automated processes in theory keep their value close to that target. Clearly still experimental, price peg algorithms let traders mint and burn coins as needed to maintain their price.

In May 2022, Terras algorithmic stablecoin, UST, famously depegged because of its circular dependency design. Multiple wallets exploited vulnerabilities in the Terra ecosystem and its automated procedures. The UST stablecoin and its collateral token, LUNA collapsed, dragging the market into another winter. 

The bad news is that fiat-collateralized stablecoins can also depeg in a bank run. 

Depegging and cash reserves 

Stablecoins move up and down with their dollar pegs constantly, within a predefined range of normal movement. A small range of fluctuations is normal, but significant movement for a sustained duration leads to depegging concerns.

The real problem is the actual pegging itself, says Sinclair Davidson, an economist at RMIT University. Creating a fixed exchange rate regime is tried and tested. Nation-states have failed, and now, the private sector is trying to do the same. Almost all pegged exchanges in human history have been subject to attacks.

Bank runs are a self-fulfilling prophecy, as customers race to withdraw funds in a panic before others beat them to it. Stablecoins can depeg and potentially collapse at hyperspeed, as they are sold on hundreds of crypto exchanges and traded 24/7. 

Some collateral is less liquid, and valuations of stated collateral may change based on the price of the underlying assets and the costs of converting it to cash. Even USDT, USDC and BUSD face risks that are hard for seasoned crypto investors to see.

For example, USDTs collateral incorporates secured loans (8.7%) and other investments (4%), with unknown information on their maturity details or underlying security. USDT also lists corporate bonds and precious metals (5.1%) in its audited reports.

The USDT report dated December 2022 shows only 58.5% of cash reserves in U.S. Treasurys, with an average maturity date of fewer than 60 days. By comparison, USDC and BUSD have 100% of their collateral with the U.S. Treasury Department as bonds and also strong cash deposits.

So, as fiat-collateralized stablecoins grow in market cap, third-party audits verifying proof of collateral will become a crucial part of the industry. They are already a topical issue since the FTX collapse and for DAO treasuries, whose native tokens might be highly volatile. So, a bank run depeg is plausible. 

Recent redemption depeg threats 

Whale Alert a blockchain analytics system reporting token burns and mints for USDT, USDC and BUSD records that from late 2022 to early 2023, there was a significant increase in stablecoin redemptions, predominantly in BUSD.

The declining market caps of these stablecoins confirm this. Since their all-time supply highs in November 2022 until Feb. 10, 2023, a combined $9.8 billion or 7.23% of stablecoins were redeemed and exited the crypto market. Before Feb. 13s SEC actions, BUSD already represented over 31% of redemptions.

Crypto investors might not have noticed the decrease in stablecoin dominance in the crypto market. Stablecoins slid down from a 16.5% market cap to 12.9% over the past three months, removing almost $10 billion of liquidity from the market.

Large-scale redemptions have meant reduced liquidity for stablecoins. These fiat-collateralized or Treasury-collateralized stablecoins might stress-test the current cash-on-hand ratios (the 20% range in the case of USDC, 6% for BUSD, and an unknown ratio for USDT). 

So, fiat-collateralized may be a misnomer, as up to 80% of the collateral is held in 30-day fixed-maturity Treasury bills, with only 20% held in liquid cash deposits. 

Stablecoins are likely to remain relatively stable during a market crash. However, large withdrawals of stablecoins on centralized exchanges to self-custody wallets or into fiat may cause delays. CEXs, the fiat on- and off-ramps, may not have sufficient stablecoins to meet withdrawals, or the volume of stablecoin redemptions may be larger than the cash on hand for instant redemptions.

The latter example is untested but possible. On Dec. 13, 2022, Binance paused over $1.6 billion in USDC withdrawals, as the exchange didnt have the USDC on hand to fund said withdrawals.  

The delay was around eight hours, but these redemption delays have the potential to temporarily depeg a stablecoin.

