Last October, the Financial Crimes Enforcement Network (FinCEN) – the U.S. Treasury Department's money laundering watchdog – announced a proposal to label crypto mixers as a "primary money laundering" concern, a move that alarmed a broad swath of the crypto industry. Treasury Under Secretary for Terrorism and Financial Intelligence Brian Nelson addressed this move and more at CoinDesk's Consensus 2024 last month in Austin, Texas on stage. The following transcript has been lightly edited (and the bulk of my questions have been slimmed down to their gist).

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'This is not a ban on mixers'

The narrative

Brian Nelson is a senior Treasury Department official focused on both money laundering and sanctions issues. He's addressed and overseen actions taken both by FinCEN and the Office of Foreign Assets Control (OFAC). Last month, he joined me on stage at Consensus.

Why it matters

Treasury Under Secretary for Terrorism and Financial Intelligence Brian Nelson discussed Treasury's proposed rulemakings and other issues on stage in Austin last month.

Breaking it down

Nikhilesh De: I just want to give you a chance to really just introduce yourself and talk about what you're doing and why you're here.

Brian Nelson: So, first of all, thank you for having me. And some of you may know, I am the Under Secretary for Terrorism, Financial Intelligence at the Department of the Treasury, which has the responsibility for managing both our Office of Foreign Assets Control, which administers U.S. sanctions, as well as our Financial Crime Enforcement Network that administers the Bank Secrecy Act and all of the AML/CFT [anti-money laundering/combating the financing of terrorism] obligations financial institutions have to comply with that are operating here in the United States. I also have offices that do international policy work, because what we have discovered in this space, both in terms of our sanctions authorities, as well as our AML/CFT authorities, is that we need to do that with partners and in a way that is directionally aligned with setting global standards. And then lastly, we have an office of intelligence analysis, intelligence office that really is the foundation for so much of the work that we're able to do,

I thought I would just take a couple of minutes to level-set a little bit about the work that we're doing in the space that's most relevant to you all and, and give you a sense of where we're going. So I know, across a number of sessions for this year, there's really been a guiding principle focused on innovation and ensuring privacy, while also mitigating those risks. And of course, I'm primarily interested in those risks associated with illicit finance. As I said, one of the reasons why I am here and why we have so much industry engagement is because this work requires that we all have a firm understanding of the threats and risks and vulnerabilities associated with any of these products and services, including, of course, financial services. I'll announce – maybe some of you all have seen it – but today, we published a risk assessment on non-fungible tokens or NFTs. It really identifies that NFT and NFT platforms, while rarely used for terrorists or proliferation financing, are really highly susceptible to the use and fraud and scams, and many of these traditional schemes that involve NFTs which can be of course stolen from victims, and then use to launder proceeds generated from illicit activities. I would just encourage you all to read it if you haven't had a chance to read it yet, and it just dropped a couple of hours ago. It really builds on national risk assessments that we've done in the context of money laundering, proliferation, financing and terrorism financing over the course of this year, and all of these NRAS noted that we are really continuing to observe that digital assets are being abused by those actors that you would expect. So these are North Korean cyber criminals as well as ransomware actors. And they're doing this to generate revenue and launder their illicit proceeds.

We've also identified some newer trends within the digital asset ecosystem, which includes a sharp rise in investment scams. I think you all are familiar with pig butchering. This was something that was relatively new to me, as well, last year, but we're really seeing that is generating quite a bit of losses as well as other investment schemes that have accounted for 75% of internet enabled investment fraud, as of 2023, and those losses totaled over two and a half billion dollars. We've also observed the increased use of stable coins, notably tethers USD T by sanctioned person scammers and terrorist groups. And a key theme across all of that is that bad actors are seeking out those jurisdictions. And those products where there are weak or insufficient AML/CFT, or sanctions, compliance programs, and some virtual assets, service providers are sort of outright failing to meet their compliance obligations. So all of this, I think, emphasizes the importance of our engagement with you and your companies, as well as, from my perspective, how significant a national security risks, some of this activity really poses to the United States. Just a last word, and then want to get to the conversation. You may have seen late last year, we, along with our colleagues at the Department of Justice, and the CFTC, took an enforcement action against Binance, which of course, is the world's largest virtual assets service provider. We did that because of the extraordinary amount of illicit activity we received through Binance. And their failure to meaningfully manage an AML/CFT compliance program, particularly as it related to U.S. persons. And it really reflects our desire to create an environment that incentivizes compliance, and that's through education as well as enforcement, additional regulatory clarity, and all of that, again, really requires that we work collaboratively together. So I'm happy to be here and in that spirit, I've told you a lot about what we're doing. I'm excited to have this conversation and reflect some more on the way ahead. Awesome.

I think the area I want to start with is most recently, you mentioned the report on NFTs. How do you build on that? Can you just speak to you know, what's the next steps? What will you do with this information now that you've put it together?

That's a great question. And really, we identified NFTs as a particular source of risk back in 2022, when we released the risk assessment, as it relates to the digital asset ecosystem, broadly and committed that we would take a closer look at this asset class in particular, recognizing that NFTs and MT platforms are hard to define because they have the capacity to do a number of things. And of course, in 2022, the sort of NFT marketplace was going way up, it went down and, it's sort of come back up a little bit over the last number of months. But I think it reflects that absent, you know, sort of whatever the market movements are, we perceive, given the risk of abuse by illicit actors that we need to emphasize doing a number of things, one, creating the shared understanding through our risk assessment, which is really to communicate to stakeholders in industry, but obviously, across our government and with international partners, acknowledge that there's probably work that we need to do to better clarify how our regulatory authorities and AML/CFT compliance relates to NFTs. We need to do more things like this, which is enhanced stakeholder engagement, which we are committed to do. And, you know, sort of I think critically, from what I see is the sort of this jurisdictional arbitrage. So it's the capacity for virtual assets, service providers, you know, other actors within the virtual asset ecosystem to build companies that really don't have that compliance tone from the top technology to manage illicit finance risks. So working with foreign jurisdictions to have a shared understanding of the best way to regulate NFTs internationally, with sort of one clearly understood standard is another way for err that we identified in this report. Gotcha.

One thing that I think was really controversial within crypto circles was the NPRM, the Notice of Proposed Rulemaking, last year on crypto mixers and potentially treating them as areas of primary money laundering concern. Can you speak to the feedback you've received, the risks that you're trying to address and then where you might go from here?

We had a proposed rule that would require financial institutions to report information about transactions with crypto mixers. That comment period has now closed, we received a number of those comments, and we are, of course, working through them in order to promulgate a final rule. So I'll just make a couple of points about our concern about mixers and what I see is the road ahead. I mean, in the first instance, I think, from our perspective, we believe that there is a difference between sort of obfuscation and anonymity enhancing services and those that support privacy. And we, of course, totally recognize that, in the context of public blockchains, which provides information about financial transactions, that there would be a desire to have a certain degree of privacy around those financial transactions. That's obviously a core principle that is reflected in the BSA and protecting financial transaction privacy. And we, in that spirit, in terms of our commitment, and ongoing support for technological innovation, we want to work closely with industry to identify and, and collaborate on tools that can enhance privacy.

But what we see today is that mixers are not designed to provide that privacy, they're designed to offer escape from the origin, movement and destination of these assets. And, of course, in that context, they're extremely attractive to illicit actors. And in this context, we see North Korean cyber criminals and ransomware actors using mixers, to obfuscate the movement of these funds, the destination of these assets. And that creates a significant national security challenge for us. It is something in the context of this NPRM, this proposed rulemaking, we seek to enhance transparency around what is going on with these convertible virtual currency mixing services. But at the end of the day, I would just, you know, I would say this is not a ban on mixers. This is a proposed rule designed to drive additional transparency. And again, as we work through the comments towards the final rule, will, of course, have much more to say about a way to again, manage illicit finance risk in the context of these technologies, and the service providers with a goal to meet the desire for meaningful privacy and the use of some of these technologies.

Right, so can you just maybe just build a little bit upon that, and, you know, in your, you know, you know, just kind of further talks about distinction between privacy and obfuscation? You know, to you, where's the how do you look at this question of balancing those two different, arguably similar issues with this technology?

