Wednesday, October 27, 2021

DeFi Attack Drains $100M From CREAM Finance

The biggest crypto news and ideas of the day

Oct. 27, 2021

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Today's must-reads

Top Shelf

TOP COP: The Commodity Futures Trading Commission (CFTC) is ready to be the "primary cop" for crypto, its acting head said Wednesday. Rostin Behnam, during his confirmation hearing to lead the agency before the Senate, said the commodities regulator is ready to become the primary federal regulator for digital assets, should Congress expand the agency's remit. He also estimated that 60% of digital assets are commodities.

CREAMED: Decentralized finance (DeFi) platform C.R.E.A.M. Finance appears to have been the target of a devastating exploit Wednesday morning that drained over $1 billion in funds, likely the largest DeFi exploit to date. The protocol's Ethereum-based pools are now empty, following a flash loan attack that involved 68 different assets and cost over 9 ETH in gas.

VISA BACKED: Visa Inc. has joined Mastercard Inc. as an investor in Deserve, the startup that offers a credit card with bitcoin rewards in partnership with BlockFi. Transaction volume for the card is approaching $2 billion on an annualized basis, and BlockFi cardholders are projected to spend roughly $30,000 per year, 50% above that of average credit card holders, Deserve's co-founder and CEO Kalpesh Kapadia told Bloomberg.

KRAKEN IN: SkyBridge Capital – the money management firm that's run by Anthony Scaramucci, who was briefly a White House communications director under then-President Donald Trump – is privately offering investors the chance to invest in Kraken as the U.S. cryptocurrency exchange plans to go public next year. In an email to investors, SkyBridge said it is purchasing preferred stock from an early investor on behalf of its funds and clients "in one of our largest private market investments to date."

DOWN BAD: Robinhood, the zero-commission trading platform, said its crypto revenues fell to just $51 million in Q3, down from a record $233 million in Q2. Total revenue for the quarter was $365 million, short of analyst estimates of $437.1 million, according to FactSet. The company reported an adjusted net loss of $2.06 per share, versus analyst expectations of a loss of $0.67.

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Overheard on CoinDesk TV ...

Sound bites

"I would not be surprised if the amount of money that we spend on acquisitions over the next year or so was north of a billion dollars."

–FTX founder and CEO Sam Bankman-Fried, on CoinDesk TV's "First Mover."

What others are writing...

Off-Chain Signals

Long list today, but lots of incremental stories that fit within larger trends.

Maria Bustillos on crypto's energy use: stop comparing it to small countries (The Brick House Cooperative)
U.S. regulators exploring how banks could hold crypto assets - FDIC chairman (Reuters)
Shiba Inu is the third most googled crypto in 2021, new study shows (MarketWatch)
$2.6 Billion Quant Hedge Fund GSA Capital Joins the Rush to Crypto (Bloomberg)
How PleasrDAO Bought the Secret Wu Tang Album (Bankless, Youtube)
Paradigm Bets on a Cross-Chain Future With $21M Round for Cosmos' Osmosis DEX (The Defiant)
Adobe partners with OpenSea and other NFT marketplaces to display content credentials (The Verge)
European Central Bank appoints 30 members to digital euro advisory group (The Block)
An "Initial Litigation Offering" is looking to fund a case against a California county by offering a tokenized stake in any resulting recovery (The Block)
Economist 'DeFi Rabbit Hole' Cover NFT Sells for $419K in Ethereum (Decrypt)

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Putting the news in perspective

The Takeaway

Crypto and Multi-Level Marketing Schemes

The U.S. Federal Trade Commission (FTC) on Oct. 26 sent what's known as a "Notice of Penalty Offense" to more than one thousand companies, including the crypto exchanges Blockchain, Gemini and U.K.-based Bixo. The notices, which warn businesses not to overstate the earning potential of investments or business opportunities, were also sent to a large number of gig-work platforms, multi-level marketing firms (MLMs) and franchise companies, all of which can sometimes resemble exploitative pyramid schemes.

The agency makes clear that the notices are not in any way indicative of misconduct by the companies. Instead, the regulator says the companies are now "on notice that if they deceive or mislead consumers about potential earnings, the FTC won't hesitate to use its authority to target them with large civil penalties." At worst, it seems plausible that crypto exchanges have made what the FTC sees as excessively optimistic statements about the growth potential or safety of speculative cryptocurrency investment, and the notice is a warning to cool their jets a bit.

Unfortunately, that has left the exchanges lumped in with some companies that I would argue are far more exploitative. "Gig" platforms also getting FTC warnings included Amazon and Amazon Web Services (with their Mechanical Turk and gig-delivery systems), as well as Fiverr, Postmates, Upwork and Uber. Investigations have shown that such gigs often amount to working for below minimum wage.

The list also includes MLMs with names like Candle Divas, Closet Candy and Herbalife. These "business opportunities" often charge huge startup costs that turn them, in effect, into insider-enrichment schemes, as recently chronicled in the documentary "LuLaRich," about clothing MLM LuLaRoe (which also received an FTC warning yesterday). MLMs remain legal in part thanks to the political clout of people like Trump administration Education Secretary Betsy DeVos.

Finally, the list includes a lot of franchise operations. These are also sometimes twisted into something very closely resembling an MLM, with large up-front licensing fees that drive revenue for a parent company but leave franchisees deep in a hole. I strongly recommend the in-depth treatment of franchising as a labor-law workaround by the podcast "The Uncertain Hour."

As much as we may hate to see crypto exchanges lumped in with such sketchy categories, there are important takeaways. First and most simply, the inclusion should be taken seriously as an index of how regulators still often see crypto – as a den of scammers looking to grift regular people. As genuinely exciting as crypto is right now, it's worth keeping that context in mind before, say, hitting "send" on some dumb Tweet about how bitcoin is going to be worth a million dollars a token by 2022. A little restraint could help the sector earn better treatment by regulators.

The second takeaway is more complex, and has to do with the economic context for crypto's growth. The FTC points out in its announcement that "as the pandemic has left many people in dire financial straits, money-making pitches have proliferated and gained special attention … Americans are bombarded by offers that often prove to be less than advertised."

This is actually underplaying it: The explosion of MLMs and gig work stretches back to the aftermath of the Great Recession, when good jobs became much, much rarer. They often exploit either the desperation triggered by joblessness, or the dream of entrepreneurial independence for the many workers who see themselves as miserable wage-slaves.

While cryptocurrency is a real and substantive innovation, the truth is that much crypto investment is driven by the same economic context. Over the years I've seen some really worrisome behavior (such as mortgaging houses) from people hoping to get rich quick on crypto and escape their economic straitjacket.

Obviously, that has worked out for many in the short term, but many crypto prices (like the prices of many stocks right now) are still well above what's justified by actual user demand. That means they're still speculative and risky, particularly for smaller retail investors who can't weather downturns or bad bets. Long-term faith in the sector will benefit from clearly communicating the exciting potential of these new technologies – but also clearly laying out their risks as investments.

–David Z. Morris

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