Third-party audits needed

According to the September 2022 attestation report from Grant Thornton USDCs auditors only 19.4% of USDC was held as cash deposits. The remaining 80.6% was held as reserve assets, a range of U.S. securities with a weighted average maturity date of 29.6 days. 

Therefore, trust in stablecoin auditors is paramount and theres not much trust around. Many in the crypto community, for example, have reservations about Tether, which has engaged six different accounting firms since 2017. It has also been fined $41 million by the Commodity Futures Trading Commission for publishing false reserves data. The CFTC said that rather than having $1 of backing for every 1 USDT as Tether claimed Tether at one point had $61.5 million while having more than 442 million USDT circulating.

Tethers accounting firm, Friedman LLP, was accused by the SEC of serial violations of the federal securities laws as well as improper professional conduct and fined $1 million. 

Castor highlights Tethers tricky actions when it opened an account at Noble Bank on the morning of Sept. 15, 2017: 

Bitfinex transferred $382 million into Tethers account from their account, and then Tether showed Friedman LLC their new account balance at 8:00 pm that day. 

Crucially, while stablecoin providers have engaged independent auditors, there are significant differences between attestations and full audits. For example, Grant Thortons September 2022 report on USDCs financials is called an attestation report, not a full audit. In the introduction, there is a disclaimer that Circle self-attests its own financial reporting: 

Circle Internet Financial, LLCs management is responsible for its assertion. Our responsibility is to express an opinion on the Reserve Information in the accompanying USDC Reserve Report based on our examination.

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Castor points out that An attestation is a snapshot. It means that maybe the stablecoins were fully backed for a minute. Thats about all it means. She continues:

In a full audit, you want to look for unreported liabilities. You also want to check the reserve over time to make sure the stablecoin issuer doesnt pull the wool over the accountants eyes as Tether did in 2017.  

In summary, the next bank run could depeg USDC if more than 20% of cash deposits are required to fulfill customer redemptions in a short space of time, and contagion could spread quickly. The market cap for stablecoins is now too big for the U.S. government to ignore.

What happened with BUSD?

In February, the SEC issued a Wells notice (meaning it is considering enforcement action) to Paxos, alleging that BUSD is an unregistered security. Paxos can now respond with its case against being sued. But the SEC has stated that it considers most crypto assets securities, including stablecoins. 

We dont know exactly why the SEC is targeting BUSD because the Wells notice is not public and the SEC has not filed a complaint yet, Castor tells Magazine.

So, we dont know if there is something special about BUSD that the SEC doesnt like or if they are planning to target all stablecoins. Certainly, the latter is what everyone in crypto is afraid of.

A rumor the SEC had sent Circle a Wells notice over USDC was quickly denied.

According to Castor, BUSD issued by Paxos is not an investment contract according to the Howey test (which determines what a security is under U.S. law) because theres no expectation of profit. However, the Securities Act of 1933 includes more than 30 features that define a security. 

We also cant rule out that the SEC may also be targeting BUSD because it doesnt like the relationship that Paxos has with Binance.

She continues, Paxos relationship with Binance and the Binance-peg BUSD does not sit well with the NYDFS, so the NYDFS has asked Paxos to stop issuing BUSD and proceed with an orderly redemption, which means KYC/AML.

To clarify, there are two forms of BUSD: the Paxos-issued BUSD, which is an Ethereum ERC-20 token, and a second version called Binance-Peg BUSD that is issued by Binance and is run on a plethora of other blockchains.

While Paxos-issued BUSD is backed by real dollars in bank accounts, the Binance-Peg BUSD is a stablecoin of a stablecoin. Sometimes its properly backed, and sometimes its not, Castor says. That could be the SECs concern.

Paxos will only redeem BUSD on the Ethereum blockchain, not wrapped BUSD. Some believe the price of Bitcoin has spiked because users who cannot redeem their BUSD are buying Bitcoin to cash out.