I think it goes back to a couple of core principles that Treasury has reflected for a long time in its rulemaking. One is, you know, focus on the activity, not necessarily the product, and then based on the activity, making sure that we are building regulatory obligations to meet the risk associated with that type of activity. And certainly, that reflects the really the core of what we do and how we think about our regulations, which is that they need to be risk based and drive risk based behavior. So when you think about, again, these 80s and mixers and you reflect on the fact that they are really both I'm very attracted to elicit actors. But to this is, I think the important point and in terms of like, how do we manage privacy versus anonymity, you have these mixing entities that are not doing meaningful KYC, there's no AML/CFT, there are none of the things that are in place to manage exactly this tension. So it's not that everybody needs to know who you are transacting with. But there has to be a capacity, we think, for a U.S.person to be in a position to FOLLOW U.S.law, and not engage with a sanctioned individual, or a U.S.financial institution to not unwittingly engage in activity that is supporting the building of weapons in North Korea, and the like. So, ultimately, that's the good news is we balanced it, and I think we have sort of the policy framework to balance it. But we recognize that the technology is developing quickly, we recognize that we need to engage closely with industry so that we understand the technology and as we think through potential new regulatory authorities, and, you know, a new definition of financial institution that clearly covers virtual assets, and virtual assets are riders and, and the like that, that we are doing in a way that is informed by what we are learning from, from, frankly, from smart people in this room.

Last year, Treasury requested additional authorities and resources from Congress to specifically talk about or go after and police crypto issues. And I think you even repeated that request in risk assessments over the last couple of months. Could you just speak to you know, how's Congress reacted, what the engagement with them looked like? And do you think you'll get what you're hoping for?

Look, I think we're in a we're in a constant conversation with Congress, I think we've reflected and we've tried to reflect here, some of the key risks that we perceive, one of them being this challenge with the jurisdictions out there that are developing virtual assets and an environment where there's very little or no regulatory infrastructure around managing illicit finance and AML/CFT compliance in line with international standards set by the Financial Action Task Force. So how do we help our U.S. persons andU.S.financial institutions manage that risks and some of the ways that we've reflected that we can do that is by creating authority for Treasury to restrict financial institutions and other U.S.persons from engaging or virtual assets, service providers that are here in the United States from engaging with these other virtual assets, service providers that are operating in jurisdictions that have no meaningful AML/CFT compliance, or we know are behaving in a way that is allowing for a lot of this type of illicit finance that we perceive and are collectively concerned about?

I think the second thing that we've been really focused on is the risks around stable coins. And particularly, as we have seen those become more attractive to terrorists and other bad actors. Is there a way to work with Congress to get in authority so that those stable coins that are U.S. backed are clearly subject to OFAC sanctions authorities? And then, you know, I think overall, you know, it's the work to ensure that virtual asset service providers and other entities that operate in the ecosystem know clearly that based on the activity that they are engaged in, they are required to register with FinCEN as a money services business, or, or are really a financial institution that's subject to all of the AML/CFT obligations that FinCEN administers. Right now. What we have, we often see is virtual asset service providers, big and small, will say well, 'that's not us, we're not subject to your regulatory remit.' So making clear that, no, you don't get to define whether you're you are not based on the product that you that you are developing or you have promulgated, but really it's based on the activity that you're engaged in and regulate statutory definition of financial institutions may be the way to get at that challenge.

You mentioned Binance earlier, and, you know, we have an entire panel tomorrow on just corporate monitorships in crypto companies and their potential continued evolution. Could you speak to the settlement itself, how that came to be. And then I know a corporate monitor has finally been appointed a few weeks ago, here to speak to what that engagement with them will look like in the coming weeks and months.

Just set the stage a little bit on Binance. We, with the Department of Justice CFTC, engaged in the largest enforcement actions that Treasury has ever undertaken, which was settled for $4 billion. But as a sort of a critical piece of that settlement is this monitorship that will last for five years. The reason the monitor ship is so important is because of the violations that we saw Binance engaged with and that included apparent violations of our sanctions programs, which included U.S. persons engaging with sanctioned jurisdictions, Iran, Syria, North Korea, Cuba, Crimea and Ukraine and the like.

We saw that Binance had no meaningful AML/CFT compliance program to speak of and as a result of that, there were over 100,000 suspicious transactions that were not identified by Binance over a period of years. So the monitorship will allow FinCEN to ensure that Binance has a credible and comprehensive AML/CFT compliance program in place, that they have fully incredibly exited the United States that they will engage in a look back of that history of suspicious activity and prove and file and provide information as it relates to those transactions. And one of the, you know, sort of foundational things in addition to the monetary payment, we're really these sort of historically important capacity to ensure for ourselves that Binance is no longer engaged in the type of activity that was so deeply problematic over the last number of years. And certainly to the extent that we identify that Binance continues to engage in those activities that would be subject to very significant additional penalties, to the extent that they breach the agreement.

It feels like we're starting to get to a point where a lot of crypto companies are beginning to accept and understand that maybe they should have compliance departments and worry about these issues earlier in the stage. Do you have any thoughts or advice for them to make sure that they don't end up in a place down the line where they are now facing down [a similar enforcement action]?

I think the key is really that sort of tone from the top and compliance really built into the culture of an organization. That's like a day one principle, it can't be, 'we'll get to it once we've scaled some.' I think that's a problem that we often see, we see, you know, sort of the desire to sort of outsource compliance or relegate compliance, a certain part of your business, and that isn't as a successful operating model. I think that that sort of tone from the top is critical. The other thing is really building in the sort of the tools and the technology to manage illicit finance risks, to do AML/CFT, the KYC, the sanctions list screening, from the very beginning, again, don't wait until you've scaled to do those types of things. And the thing that we really need and we really want to see and have for many firms, but for many others we don't see this is really that sort of proactive engagement, proactively engaging us on sort of what You're seeing because you're obviously will be much closer to it.

And that type of proactive engagement can help you better assess your risk and ensures that your compliance program isn't geared towards a risk environment that hasn't, you know, frankly, shifted quite a bit to the right. I think the thing that we really need and find to be so valuable, and I think as really a really a great sort of feedback loop, when it works well is getting those reports of suspicious transactions and suspicious activity that provides really the foundation for the advisories and the alerts and the other communications that FinCEN provides about sort of the risks that we that we are seen. And that's been true, very true in the context of digital assets. And since 2022, I think FinCEN has released 15 of those types of alerts and advisories. So that is critical to what we do and and I and at the end of the day, I think we want to create more avenues and more forums for Frank, productive, open exchanges. FinCEN hosts what's called FinCEN exchanges, which are statutorily mandatory and that provides a confidential format, to have direct conversations between FinCEN law enforcement and companies to talk about sort of the illicit finance risks that we collectively proceed and way to tailor our respective approaches to manage that risk. Awesome.

So we're about to wrap up in a minute, but really quickly, so maybe you could just speak a little bit to kind of sanctions compliance and monitoring with crypto companies , in particular, if there's any challenges you've had with, you know, making sure crypto companies – even the ones that want to work with Treasury – that they have for making sure they're actually able to do so effectively.

I think it's to two things, I would say on the sort of sanctions list side and sort of understanding what can and cannot be done as it relates to OFAC authorities. OFAC has a hotline, it's 24 hours, they'll respond usually for the vast majority within 24 to 48 hours, encourage you to use that hotline and ask your questions of OFAC. And then with FinCEN, you know, to the extent that we are not providing alerts and guidance that is useful to your business, or you don't perceive that please come talk to us. And I know we are happy to facilitate additional opportunities for exchanges that directly related to the types of risks that you're seeing. But we can't do that, if we don't have the type of industry cooperation, which is really in that sort of the two flavors, one the sort of meaningful AML/CFT compliance programs that allow for the identification of specific activity on your platforms or through your service. So I think having that information really allows us to work more effectively and efficiently with this industry and I think will result in the type of hopefully tailored regulatory and statutory approaches that will achieve the goal that we all want, which is to promote and support financial innovation here in the United States.

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EU Vote See Reelection of Some Officials With Key Roles in Bloc's Crypto Journey: The European Union's elections concluded over the past week, and while the balance of the body has changed, many legislators who worked on or advocated for crypto issues will be returning to their seats.

Senate Bill Could Open Crypto to U.S. Sanctions, but Industry Trying to Head It Of: The Intelligence Authorization Act contains a clause that might create greater sanctions rules around crypto issues, though it's got a long way to go before it may become a law.

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This week

Thursday

14:00 UTC (10:00 a.m. EDT) The Senate Appropriations Committee will meet to discuss the SEC and CFTC's budget requests for the upcoming fiscal year. The Financial Innovation and Technology for the 21st Century Act may come up.

Elsewhere:

(Wired) Microsoft developed a feature called "Recall" for new machines. Recall will store screenshots of user activity every few seconds. Microsoft said security was a priority. There are now two different tools or exploits available to the public to abuse this feature.

(The New York Times) The Times published a look into BNN Breaking, which pretended to be a real news organization but actually used AI to write stories – unsurprisingly, some of those were less than accurate.

