August 29, 2024 | Read Online

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"Give the people what they want."

— The Kinks on crypto investing

Thursday Securities Mailbag

Q: Are NFTs securities?

At the risk of being crypto-cancelled, yes, I think some NFTs could reasonably be categorized as securities.

As a refresher, the Howey test would define NFTs as securities if there is an investment of money [check], with the expectation of profit [usually], in a common enterprise [sometimes], based on the efforts of others [often].

Is it unreasonable to think that at least one of the many thousands of NFTs that have been listed on OpenSea ticks all those boxes?

Because that's all the SEC needs, just one.

I suspect even crypto mom Hester Peirce would think they might manage: As far back as 2021, she warned NFT creators and exchanges that "the definition of security can be pretty broad" and that fractionalizing NFTs could well meet it.

OpenSea, the NFT exchange that's received a Wells notice from the SEC, does appear to list fractionalized NFTs, like this one, and if that's what it's about, they maybe shouldn't be surprised.

Nevertheless, I share the righteous indignation that the attack on OpenSea has provoked on Crypto Twitter.

The vast majority of NFTs are clearly not securities — probably not even the for-profit ones offered this week by President Trump in his gloriously late-night-infomercial fashion.

(Although, "we're gonna have a lot of fun" and "I'm doing great things for my Trump card collectors" might reasonably be construed as raising an expectation of profit based on the efforts of others, so, maybe.)

By any definition, the market for NFTs that might plausibly be securities is so small that threatening OpenSea is — at best — a waste of the agency's limited resources.

At worst, it will stifle a market that still has a lot of promise.

Also, it's just mean — NFT volumes have collapsed from their 2021 heyday and OpenSea's market share has collapsed as well — they only do about 10% of that much reduced market now.

Whatever the merits of their Wells notice, kicking a dog when it's down is a bad look for the already unpopular SEC.

Q: Is USDC less great than RAI?

That is Vitalik's assessment, so you have to respect it, but I have enough belief in markets to think that the comparative market capitalizations ($34 billion for USDC vs. just $3.7 million for RAI) must mean something.

What I think it means is that, for payments, trading, and even storing value, people don't want crypto with less volatility — they want digital dollars with zero volatility.

RAI is a "non-pegged stable asset" and that is a worthy experiment — the reason we have centralized stablecoins is because decentralized cryptos are too volatile, so it makes sense that a less-volatile, decentralized semi-stablecoin like RAI might have caught on.

But things don't always make sense and sometimes you just have to accept the verdict of markets: Insisting that RAI is better than USDC is like insisting that Esperanto is better than English.

You might be right in some technical sense, but no one will care, because, in both cases, the market has spoken: People want US dollars and (US) English.

I'm also sympathetic to Vitalik's larger point, which is that he's not entirely happy with the kinds of applications that crypto builders have been building.

But the purpose of businesses (including crypto ones) is to create things that people want — not tell them what they should want.

The purpose of markets is to facilitate the allocation of resources to that end.

Crypto markets don't seem to be doing a great job of that, perhaps because the industry is still dominated by people who got impossibly wealthy simply by being early — which now affords them the freedom to ignore market forces.

To succeed, though, the allocation of crypto's resources will have to be more market-driven.

As discussed yesterday (and here, too), I think that's starting to happen.

It's no longer all that early in crypto — you probably won't 1,000x your money just by waiting for a new wave of buyers to indiscriminately buy up every crypto as much of the OG crowd did.

To get rich from here, you'll instead have to do the hard work of finding protocols that go on to provide real value to large numbers of people who are otherwise uninterested in crypto.

In other words, if we do our job as investors, we'll be allocating our capital to the builders who are building products and services that people will want.

The days of hitting it impossibly big just by creating tokens that traders might want are probably over.

Q: Will stablecoins have to KYC their holders?

That might be the thing to make RAI great again, but I'm hopeful it won't come to that.

On Tuesday, I compared the financial privacy provided by stablecoins to the messaging privacy provided by end-to-end encryption and made the point that both of these privacies exist only at the pleasure of our governments.

Stablecoins, I think, have a better chance of staying in their good graces.

Messaging apps are more popular than stablecoins, but they are one high-profile scandal away from being forced to build backdoors into their messaging apps so that they can deliver the kind of information that French law enforcement is demanding of Telegram founder Pavel Durov this week.

If so, that would undermine the purpose of end-to-end encryption — the messaging companies would probably still call it encrypted, but encryption with a backdoor is no longer encryption.

Stablecoin issuers, by contrast, can (and do) cooperate with law enforcement without compromising the design of their stablecoins.

Stablecoins were a compromise right from the start (crypto, but centralized) and I think that might prove to be their saving grace.

If they can give law enforcement what they want (freezing funds, being transparent), they'll be able to give holders what they want, too — digital dollars.

— Byron Gilliam

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Can Bitcoin Break Through $70k, Or Lower?

Avi and Jonah dive deep into Telegram/TON and what's next for crypto. They answer: Is ETH this cycle's XRP? The duo also opines on how to improve trade execution before ending the episode with a live Q&A segment.

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Dan Smith @smyyguy

An interesting question to ponder is how TEV should be distributed between validators, stakers, and token holders

Today Solana sees roughly a 1/3 split, with validators earning all tx fees + comm. on tips, stakers earning tips less comm., and holders benefiting from the burn