Castor also thinks this BUSD redemption is causing issues with banks, as $16 billion is getting sucked out of the banks. Paxos keeps deposits in a few banks, including the two major crypto banks, Silvergate and Signature. Silvergate is already under fire because it got a $4.3 billion bailout from a Federal Home Loan Bank. Following the FTX implosion, Silvergates other crypto customers took out their money in a panic, and the bank lost $8.1 billion in deposits, she says.

They werent insolvent they had loans to cover those deposits but didnt have cash-on-hand liquidity. So, they got a $4.3 billion loan from the Fed. 

This is an example of the sort of contagion the U.S. government is worried about and explains why it has been busy trying to erect firewalls between traditional banks and the crypto industry.

Davidson cautions, however, that a certain amount of issues are to be expected with any innovative financial technology.

Failure here in the crypto industry shouldnt be condemned as showing how terrible crypto is. This has always happened in human history. Not to say stablecoins wont succeed, but we should still expect a lot of trial and error, says Davidson.

U.S. Treasury and contagion risk

Stablecoins are also becoming substantial holders of U.S. securities, creating risks for not only the crypto markets but also bondholders and the U.S. government.

According to the U.S. Department of Treasury, the combined market cap of U.S. dollar stablecoins as of October 2022 would make them the 16th-largest holder of U.S. securities, behind Singapore and ahead of Saudi Arabia, Korea, Norway, Germany and 20 other nations.

A majority of the collateral held by these stablecoins was in U.S. Treasury securities. A run on stablecoins could spill into bond markets, as issuers of these cryptocurrencies may have to sell U.S. Treasurys to honor redemptions, warns Eswar Prasad, an economics professor at Cornell University:

And a large volume of redemptions even in a fairly liquid market can create turmoil in the underlying securities market. And given how important the Treasury securities market is to the broader financial system in the U.S., […] I think regulators are rightly concerned.

Davidson agrees. Depegging can spill over into non-crypto markets. As investors sell off crypto assets, they also sell off non-crypto assets. Over time, we will expect to see the correlation to rise, similar to all risky assets.

The correlation takes place, says Davidson, because some groups of individuals increasingly own both classes of assets.

This complex relationship between stablecoins and U.S. Treasury securities as collateral means regulation is coming. While the SEC can attempt to regulate via enforcement, Congress will have the final word.

Regulation imminent 

Just before Christmas 2022, outgoing Pennsylvania Senator Pat Toomey introduced a bill titled Stablecoin Transparency of Reserves and Uniform Safe Transactions Act of 2022 to the U.S. Senate. The bill included plans for standardized disclosure requirements and attestations by registered accounting firms for stablecoin issuers. It also proposed a licensing system for stablecoin issuers and improved consumer protections by prioritizing consumers if a stablecoin issuer became insolvent. 

Ari Redbord, head of legal and government affairs at TRM Labs a blockchain intelligence company tells Magazine that blockchains transparency is actually quite beneficial for regulators and law enforcement agencies and can ultimately help avoid illicit activity, maintain market integrity and mitigate systemic risks.

Redbord was formerly a senior adviser to the deputy secretary and the undersecretary for terrorism and financial intelligence at the Treasury. He notes that even the collapse of Terra didnt affect the broader economy.  

Policymakers such as the U.S. Treasury secretary even in response to Terra made clear that stablecoins do not, today, pose a significant risk to the broader financial system.

While Congress could not reach an agreement on legislation last year, Redbord  points out that stablecoins are one of the few areas on which we see general agreement between policymakers and industry.

We are likely to see progress on a bill on stablecoins this year that requires 1:1 segregated reserves, meaningful audits and other consumer protection controls, he says. In this more optimistic view, regulatory guidance will help the industry and lead to broader adoption. 

Artist name: Grant Riven Yun Location: Milwaukee Date minted first NFT: Feb. 3, 2021Which blockchains? Ethereum, Counterparty (Bitcoin) Who is he? Grant Yun has always been an artist at heart with an early aspiration to have his work featured at a major auction house. A curious and motivated individual, Yun is studying medicine while juggling his work […]

Artist name: Grant Riven Yun 
Location: Milwaukee 
Date minted first NFT: Feb. 3, 2021
Which blockchains? Ethereum, Counterparty (Bitcoin)

Who is he?