(The Atlanta Journal-Constitution) A Georgia superior court judge ordered the attorney for a defendant in a murder/crime gang trial to be held in contempt because the attorney had information he apparently was not supposed to have. Namely: Superior Court Judge Ural Glanville allegedly was part of a conversation with a Fulton County prosecutor and a key witness that defense attorney Brian Steel charged amounted to coercion. The judge ordered Steel to share who told him about the ex parte conversation, which Steel refused to comply with. Steel has been ordered to spend the next 10 weekends in jail, and asked that he spend those weekends with his client. What's really interesting to me is while Glanville seems to have taken issue with Steel having information about the conversation, at no point did he appear to refute any of the details Steel shared.

If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Twitter @nikhileshde.

You can also join the group conversation on Telegram.

See ya’ll next week!

The intersection between generative artificial intelligence and Web3 is one of the most active areas of research and development in crypto circles over the last few months. Decentralized compute, zero-knowledge AI, smaller foundation models, decentralized data networks, and AI-first chains are some of the recent trends that aim to enable Web3-native rails for AI workloads.

These trends are technological innovations that seek to bridge the worlds of Web3 and AI, representing a natural friction against the centralized nature of generative AI. While creating technological bridges with AI is foundational for the evolution of Web3, they don’t represent the only integration path for these technology trends.

What if the path for integrating Web3 and AI was financial instead of purely technical? It turns out that the programmable finance and capital formation capabilities of crypto could be useful for one of the biggest challenges facing the current generative AI market.

What challenge are we referring to? Nothing other than the funding challenges of open-source generative AI.

Open Source Generative AI Needs to Succeed

Despite the recent level of innovation in decentralized generative AI, the gap with centralized AI tech is increasing rather than decreasing. Many people agree that blockchains represent the best technology alternative to the increasing centralized AI control of large tech platforms. However, the adoption challenges for decentralized AI platforms are monumental.

Decentralized compute is a clear pillar for decentralized AI but proves impractical for pretraining and fine-tuning workloads that require GPUs in close proximity with access to datasets that often sit behind corporate firewalls. Zero-knowledge ML is too expensive to be practical in large foundation models and hasn’t seen any real demand in the market. Decentralized data marketplaces need to overcome the same issues that have prevented data marketplaces from becoming large tech businesses.

While decentralized AI strives to overcome these frictions, centralized alternatives are accelerating at a frantic pace, creating a scary gap between the two. The one trend that is keeping the hopes for a world in which decentralized AI can succeed is the rapid evolution of open-source generative AI.

All decentralized AI trends rely on a healthy open-source generative AI ecosystem, yet that ecosystem might not be as healthy as it seems.

Open Source Generative AI Has a Massive Funding Problem

In the last couple of years, we have witnessed an explosion of innovation in open-source large generative AI as an alternative to platforms such as OpenAI/Microsoft, Google or Anthropic. Meta has become a surprising undisputed champion of open-source generative AI with the release of the Llama models. Companies like Mistral have raised billions in venture funding, enterprise platforms like Databricks or Snowflake are pushing open-source models, and there is a growing number of open-source generative AI releases on a weekly basis.

While the momentum in open-source generative AI is strong, a more detailed analysis shows a different reality. Open-source generative AI is facing a massive funding issue. When it comes to large foundation models, only large companies such as Databricks, Snowflake, Meta or well-funded startups like Mistral are keeping up with the performance of large closed models. Most of the releases from other labs, like Databricks and Snowflake, are focused on optimized enterprise workloads, while most of the recent open-source research is focusing on complementary techniques rather than on new models.

The reason behind this phenomenon can be attributed to the astronomical costs of building large frontier models. Any pre-training cycle for a 20 billion-plus parameter model could cost between ten to a hundred million dollars and involves a multi-month process with many failed attempts. These costs fall outside the budget of most university labs. To make matters more interesting, many of the grants for AI university labs come from large tech incumbents, which then are the immediate beneficiaries of the outputs.

Making money with open source has historically been hard, and making money with open-source generative AI is hard at AI scale. As a result, open-source generative AI is experiencing a massive funding crunch that can create a serious gap with the AI incumbents.

Crypto capital for open-source generative AI

The capital formation primitives of crypto seem like one of the few viable alternatives to address the funding crunch in generative AI. Throughout its history, crypto tokens have been a primary vehicle for capital formation for Web3 projects through bull and bear market cycles. Could some of these principles be applied to open-source generative AI? There is certainly more than one interesting option.

Gitcoin Quadratic Funding

Gitcoin represents one of the most successful examples of funding open-source innovation in Web3. The quadratic funding mechanism pioneered by Gitcoin could apply directly to generative AI. Bringing native generative AI capabilities to Web3 is paramount for the evolution of the space, so it is natural to expect that generative AI projects will drive community attention.

Let’s say that a university AI lab needs to raise $10 million for pre-training an LLM based on novel architecture. Multiple DAOs and foundations can contribute to a Gitcoin grant that can also be matched by the grantors, creating a more efficient funding mechanism. This mechanism is far more efficient than the current alternatives in the market.

A New Open-Source Generative AI License

Funding open-source projects enables mechanisms in which the value created by those projects can benefit the original funding community. When it comes to Web3 and open generative AI, an interesting idea is to establish a license in which any commercial application using a model funded using Web3 tokens should contribute part of that revenue back in the form of that specific token. This mechanism can even be enforced via smart contracts.

Addressing a Systemic Risk to Open Generative AI

Financing vehicles for open-source AI are one of the most important challenges to address in the current generative AI landscape. Open source is traditionally hard to finance, and open-source generative AI is even more so, considering the expensive computational requirements. Not enabling proper funding channels to foster open-source innovation in generative AI can create a systemic risk to the entire space as the balance will shift entirely to closed commercial platforms. Crypto has established some of the most sophisticated and battle-tested channels for funding open-source innovation. Maybe, the first bridge between Web3 and generative AI will be financial and not necessarily technical.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.

Cryptocurrencies tumbled deeper into correction on Tuesday with bitcoin {{BTC}} dipping to near $66,000 as traders brace for Wednesday's key U.S. inflation report and Federal Reserve meeting.

Bitcoin {{BTC}} started the day trading near $70,000 before hitting a three-week low price at $66,170 during the U.S. session. It slightly rebounded to near $66,500, but was still down nearly 5% over the past 24 hours.

Altcoins saw even deeper pullbacks during the same period, with the broad-market crypto market benchmark CoinDesk 20 Index declining over 6% with all twenty constituents being in the red. Ethereum's ether {{ETH}} broke below $3,500 and was down 6.5%, while solana {{SOL}}, dogecoin {{DOGE}}, Cardano's ADA and Chainlink's LINK endured 6%-9% losses.

The sudden pullback incurred over $250 million in liquidations of leveraged derivatives trading positions across all crypto assets, CoinGlass data shows, marking the second significant leverage flush in a week after Friday's $400 million liquidations.

Liquidations occur when an exchange closes a leveraged position due to a partial or total loss of the trader’s initial money down, or "margin," because the user fails to meet the margin requirements or doesn't have enough funds to keep the position open.

One reason behind the pullback is investors “de-risking” from crypto assets ahead of tomorrow's May Consumer Price Index (CPI) report and Fed meeting, hedge fund QCP said in an update.

Bitcoin could see a volatile session Wednesday as it has been "highly responsive" to economic data recently and its 30-day correlation with U.S. equities climbing to highest since 2022, K33 Research noted in a Tuesday market update.

"The stage is set for a frantic macro-Wednesday, with both May CPI data and the FEDs interest rate decision poised to move the market," K33 analysts said.

Investors will monitor the Federal Open Market Committee (FOMC) members' interest rate outlook – so-called "dot plot" – to see how many rate cuts policymakers are projecting for this year in light of recent sticky inflation readings and softer economic data.

"The FOMC dot plot, alongside forward guidance during Jerome Powell’s press conference, is likely to be the most material price movers, as BTC has resumed its attentiveness to the market's interest rate expectations."

Market observers noted some positive signs during the sell-off that could point to a quick recovery.

Bitcoin saw multiple pullbacks this year before FOMC meetings only to reverse the move soon after, pseudonymous crypto analyst Gumshoe pointed out in an X post.

this is a scam dump.there have been 4 FOMC's in 2024every single one of them had the same scam dumpBTC dumped 10% in the 48 hours before all of them on FOMC day it recovered the entire movethe market always prices in overly bearish statements, then reverses pic.twitter.com/oFa801csND

— gumshoe (@0xGumshoe) June 11, 2024

Bitcoin futures open interest on crypto exchanges BitMEX and Binance deviated earlier today, crypto analytics platform CryptoQuant posted citing pseudonymous trader BQYoutube. "Often this kind of phenomenon is seen when whales [on] BitMEX start to accumulate positions while Binance retail gets washed out,” the post added.

"Despite short-term headwinds, we think this might be a good opportunity to accumulate coin," QCP said.