Grant Yun has always been an artist at heart with an early aspiration to have his work featured at a major auction house. A curious and motivated individual, Yun is studying medicine while juggling his work as an artist and performing as a breakdancer who has competed all over the United States. 

Since discovering NFTs a little over two years ago, the Wisconsin resident has propelled his art and personal brand into the stratosphere much quicker than hed imagined. With a minimalist style that elicits nostalgic vibes among collectors and his witty personality on Twitter, Yun is slicing out a significant percentage of mindshare amongst digital art fans. 

Before NFTs, I told myself I would become an artist who sells at a large auction house one day because, at the time, that was my only metric through which I knew what it meant to be a successful artist. I had no experience being an artist overall, so that was the only metric I had to measure. 

He reached the metric in October 2022:

Having my work be put up at Sothebys was surreal. I think the most pivotal moment for me was when I signed the contract… It just felt like such a monumental moment.

Yun paid homage to NFTs as the accelerant that helped him achieve what might otherwise have taken a decade. 

Its honestly been surreal. I think that the growth of artists in this space is hyper accelerated. To have achieved what Ive achieved shouldnt happen within a decade. For me, it happened within two years of me joining the space. But, here we are. 

Personal style

Describing his own distinct style, Yun acknowledges the impact of simplicity to evoke memories and the impact of old school video games. 

I see my work as minimalist and nostalgic, he says. I think my art is really focused on being ambiguous enough to where people can relate to it with their own personal experiences, but specific enough to where it can elicit certain memories from peoples lives.

I try to limit the amount of details and clutter. Its really a less in more kind of mentality.

With the gaming vibes in my art, its mostly based around Nintendo games particularly the Super Nintendo era, Nintendo 64 and GameCube. I feel like Nintendo games, especially the ones that were published by Nintendo themselves, have a very specific color palette a bit like Pokemon and The Legend of Zelda. All of those have a very unique and similar kind of set of colors. 

Notable sales to date:

The Alien from the series Space sold for 136.9 ETH on July 28, 2022 ($236,217 equivalent on date of sale).

Laundry from the series Northeast sold for 70 ETH on Jan. 28, 2023 ($115,182 equivalent on date of sale).

Casa Roja from Grant Yun Early Works sold for 25 ETH on Jan. 8, 2023 ($31,596.50 equivalent on date of sale).

En Route #7 from the Grant Yun x Avant Arte collection sold for 16 ETH on Jan. 3, 2023 ($19,426 equivalent on date of sale).

Influences

Traditional art continues to provide inspiration, particularly established painters from the early to mid-20th century, such as American Gothic painter Grant Wood or the pop artist Ed Ruscha.

Most of my inspiration comes from painters like Grant and Ed and studying painting from the traditional art world. 

Yun added, I should mention, I do like to leave easter egg, crypto-related things in my illustrations. But the vision for where my art is going I think has remained the same. 

What should artists be paying attention to? 

As a student of the digital art game and a big fan of generative art in particular, Yun says Mpkoz is one to watch out for. Mpkoz is the artist behind the notable collection Chimera. 

Also receiving props from Yun is Summer Wagner, an emerging NFT photographer who Justin Aversano also rated in a recent NFT Creator. 

Two of my favorites right now are definitely Summer and Mpkoz. Theres so many others I know Im leaving out though. 

Process 

Known for his ability to uncover the charm in commonplace surroundings, Yun is also a fan of categories and creating work in a series. 

When I create an illustration, I try for the most part to sub-categorize them into certain series. I think I do my best work in a series, Yun said. 

To me, it helps because I like to view the world in a categorical manner. I also think a lot of people do the same subconsciously or consciously. I believe this is why we always place a big emphasis on collecting a set or even collecting in general. For continuitys sake for myself and also for collecting, he says. I try to work with very similar themes from past illustrations.