AI has arrived, and it’s already changing things in the world of crypto. Coders use it to code, researchers use it to research and, unfortunately, scammers use it to scam. That is the finding of a new report by blockchain analytics firm Elliptic about the emerging risks of AI in perpetuating criminal use of crypto.

This is an excerpt from The Node newsletter, a daily roundup of the most pivotal crypto news on CoinDesk and beyond. You can subscribe to get the full newsletter here.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.

“The rise of artificial intelligence has shown huge potential for driving innovation, not least within crypto. However, as with any emerging technology, there remains a risk of threat actors seeking to exploit new developments for illicit purposes,” the report reads.

While the risk right now remains small, the firm’s researchers did identify five “typologies” where AI is already being deployed in nefarious ways. These include in creating and disseminating deepfakes to make more convincing scams, building AI-scam tokens to capitalize on hype, using large language models to devise hacks, spreading disinformation and making more convincing phishing websites/prompts to facilitate identity theft.

Awareness of these new (or frankly, old, but now supercharged) scams means that users can stay ahead of the curve. That means crypto users should become more familiar with the most common types of crypto-related scams. CoinDesk has a good report on that front here covering all the basics like social media scams, Ponzi schemes, rug pulls and “romance scams” (now often referred to as “pig butchering”).

“The reason there is no easy way to deal with the problem is because it's really multiple problems, each with its own variables and solutions,” Pete Pachal, author of the excellent Media CoPilot Substack, wrote in a recent piece about deepfakes, AI and crypto.

According to Pachal, who recently spoke at a Consensus 2024 session called “From Taylor Swift to the 2024 Election: Deepfakes vs. Truth,” deepfakes have become increasingly difficult to spot as AI image generation has improved. For instance, earlier this month a video circulated on social media of fake Elon Musk promoting fake trading platform Quantum AI that promised users fake returns that apparently tricked more than a few people.

Instances like these are likely only going to grow. Verification company Sumsub claims that crypto was “the main target sector” for almost 90% of deepfake scams detected in 2023. While it’s unclear how effective these scams were, the FBI’s online crime report found crypto investment losses in the U.S. grew 53% to $3.9 billion last year.

See also: This Is How Scammers Can Drain Your Crypto Wallet

However, it’s worth noting that oftentimes instances of fraud in the crypto industry are just incidentally related to crypto, because it just happens to be a topic that draws a lot of attention and is often complicated for people not steeped in the culture.

As CFTC Commissioner Summer Mersinger told CoinDesk: “I think it's a little unfair because a lot of these cases are just run of the mill fraud; somebody stealing someone else's money, someone claiming to buy crypto, but not actually buying the crypto. So we've seen this play out with whatever the hot topic is at the time.”

If there’s any consolation, it’s that images, video and text generated by AI are still relatively easy to notice if you know what to look for. Crypto users in particular should be vigilant, considering how common it is for even high-profile figures to get tricked by social engineering schemes or malicious scripts.

MetaMask builder Taylor Monahan has sage advice here: always know you’re a potential target, and actually verify what you’re clicking on is what it purports to be.

Crypto is already a low-trust environment, just given the nature of the technology. And it might get even lower.

This week in prediction markets

Do prediction markets have a pro-Trump bias? Or do they just put a premium on the front-runners?

Trump and Biden will likely debate, while Trump won't be charged with another felony, Polymarket prices signal.

Kalshi bettors place Coinbase volume above last quarter's.

If traders on Polymarket are right, and there's $165 million bet on the question, the 2024 U.S. presidential election will be a blowout for the ages.

With a 56% chance of winning, former president Donald Trump has a 22-percentage-point lead over incumbent Joe Biden, according to the crypto-based platform's officially non-American bettors (as part of a settlement with the Commodity Futures Trading Commission, Polymarket agreed to geo-block U.S.-based users). Contrast that to an aggregate of polls prepared by Nate Silver's FiveThirtyEight, which gives Trump a mere one-point lead.

Some might be quick to attribute the huge gap to the fact that Polymarket users are, by definition, crypto users, and therefore might be biased toward him. They might note that on PredictIt, a more traditional prediction market platform settled in U.S. dollars, Trump is leading 50-45: Still a wider margin than the polls, but nowhere near as dramatic as only Polymarket.

Trump, after all, is the pro-crypto candidate. There's also the crypto community's love of a troll: Trump-themed "PoliFi" tokens have a higher market cap than their Biden counterparts.

On the other hand, these traders are betting on what will happen, not what they want to happen. So they are highly incentivized to research and make informed decisions, regardless of their political preferences. In theory, at least, these markets should be a more reliable gauge of sentiment than polling, and perhaps a superior forecasting method as well.

Indeed, Ryan Selkis, founder of crypto research outfit Messari, claimed in a recent tweet that the Trump campaign has been giving their candidate Polymarket numbers on top of the usual polling readout, because the team is heavily skeptical of polls in general.

Remember: in prediction markets, those who bet on the correct outcome receive $1 per share, while those who bet wrong get nothing, with share prices reflecting probabilities. A share trading at 40 cents indicates a 40% chance of success, for example.

Another, more banal explanation of Trump's outsized odds on Polymarket is that traders there tend to put a high premium on any leading candidate, way ahead of the polls.

Look at other recent elections where there was a gulf between Polymarket and the polls.

Ahead of Taiwan's Jan. 13 election, Polymarket gave the Democratic Progressive Party's Lai Ching-te a 60% to 70% chance of winning, even though his polling numbers were only in the high 20s to low 40s. Lai won with 40% of the vote.

In the run-up to Indonesia's election in February, Polymarket put Prabowo Subianto's chances of winning in the high 70s, while his polling numbers were in the high 50s. He won with 55%.

There are a lot of other factors at play in Trump's high odds on Polymarket. Traders are heavily discounting independent candidate Robert F. Kennedy, Jr. at around 2% probably, while 538's poll aggregation has him closer to 9%. Similarly, in Taiwan's, the presence of a third-party potential spoiler in the form of the newly established People's Party, led by Taipei's former mayor Ko Wen-je, added some complexity to the model as Polymarket gave the TPP lower probability than its polling numbers.

So is the Polymarket premium a predictive force or an online flex for Trump fans? We'll have much better data to answer that question after the November ballot result.

Debate Is Likely; Another Conviction Isn't

Trump, ever the showman, is said to be thrilled about taking the stage against Biden for the first Presidential election debate scheduled for later this month. So thrilled that his campaign is calling for more: four debates as opposed to the two proposed by the Biden camp.

There's a growing narrative, however, that Trump will ghost the debates entirely if he doesn't get his way about formats and other specifics.

In an interview in late May, Democratic strategist James Carville suggested that Trump won't show up to the debates if he doesn't think doing so is in his own self-interest.

"I don’t think Trump will go to the debate," Carville said in an interview with neoconservaitve commentator Bill Kristol. "He doesn’t do anything that’s not in his perceived self-interest, and this is one of these things where he could hurt — Biden has a chance to help himself."

The market seems to be dismissing Carville's prediction, giving the debate a 77% chance of going on as scheduled.

Meanwhile, news that Trump's other felony trials are stuck in bureaucratic limbo means that the market is only pricing in a 14% chance that he'll appear before a court – and be convicted again – prior to the election in November.

Are Retail Traders Reaping Crypto's Riches?

Coinbase is set to report quarterly earnings on June 14, and a closely watched metric will be the crypto exchange's trading volume, a measure of retail investors' market participation.

Coinbase, of course, isn't all retail. It has a large institutional business, but the licensed exchange with reliable banking on- and off-ramps is a bellwether for retail trading. Its mobile app's position in Apple's top 100 free app section has been a popular indicator of retail's participation in the crypto market.

Over at Kalshi, the lone U.S.-regulated prediction market platform, a contract asking bettors to forecast Coinbase's trading volume has it coming in at $174 billion, higher than the $154 billion Coinbase posted at the end of its last quarter in February.

With the wreckage of FTX cleaned up, a big narrative trend has been the institutionalization of crypto.

There's a lot to be said as to why this is a positive development for crypto, as endorsements by the world's largest fund managers, such as BlackRock and Fidelity, in the form of exchange traded fund (ETF) products are an indicator that the asset class isn't a fly-by-night operation ready to rug pull investors.

At the same time, it can be argued that a heavily institutionalized asset class is antithetical to the vision of Satoshi Nalamoto, who wrote the bitcoin white paper in the aftermath of the 2008 financial crisis when these same institutions torpedoed the global economy.

In the time since Coinbase's last earnings report, bitcoin is up around 45%, according to CoinDesk Indices data. Kalshi bettors are plotting just a 13% increase in Coinbase's trading volume for the same period. Whom are the spoils of this bull market going to?