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Having moved from the hustle and bustle of California to the quieter fields of Wisconsin, Yun is passionate about telling a story within his art simply by being present and observing what is right in front of him. 

All of my themes come from my experiences, like where Ive lived and particular memories Ive had. When I set out to create an illustration, I kind of dwell and think of a composition in my head. For example, if Im driving somewhere and I see a random thing on the side of the road, Ill have a composition come to my head, but I then try to shape that composition into a series that Im working on. 

Another example might be, if I look out of the window and I see a building, Ill try to make sure that Ill use that building as a reference, but the illustration itself will try to embody one of the different themes that I have going on. 

Musings on the new artist/collector relationship via NFTs

Yun says the artist-collector relationship is completely different in the NFT world than in the traditional art world. Prior to NFTs, artists were represented by galleries, and the galleries were the line of communication for collectors and buyers. It was almost discouraged and it still is almost discouraged for artists to do direct transactions or communications with collectors. This is in complete contrast to what is happening right now in the Web3 space, Yun says. 

Like other creators, he attributes his presence on social media to building up a following. If Im being honest, I do think part of my success is due to how active I am on Twitter and how willing and eager I am to talk to people. He adds that he doesnt think the value of art should be entirely dictated by ones willingness to be active on Twitter. 

I do feel for people who might not be in their 20s like I am, or who might not be technologically savvy enough or have the experience like I do being around technology essentially since birth.

Links: 

Grant Yun website 
Breakdance record and video
Grails III Artist Reveal Show 
SuperRare 

Ethical consumption is a trend on the rise as the world grapples with exhausted landscapes. Initiatives like the EU Digital Product Passport may force the trend forward.

Chris Georgen, founder of the social impact-focused blockchain company Topl, believes that many consumers are unaware of the consequences of their buying habits.

Forced labor, deforestation, the destruction of endangered habitats… As responsible citizens of the world, we wouldnt knowingly support, condone or participate in anything like this, he tells Magazine. 

Unfortunately, too often, what we buy can lead to this (and sometimes worse). Whether we know it or not, the things we buy profoundly impact the lives of others and the health of our planet.

Blockchain may not be able to solve these problems directly, but it can play a significant role in supply chain transparency and rewarding ethical behavior.

Mesbah Sabur, founder of Circularise a blockchain company tackling traceability solutions for a more circular economy stresses the importance of consumers making greener choices:

As consumers, we should be more informed about where the products we buy come from, what they are made of, and how they impact people and the planet. Consequently, making choices towards more ethical options and signaling the market a need for change.

The rise in global challenges signifies our collective responsibility to reverse the rate of environmental degradation, says Sabur.

Many believe that tracing the origin of products allows people to better understand the impact of their products and make more informed choices.

We can trace the coffee beans in our morning latte across continents to see exactly what a local farmer was paid. We can even use blockchain technology to begin to unpack what are known as Scope 3 carbon emissions and better understand the climate impact of the goods we buy, says Georgen.

The public is increasingly concerned with the values of businesses. How the company treats its customers, its employees and its raw materials make blockchain-based systems a natural fit for ethical consumerism.

There are two ways that consumers could adopt or, more controversially, be compelled to adhere to standards of ethical consumption. The first is through regulation and enforced rules around production, which Energy Web a blockchain-based nonprofit accelerating the transition to clean energy believes is coming in the near future. The second is by embedding technology within products that afford consumers more choices when it comes to their buying behavior.

More robust tracking of product supply chains and broadening access to carbon markets are ways blockchain technology can encourage future ethical consumption.

Infrastructure for ethical product standards

To better understand the enforcement of production standards, Magazine sat down with Ioannis Vlachos, commercial director of Energy Web one of the key stakeholders working on the EUs CIRPASS passport, which will see end-to-end traceability of products.

EnergyWeb aims to foster and promote the transition to interoperable public infrastructure. Regulation looks set to play a key role in facilitating this transition.