The European Union's Innovation Hub for Internal Security warned law-enforcement agencies that crypto platforms like mixers, privacy coins and layer-2 blockchains can complicate tracing.

In a separate report, France's Autorité des Marchés Financiers (AMF) said crypto remains a high risk for money laundering.

Privacy coins, mixers and layer-2 platforms can make it difficult for law-enforcement agencies to trace funds, according to a report from the European Union's Innovation Hub for Internal Security, a network of labs supporting internal security organizations in the 27-nation bloc.

The report, published Monday by crime-fighting agencies including Europol and Eurojust with the European Commission and others, told law enforcement agencies they need to be prepared to encounter those types of tools in their investigations.

Crypto mixers have recently been in the spotlight. Tornado Cash developer Alexey Pertsev was sentenced to spend more than five years in jail by a Dutch court after prosecutors successfully argued the platform was created for money laundering. Tornado Cash allows crypto users to exchange tokens while hiding wallet addresses on the Ethereum, BNB Chain, Arbitrum, Avalanche and Optimism networks.

"Mixer Tornado.cash has also been using zero-knowledge proofs to enable users to withdraw funds from the mixer without revealing what their original deposit was," the report said. "This significantly complicates tracing the origins of (illicit) cryptocurrency for law enforcement."

Privacy coins like Monero build privacy into their protocols, hiding the identities of the sender, the receiver and even the money being sent.

"Layer 2 solutions such as the Lightning Network might also be abused by criminals," the report said. "This can be used, for example, to make payments to each other without making times and amounts of these payments visible. Similarly, new wallet encryption schemes may also complicate lawful access by law enforcement."

Separately, France's Autorité des Marchés Financiers (AMF) said crypto remains a high risk for money laundering due to its popularity, cross-border nature and anonymity that comes with platforms like mixers. The securities regulator published its own report on Monday.

Solana {{SOL}} crypto wallet startup TipLink is making a play for newcomer blockchain users with a service that cuts wallet browser extensions out of the equation.

Called TipLink Wallet Adaptor, it creates an in-browser wallet linked to a person's Google account, sidestepping the usual requirement that one set up a less-user-friendly Phantom, Solflare or other wallet before receiving any tokens.

"It unlocks the rest of the world for easy onboarding," said CEO Ian Krotinsky.

TipLink's builders are betting the workaround will have stronger appeal to the vast majority of internet users who don't have a crypto wallet, nor the knowledge or desire to set one up. Instead, they can receive a link to a wallet, login with the popular credential and go.

That might irk the most committed of self-custody proponents, the ones for whom "not your keys, not your coins," rings loudest. But Krotinsky isn't worried about catering to that crowd. The app buries its private keys beyond easy reach to limit the possibility of users accidentally handing them to a would-be phisher, he said. Google's security protocols go a long way, especially for users who have two-factor authentication.

"It's currently not the place users will likely store a million dollars in," Krotinsky said, adding that the team is working to add "more layers of security" over time.

For example, TipLink works in something of a walled garden for dapps. It will only interact with programs that have been vetted to ensure they are not malicious or won't steal user funds, according to a promotional video shared with CoinDesk.

TipLink is also spinning up a "Pro" service to help developers distribute their cryptos to hundreds or thousands of users with links via campaigns.

Metplanet bought an additional $1.6 million worth of bitcoin, bringing its total holdings up to $9.4 million.

Metaplanets stock jumped by 10% following the disclosure on Tuesday.

Japanese investment firm Metaplanet disclosed an additional bitcoin {{BTC}} purchase, worth 250 million yen ($1.6 million), taking its holdings of the largest cryptocurrency to 141 BTC, a value of about $9.4 million.

Metaplanet stock rose by 9.9% Tuesday after it made the purchase, its third since April 2024, public.

Last month, the company said it made bitcoin a reserve asset to reduce its exposure to risk arising from Japan's debt burden and the resulting volatility in the yen. In 2023, the government's net debt to gross domestic product ratio was the highest in the G7, about 159%, according to data on Statista. Canada had the lowest ratio, just 15%.

Metaplanet's bitcoin strategy mirrors that of Tysons Corner, Virginia-based software developer MicroStrategy (MSTR), which has accumulated 214,400 BTC worth $14.3 billion since it started purchasing the asset in 2020 and is the largest corporate owner of the token.

Tether invests most of its reserves in U.S. treasury bills and other securities to return billions in profit.

Ardoino said it will allocate a percentage of this for deals.

Stablecoin developer Tether's investment arm expects to make deals worth $1 billion in the next year, CEO Paolo Ardoino has said, according to a Bloomberg report on Tuesday.

Tether's focus for investment is financial infrastructure, AI and biotech, Ardoino said in an interview. The company has also invested around $2 billion in these areas in the last two years, a trend it expects to continue.

As the operator of the world's largest stablecoin USDT, Tether invests most of its reserves in U.S. treasury bills and other securities to return billions in profit. Ardoino said it will allocate a percentage of this for deals.

"It's all about investing in technology that helps with disintermediation with traditional finance," he said. "Less reliance on big tech companies like Google, Amazon and Microsoft."

Among Tether's most notable investments to date are its $200 million majority stake in brain-computer interface company Blackrock Neurotech and its association with data cloud provider Northern Data Group.

Tether did not immediately respond to CoinDesk's request for further comment.

Read More: Tether Buys $100M Worth of Bitdeer Shares With Option to Purchase $50M More

Layer-2 network Polygon is starting a Community Grants Program to encourage builders to build in its ecosystem, Polygon Labs said on Tuesday. The program aims to place 1 billion POL, Polygon’s soon-to-rebrand MATIC token, into the hands of developers over the next 10 years.

The program went live Tuesday with 35 million tokens, worth $23 million at current prices, eligible for distribution. The network is in the process of transitioning its current token, MATIC, to the new POL ticker, so this first tranche of tokens will be denominated in MATIC.

The program will tap into funds made available by Polygon’s Community Treasury, and the team shared that roughly 100 million POL tokens will be given out each year.

Those looking to participate in the program can opt into two tracks. The first is what the team calls a “General Grant Track,” which is for builders looking to build anything on Polygon. The second is the “Consumer Crypto Track,” which focuses on projects that drive crypto adoption, including gaming, decentralized social applications, AI and blockchain integrations, and NFT innovations.

“The grant program follows proposals to ensure that Polygon becomes a strong, community-governed aggregated network of chains,” Polygon wrote in a blog post.

Read more: Polygon Acquires Zero-Knowledge Cryptography Firm Toposware

Lido, the Ethereum staking stalwart, has recently been grappling with the frenzy around "restaking," a new trend that threatens to erode the staking platform's grip on decentralized finance (DeFi).

Lido is controlled by the Lido DAO, a consortium of LDO token-holders who vote on protocol strategy and key upgrades.

A new initiative from the DAO will see Lido's partnering with Mellow Finance, a platform that lets users generate yield by depositing into restaking "vaults," and Symbiotic, a permissionless restaking protocol. Under the new initiative, traders will gain access to restaking tools that could help return Lido stETH to center stage.

"The strategy for Lido is to demonstrate to the market that using stETH as the restaking asset of choice is actually the superior way of doing restaking," adcv, the pseudonymous co-founder of Steakhouse Financial and the Lido DAO's finance workstream said in an interview with CoinDesk.

Lido sits at the center of Ethereum's DeFi ecosystem, allowing users to stake cryptocurrency—parking it with the chain to help protect it—in return for rewards. Lido's big innovation when it launched a couple of years ago was that it gave depositors a "liquid staking token" called Lido staked ETH (stETH) that users could trade even as their underlying deposits were technically locked up on Ethereum.

Lido currently ranks as the largest decentralized finance protocol on Ethereum, with $ billion worth of deposits. StETH, meanwhile, has grown to become one of the most popular assets in DeFi.

But lately, Lido's dominance has fallen as users have moved assets over to EigenLayer, a newer service that allows users to "restake" assets like ether (ETH) and stETH to help secure other networks in exchange for additional rewards.

Read more: Restaking 101: What Are Restaking, Liquid Restaking and EigenLayer?

Lido recently introduced The Lido Alliance—a group of partners and protocols committed to protecting stETH's role in Ethereum DeFi. Lido's head of strategy, Hasu, has also outlined reGOOSE, a multi-pronged strategy to help Lido to address the risks posed to it by restaking.

This new initiative—the launch of four stETH-centric restaking products on Mellow Finance—is the first example of reGOOSE and The Lido Alliance in action. It's also the first hint of how Symbiotic, a startup backed by Lido's co-founders and largest investor, could play a key role in Lido's future plans.

Lido backs Mellow Finance

Lido DAO is throwing its formal endorsement behind Mellow Finance, a DeFi protocol that offers liquid restaking "vaults." Users can deposit assets like stETH into the vaults, and "curators"—which are like crypto underwriters—will deploy those assets across different actively validated services, or AVSs (protocols that are secured by restaked assets), to help users earn extra interest on their funds.

Mellow's new platform is an answer to liquid restaking protocols like Renzo and Ether.Fi, which restake user deposits into EigenLayer (and, soon, other restaking protocols) to help investors earn extra interest.

Like everything else DeFi, liquid restaking exists as a way for people to wring out as much "economic efficiency" (read: yield) as they can from their digital assets. Protocol users earn receipts on their deposits called "liquid restaking tokens," or LRTs, that can be traded, lent and borrowed on other protocols in exchange for additional rewards.

In liquid restaking, "you have players like Renzo and EtherFi that do it top to bottom, but Mellow brings a permissionless quality to it, which we found quite appealing," said adcv.

Whereas traditional liquid restaking protocols take a one-size-fits-all approach to select where they deploy user capital, Mellow lets anyone set up a vault and distribute deposits according to their own risk parameters and investment theses.

"Vaults are an important step in realizing the reGOOSE strategy, offering stakers the power to navigate the varied terrain of the risk/reward landscape," Lido DAO said in a statement shared with CoinDesk.

Mellow curators Steakhouse, P2P Validator, Re7 Labs and MEV Capital are each introducing vaults that accept stETH in tandem with Tuesday's announcement.

For now, the rewards that users receive for depositing into Mellow's vaults will come in the form of loosely-defined "points" that may eventually be tied to future token airdrops. (There are currently no AVSs rewarding interest on Symbiotic or any other restaking protocol.)

Read more: As Crypto 'Points' Farming Grows, So Does Risk of Vague Promises

For the time being, the vaults are best viewed as proof of concept for why stETH is a useful asset for restaking. "StETH is the best possible asset to use as restaking collateral," insists adcv. "It has all of the network effects. It has all of the liquidity, and it has the ability to abstract away the native staking [...] It earns the native staking yield at all times."

"I personally expect and hope that other LRTs—Renzo, EtherFi, whoever—to recognize that as well and adopt it in turn as their primary collateral," said acdv.

Enter, Symbiotic

It's no coincidence that Mellow Finance is building its restaking vaults using Symbiotic, an up-and-coming competitor to EigenLayer.

Last month, a CoinDesk report first revealed that Symbiotic was quietly being funded by Paradigm, Lido's biggest backer, and cyber•fund, a venture firm led by Lido's co-founders. The report also showed internal company documents detailing how the yet-to-launch Symbiotic protocol might work for the first time.

On a purely technical level, it makes sense that Mellow would choose Symbiotic to build its permissionless vaults: EigenLayer only accepts certain crypto assets (namely, ETH, EIGEN, and certain ETH derivatives), whereas Symbiotic accepts any kind of crypto asset based on Ethereum's ERC-20 token standard.

But there's another reason—beyond Symbiotic's investors or technical details—why Lido DAO might choose to partner with a restaking platform other than EigenLayer. Although EigenLayer accepts deposits of Lido's stETH—meaning it's possible to use Lido and EigenLayer at the same time—it has placed caps on how much stETH one can deposit.

EigenLayer's growth has therefore come at the expense of Lido's, since some users have withdrawn their stake from Lido to funnel more assets into the newer restaking platform.

"EigenLayer was effectively, on a discretionary basis, limiting the amount of steETH that could go into their middleware—rather arbitrarily, in my view," said adcv. "I expect that this type of restriction will become more and more rare in the future, because from the perspective of a restaking provider, you don't want to put any sort of breaks on your ability to raise capital."

EigenLayer has "had it very easy until now, but with more competition, it will become more difficult to be so selective," he said.

CORRECTION (June 11, 2024 14:05 UTC): EigenLayer deposits number $33 billion, not $27 billion. Mellow's stETH vault curators are not all members of the "Lido Alliance."

Europe just elected 702 members of the European Parliament. Some would call the vote a grand exercise of democracy. Others would call it a repurposed opinion poll for domestic politics. The results show that it is a bit of both.

Broadly, Sunday’s outcomes were forecasted. The snap elections in France were not.

The main takeaway is that decisions in the European Parliament will continue to be made by a centrist majority. Together, the center-left Progressive Alliance of Socialists and Democrats (S&D), the center-right European People’s Party (EPP), and the liberal Renew will hold more than 410 votes. This is enough majority for both policymaking and to re-elect the current President of the European Commission.

The press is reporting a shift to the right. This is technically accurate. The far-right secured big victories in the heart of Europe, including in Germany, France and Italy. Mainly the Nordics and Portugal bucked the trend and gave fewer votes to the eurosceptics than forecasted.

This signals a disturbance in our societies, but to say that the far-right will now decide EU policy is an exaggeration. The biggest EU political group, the EPP, has deep ideological divergences from the parties sitting further on the right. Therefore, it is much more likely to formally partner in the above-mentioned centrist coalition. This has been the vehicle for Parliament decision-making to this date, and it will remain so.

The power of the further-right (ECR – the European Conservatives and Reformists) and the far-far-right (ID – Identity and Democracy) should not be overstated, but it should not be ignored either.

ECR, in particular, gained 15 seats last evening. 14 of those came from the party of the Italian Prime Minister, Georgia Meloni. She has been a much milder conservative than her election campaign might have suggested, recognizing the degree of cooperation needed with both Brussels and Washington DC in order to consolidate her power. Even so, formally working with the ECR might be a taboo for the mainstream parties. But collaboration on specific policy issues is now possible for the EPP, even if only used as a threat and a negotiation technique in disagreements with the center-left.

That includes issues like crypto-assets. In the negotiations over MiCA and the AML package, it was common to see left and right MEPs disagree on how prescriptive and restrictive the rules should be. Weeks of negotiations were spent in stand-offs around the EU Travel Rule or around the sustainability of bitcoin.

Several caveats before we color the new right-wing formation as positive for the industry.

Firstly, individual MEPs have made an outsized difference to EU crypto policy. Their influence combines an ability to operate within the ideology of their group, within the responsibilities given to their committee, and a high degree of understanding of the industry. This tri-factor is hard to come by, and the industry will be fortunate to see some of these progressive voices return to Brussels.

Secondly, ECR as a whole and PM Meloni’s party, specifically, have not really had a consistent view on digital assets. Within the EPP, too, the power dynamic is shifting between representatives from Poland, Spain and Germany. These are known unknowns.

Lastly, the influence of the Parliament, as an institution, should be considered in the context of where we are in the legislative cycle. The next legislative mandate, from 2024 to 2029, will not have a MiCA moment of the same magnitude. Authorities in charge of implementation at the EU and national levels will be doing the bulk of the work for the next two years.

In that sense, President Macron calling snap elections in France on Sunday could be important for the digital assets industry. Meanwhile, the European Commission has to form a view on what, if any, new policy initiatives still need to be taken in the areas of decentralization, tokenization and staking.

But there is something bigger here than election math.

Too quick or too slow, the digital assets industry is inching toward regulation and compliance. The new European Parliament and the new College of Commissioners will make a difference on whether this path is bumpy or smooth. But compliance is not enough for the industry in the long run.

These elections come at a crucial time in Europe’s history. Far-right movements are using the continent’s depressed growth and high inflation to seed anti-European sentiments. Elected leaders have put E.U. competitiveness and the need for more active capital markets top of the agenda.

The digital assets industry has some way to go to establish trust and credibility. Whom it chooses to associate with in the next five years will be telling of what the industry stands for.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.

As the founder of a layer-2 blockchain focused on consumer crypto – meaning user-friendly applications that can achieve mass adoption – I’ve spent a lot of time thinking about why it’s more popular to talk about consumer crypto than invest in it. It’s a common complaint among builders that infrastructure not only gets all the love, but also gets all the money.

While this might seem rich coming from the founder of an infrastructure project, since our success should technically depend on consumer crypto adoption, it’s an important problem to solve. The more I thought about it, the more I realized it takes stepping back to understand the incentives of the people investing in these would-be consumer applications.

Azeem Khan is the founder of Morph, an Ethereum Virtual Machine (EVM) layer-2 blockchain in testnet.

It often seems crypto investors aren’t in alignment with the projects they invest in. Maybe that's because tokens are changing how venture capital works as a whole. Then again, venture capital isn’t a monolith.

If we want consumer applications to receive investment, it will require more honest conversations about what project founders and their financial backers want to achieve.

If you were to ask anyone who understands venture capital or asked your favorite search engine how it works you’d likely see about the same response: private equity financing in which investors provide money to startups, take equity and traditionally look to see returns over 10 years. To date, that is mostly how venture capital has worked.