New EU commercial infrastructure will include the CIRPASS Digital Product Passport, which brings together 30 stakeholders, including blockchain technologists. Vlachos explains that Energy Web acts as an open-source middleware layer within the CIRPASS project.

We believe as an organization that if you want to create impact, you should be open, you should be public. There is no room for making money strategies based on private blockchains. Or creating vendor lock-ins. We do believe that impact comes from open-source and public things.

The purpose, according to Vlachos, is to lay the foundation for cross-sectoral product passports based on common rules, principles, taxonomies and standards.

Providing information about the sustainability of different products is currently voluntary, but it will soon be regulated by the European Commission. It will be mandated that every single battery imported into European Commission member states be traced from the cradle to the grave.

Regulation creates public awareness. If everyone is talking about this new digital passport of the European Commission, consumers start becoming more aware of why they should care, continues Vlachos.

Morpheus.Network has also been using blockchain technology for supply chain transparency. Dan Weinberger, founder of Morpheus.Network, believes that companies will find it easier to demonstrate ethical standards if a blockchain records a products journey.

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By leveraging the decentralized nature of blockchain technology, companies can provide consumers with a clear record of a products journey from production to purchase, he says. Furthermore, the use of smart contracts can automate compliance and certifications, making it easier for companies to demonstrate that their products meet certain ethical or sustainability standards.

Public locked out of the carbon market

In a 2020 report, the United Kingdoms Food Standards Agency found that Gen Z cares most about the environmental impact of food and believes technology will play a key role in the delivery of food with low environmental impact.

Empowering consumers to partake in these trends is an issue that requires further research and practical approaches. For example, many of these solutions are spearheaded by international bodies and are often highly fragmented and centralized, says Alexander Mitrovich, CEO of Unique Network a blockchain-based project building NFT infrastructure within the Polkadot ecosystem.

The current methods for recording carbon emissions and credits are coming under increased scrutiny, as credits are often bought in bulk by government agencies or large corporations. The World Economic Forum reported on the issue last year, stating that the overwhelming majority of the $851 billion carbon market is closed off from the general public.

They have high financial barriers. The regulations around carbon markets are issued by different central bodies that often do not align. Tokenizing carbon credits on a blockchain offers an opportunity to design an emission reduction consensus in line with international treaties like the Paris Agreement, says Mitrovich.

One potential road toward increased consumer participation is the use of nonfungible tokens that could act as receipts and divide credits so that they become accessible to daily consumers.

Mitrovich believes that carbon credit NFTs allow individuals to see the positive impact they make on societal problems.

Tokenized carbon credits are also transparent, immutable and avoid double-counting. Using advanced NFT capabilities, various properties can be nested into tokenized carbon credits to allow various benefits and rights to vote to contributors.

However, the public also needs to be aware of how to access these climate-positive activities, and to date, blockchain companies are not providing easy entry points for the average consumer.

Providing easy entry points

Unlocking the value of deals for carbon projects and those that buy into them is a way for the public to participate in what otherwise appears a difficult market to access. Solid World DAO wants to make carbon markets as liquid as possible by developing diversified pools of financing, increasing conscious consumers access to the markets. 

This type of brand consciousness is especially important among younger people, but there are also selfish reasons to know exactly where your products are coming from because it helps you ensure that you are getting something safe and reliable, says John Vibes, community manager at Solid World DAO.

For Energy Web, it is important that the consumer can verify product claims easily.

I would be able to verify by just pulling my mobile phone out of my pocket, scanning the QR code on certain products, and logging how the materials were sourced without revealing any sensitive information but with the ability to validate by myself, explains Vlachos.

Georgen says that Topl is already helping consumers make choices that better align with their values. Consumers are able to scan QR codes on everything from tea and chocolates to their clothing to see where these products originate and what type of labor practices were used. In the future, we not only can imagine the availability of this data extending to more products, but we can even envision a world where consumers can be rewarded for shopping more ethically, says Georgen.

With the development of easy entry points, consumers can make better choices automatically.