So when you go to a venture capitalist in crypto, that’s what you’d expect, right? Not so fast. Token launches have changed everything.

Tokens' impact

Take Ethereum. It’s not only one of the best-known blockchains but also the one where the majority of builders are. But Ethereum’s true innovation was becoming a platform where anyone could launch a consumer crypto application – and corresponding token for utility.

VCs saw another opportunity here, organizing multi-billion dollar token raises for so-called “Ethereum killers.” While many of these projects failed, leaving behind inactive ghost chains, it’s been a profitable endeavor for many of the investors who poured money into them. And this gets into the nature of how tokens work.

Before the introduction of token launches, venture capitalists used to invest in businesses where they received equity only – think Meta, Airbnb, Roblox and so on. The way to make the money back on their investment was either having another company acquire the startup they invested in or having the company do an initial public offering (IPO) on the stock market. This is part of the reason it took so long for venture capitalists to see returns on their investments.

Since the advent of blockchain-based tokens, investors willing to fund crypto projects have found another avenue to get their returns, often much faster.

The way venture capital agreements work with Web3 startups these days is the investors take a percentage of tokens, equity or both depending on the investment agreement. One of the main things those investors need to work out is how those token allocations work. That’s a new problem, unseen in traditional venture capital.

The two main things to look at are the “lockup” period, which is how many months after the token launch an investor must wait before they start vesting their tokens, as well as the length of that vesting period (total token allocation will be based on the investment as a percentage of total token supply).

The final thing to consider is that the tokens these investors get have liquidity, meaning they can easily be sold for cash on an open market. This starkly contrasts the equity-only model where it’s way harder to sell your stake.

Impatient capital

Bringing this back to the beginning, if investors used to have to wait almost a decade to see if their investments were successful, but now can start to cash out within a year under token agreements, perhaps it’s time we started to rethink venture capital.

Maybe it’s time that we start to examine which investors are looking to do 100x-1000x on their investments over a decade, and which ones are looking to do smaller returns over a shorter period of time. The former is the one that will lead to consumer adoption, because we need to educate people why blockchain is better for consumers, build the products, launch them, get regulators on board, and actually be in a place where the blockchains can handle the traffic, all of which take time. The latter will only continue to further enrich already wealthy VCs, which is the opposite of what we need.

Hopefully, an honest conversation about the evolving nature of venture capital will pave the way for more investment in the right infrastructure and consumer applications in the crypto world.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.

Crypto.com was registered as a virtual asset service provider in Ireland last week.

Crypto companies are vying to win approval in EU nations to be ready for December, when the Markets in Crypto Assets (MiCA) legislation becomes fully operational.

Crypto.com received approval to register as a virtual asset service provider in Ireland, allowing the crypto exchange to operate in the European Union nation.

The company was listed on the register as of June 7 under the name Foris DAX, the Central Bank of Ireland's website shows. Crypto.com will now be able to offer crypto-to-fiat exchanges and fiat wallets, the company said in a statement.

The company joins Coinbase, Ripple and Gemini on the register as crypto companies vie to win approval in EU nations to ensure they are ready for December, when the Markets in Crypto Assets (MiCA) legislation becomes fully operational. The bloc's wide-ranging rules for the industry allow firms with a crypto asset service provider license from any member state to operate across all 27 nations.

Crypto.com has received licenses across the globe. Recently, the company's Dubai entity received full operational approval from the Virtual Assets Regulatory Authority (VARA). It also has U.K. authorization as an electronic money institution as well as registration in the Netherlands and Spain.

This article originally appeared in First Mover, CoinDesk’s daily newsletter, putting the latest moves in crypto markets in context. Subscribe to get it in your inbox every day.

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Bitcoin fell below $67,000 during the European morning, extending a drop from $72,000 that commenced on Friday. The decline follows $65 million in cumulative outflows from the U.S.-listed spot bitcoin ETFs on Monday, the first loss since at least May 23, according to provisional data published by Farside Investors. Inflows have recently been strong, although the market chatter is that they stem from institutions' growing interest in the non-directional basis trade rather than outright bullish bets. At the time of writing, BTC is more than 3.5% lower than 24 hours ago. The broader digital market has followed suit, with ether dropping over 4% to $3,540 and the CoinDesk 20 Index (CD20) falling almost 3.4%.

GameStop shares fell 12% on Monday, weighing heavily on some meme tokens that tend to mirror the stock's movements. Solana-based meme token GME, which parodies the company's stock ticker, slid 25%, reversing a more-than 200% rally over the past seven days. Related tokens like Roaring Kitty and some cat-themed tokens, which previously moved alongside GME stock, lost an average of at least 10%, according to data tracked by CoinGecko. Dog-themed tokens doge, shiba inu and floki pared last week's gains, falling from 4% to 10%. GameStop shares have sunk 62% from a two-year high on Thursday after the company said it would sell up to 75 million shares and announced a drop in quarterly sales.

The Cardano network is set to move into the final phase of a multiyear program to become a wholly decentralized blockchain ecosystem later this month, co-founder Charles Hoskinson said in an X post. Once the switch is complete, Cardano will no longer be actively managed by Cardano development firm IOHK but will be wholly run by community members. “It looks like June will be the month that Cardano Node will reach 9.0,“ Hoskinson posted. “This means that Cardano is Chang fork ready and waiting for 70 percent of the SPOs to install the new node. Then, a hard fork can occur pushing Cardano into the Age of Voltaire.” Native token ADA has fallen 3.4% in the last 24 hours, broadly in line with the CD20.

Chart of the Day

The chart shows the most active ether options on Deribit in the past 24 hours. Puts are shown in red, calls in green.

Investors have increasingly traded put options, offering downside protection.

Ether's price has declined over 4.1% in 24 hours.

Source - Velo Data

- Omkar Godbole

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Fed Should Cut Interest Rate as Restrictive Stance Adds to Inflation, Democrats Say

ZKsync’s ZK Airdrop Is Coming ‘Next Week,’ Here's What to Expect

AI-Linked Crypto Tokens Underperform as Apple's Event Fails to Impress Traders

The 19-day streak of net inflows for U.S.-listed spot bitcoin exchange-traded funds (ETFs) ended on Monday with a combined $65 million in net outflows.

Grayscale’s GBTC led the outflows with $40 million, continuing its trend as the worst-performing ETF by outflows since going live in January.

A record 19-day streak of net inflows in U.S.-listed spot bitcoin exchange-traded funds (ETFs) ended Monday as the products saw a combined $65 million in net outflows, preliminary data shows.

Bitcoin ETF Flow (US$ million) - 2024-06-10TOTAL NET FLOW: -64.9(Provisional data)IBIT: 6.3FBTC: -3BITB: 7.6ARKB: 0BTCO: -20.5EZBC: 0BRRR: -15.8HODL: 0BTCW: 0GBTC: -39.5DEFI: 0For all the data & disclaimers visit:https://t.co/4ISlrCgZdk

— Farside Investors (@FarsideUK) June 11, 2024

Grayscale’s GBTC led outflows at $40 million, leading outflows among its counterparts. GBTC continues its infamous run of being the worst-performing ETF by outflows since going live in January, racking up a cumulative $18 billion in outflows.

Invesco and Galaxy Digital’s BITCO saw net outflows of $20 million. Valkyrie's BRRR ETF racked net outflows of $16 million. Fidelity's FBTC saw $3 million in net outflows in its first negative flow since early May, The Block reported.

The ETFs last reported a net outflow of $84 million on May 10 after a dismal month in April that saw weeks of outflows. Inflows since picked up and saw the products add more than $4 billion in 19 days of trading.

Such outflows came amid a market-wide slide in the cryptocurrency market and losses in broader stock markets. Traders on Monday warned of a volatile week ahead of a week as investors await a U.S. CPI reading on Wednesday and U.S. treasury secretary Janet Yellen’s speech scheduled on Friday – which can cause a reaction in riskier assets such as cryptocurrencies.

The Fed’s monetary policy is also to be decided at a two-day Federal Open Market Committee (FOMC) meeting starting Thursday, which may further add to market uncertainty based on comments.

Bitcoin has been down 2.7% in the past 24 hours, reversing gains from last week when it briefly traded over a two-month high of $70,000.

Now is the time to cut rates, three Democrat senators said in a letter to the Fed on Monday.

The Fed should move away from its 2% inflation target, the letter added.

The Federal Reserve (Fed) has kept the interest rate too high for too long and it's time for a cut, three Democrat senators said Monday in a letter to the central bank's chairman, Jerome Powell.

"We write today to urge the Federal Reserve (the Fed) to cut the federal funds rate from its current, two-decade-high of 5.5 percent. This sustained period of high interest rates is already slowing the economy and is failing to address the remaining key drivers of inflation," Senators Elizabeth Warren (D-Mass.), Jacky Rosen (D-Nev.) and John Hickenlooper (D-Colo.) wrote, according to a document on the HuffPost website.

In response to the surprisingly resilient labor market, financial markets pushed out expectations for a first 25 basis-point interest-rate cut to September from July. The hawkish repricing has stalled a rally in bitcoin {{BTC}}.

The senators argue that the elevated interest-rate environment aimed at taming inflation adds to the problem by pushing up housing, construction and auto insurance costs, and risks propelling the economy into a recession that could " push thousands of American workers out of their jobs." In April, investment banking giant JPMorgan analysts said higher interest rates are spiraling into rent.

The senators said it's time for the Fed to follow the European Central Bank's lead and move away from the 2% inflation target. The ECB and Bank of Canada cut rates last week, diverging from the Fed's higher-for-longer stance.

According to the letter, the divergence could lead to a stronger dollar and tighter financial conditions or flow of credit through various sectors of the economy. Tighter financial conditions often lead to economic slowdown.

Singapore-based crypto trading firm QCP Capital does not expect the divergence to last long and sees the drop in BTC and ether {{ETH}} prices as a buying opportunity.

Cardano's Voltaire phase, the final stage of its roadmap to create a fully decentralized blockchain ecosystem, is set to occur in June.

The Cardano Node will reach version 9.0, making it ready for a hard fork to enter the Voltaire era.

The Cardano network is set to move into the final phase of a multiyear program to become a wholly decentralized blockchain ecosystem later this month, co-founder Charles Hoskinson said in an X post Monday.

As a first step, the validating node software operated by the system's stake pool operators, or SPOs, needs to be upgraded to the latest version. Then, the blockchain will evolve into a backward-incompatible version, a process known as a hard fork, and in doing so, enter a new era known as Voltaire. Cardano is currently in its Basho era.

The project's roadmap says that once the switch is complete, the seven-year-old blockchain will no longer be actively managed by Cardano development firm IOHK but will instead be wholly run by community members.

“It looks like June will be the month that Cardano Node will reach 9.0,“ Hoskinson posted. “This means that Cardano is Chang fork ready and waiting for 70 percent of the SPOs to install the new node. Then, a hard fork can occur pushing Cardano into the Age of Voltaire.”

“We'll have the most advanced blockchain governance system, annual budgets, a treasury, and the wisdom of our entire community to guide us,” he added.

According to governance forums and blog posts, the first part of Voltaire will see the implementation of CIP 1694, a proposal that will allow holders of the native {{ADA}} token to vote on topics and features that benefit Cardano. A second step will enable more novel features, such as proxy participation and treasury withdrawals, allowing users to propose and fund projects within the Cardano ecosystem.

ADA tokens are down 1.6% in the past 24 hours, CoinGecko data shows, outperforming losses of 2.2% in major tokens tracked by the CoinDesk 20 (CD20) index.

Double-digit losses in GameStop weigh over meme coins.

Meme token GME and KITTY fall 25% and 10%, respectively.

The controversial GameStop (GME) stock rally saw its second day of reversing on Monday, ending the U.S. trading session down 12% after a 40% drop on Friday This weighed down some meme tokens that tend to mirror the stock’s movements.

GME ended Monday trading at $24.89, down 62% from a two-year high of $61 last Thursday. Elsewhere, the Solana-based meme token GME, which parodies the company, slid 25%, reversing a more than 200% rally from the past seven days.

Related tokens like Roaring Kitty (KITTY) and some cat-themed tokens, which previously moved alongside GME stock, lost an average of at least 10%, according to data tracked by CoinGecko.

Dog-themed tokens doge (DOGE), shiba inu (SHIB) and floki (FLOKI) pared gains from the last week, falling from 4% to 10%.

The stock had moved wildly since late May on the apparent return of retail trader and GME bull Keith Gill for the first time since 2021. Gill, known by his @TheRoaring Kitty and “DeepF*uckingValue” aliases, was a key figure in the stock’s short squeeze rally in 2021.

Gill flashed a $580 million position of GME equity and options holdings last week, boosting the stock’s prices and putting him on track to a potential billion-dollar exposure position.

However, gains were erased after the company said it would sell up to 75 million shares, days after it made $933 million by selling 45 million shares. It also announced a drop in quarterly sales – dampening investor sentiment.

Matter Labs, the main development firm behind the layer-2 network ZKsync era, has officially disclosed the distribution criteria for its long-awaited ZK token airdrop. According to the plan released Tuesday, 17.5% of ZK's 21 billion total token supply will be airdropped to users beginning "next week."

Like other layer-2 networks, ZKsync Era pitches itself as a quick and cheap way to send transactions on Ethereum. According to Matter Labs, the ZK airdrop will be the “largest distribution of tokens to users amongst major L2s,” with just under 3.7 billion tokens going to users.

Pre-market prices from Aevo, a crypto perpetuals exchange that currently values ZK at $.66, would place the airdrop's fully diluted value (FDV) above $2.5 billion, which is nearly triple ZKsync Era's current total value locked (TVL) of $815 million.

Under the distribution plan, 89% of the airdrop will go to ZKsync users, a group that includes anyone who has transacted on ZKsync and met a certain threshold of activity (a specific threshold was not provided). The remaining 11% will go towards contributors to the ecosystem, including zkSync native projects (5.8%), on-chain communities (2.8%) and builders (2.4%).

The airdrop news comes as Matter Labs continues to receive backlash from its layer-2 peers over its decision to trademark the term “ZK,” which is shorthand for "zero-knowledge” cryptography, the core technology underlying ZKsync and a plethora of other blockchain projects. After criticism from the crypto community, Matter Labs withdrew its trademark application, which it originally said it pursued to protect its users from similarly-named projects and token tickers.

Matter Labs said that the airdrop will cap the amount that any given address can receive at 100,000 tokens. “By capping whales, the ZK airdrop fairly rewards community members that contribute to ZKsync in different ways,” Matter Labs wrote in a press release seen by CoinDesk. ("Whales" is crypto-speak for especially big-pocketed traders.)

The team also shared that Matter Labs employees will get 16.1% of ZK tokens, and Matter Labs investors 17.2%. Those tokens will be locked for a year and then unlocked over the course of three more years.

The rest of the token supply will go to ZKsync’s new "Token Assembly" (29.3%) as part of its new governance plans laid out on Monday, and various Ecosystem Initiatives (19.9%).

“Awarding more tokens in the airdrop than to the Matter Labs team and investors is more than a symbolic decision for the community," Matter Labs wrote in a statement shared with CoinDesk. "When the ZKsync governance system launches in the coming weeks, the community will have the largest supply of liquid tokens to direct protocol governance upgrades.”

Airdrop politics

The airdrop follows a series of other airdrops, like those from StarkNet and EigenLayer, which outraged some users who expected to receive larger allotments of tokens. In the case of EigenLayer, in particular, some users took issue with the team's decision to strictly bar airdrop claimants from the U.S. and a long list of other countries.

“We have put a lot of thought into the design of the airdrop," Alex Gluchowski, the CEO of Matter Labs, told CoinDesk in an interview. “No matter what you do, some people are going to be disappointed, but we have looked into others," he said.

Among the "key pillars" Gluchowski's team used to inform its distribution plan, "number one" was to "prioritize community heavily," said the Matter Labs CEO.

Gluchowksi mentioned in the interview that “certain jurisdictions are excluded because they are either banned by sanctioned regimes or are just not welcome, unfortunately for crypto projects doing airdrops, so we have to be compliant and respect those laws.” He did not specify what countries would be allowed to claim tokens, and he didn't say what methods ZKsync would use to enforce its region restrictions.

ZK drama

The news of the airdrop criteria follows after Matter Labs found itself in hot water with competitors Polygon and Starkware over its applications to trademark the term “ZK.” Given that ZK technology and the term ZK are used by many teams in the Ethereum ecosystem, the trademark filing was seen as an attempt by Matter Labs to seize ownership over a "public good."

Gluchowski was defiant when he spoke to CoinDesk this week.

“The guys who have accused us registered “STARK” as a trademark,” Gluchowski said, seeming to reference Starkware. (A “STARK” is a type of zero-knowledge proof that was created by Starkware co-founder Eli Ben-Sasson but is now ubiquitous among Ethereum layer-2 teams.)

“I mean what are we talking about? Everyone has registered trademarks for their products, for their tokens, for whatever," Gluchowski continued.

Gluchowski added, though, that they listened to the community and decided to withdraw their trademark application. “We did not want to leave even the slightest impression that we are trying to manipulate the system to our advantage,” he told CoinDesk.

Read more: The Protocol: Another Episode in the Layer-2 Teams Drama