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May 17, 2022

Stablecoins, AML, DeFi fund

Welcome to Swarm Markets’ media memo. This weekly update provides comments from Swarm Markets’ co-founders, Philipp Pieper and Timo Lehes, on key industry news that has caught our eye, plus our own developments. 

Comments available on the following news items:

  • UK to legalise stablecoins
  • Oxford University NFT money laundering study
  • $90 million fund launched to finance DeFi

UK set to legalise stablecoins – Philipp Pieper

The UK is set to push on with legislation to regulate stablecoins, according to reports in The Telegraph.

The UK’s Government has been making noises about stablecoins and it looks set to bring in defining legislation. Interestingly, the UK seems to be focusing on one specific area of the crypto market, suggesting the government thinks it has spotted a gap in the regulatory market it would like to fill, so to speak.

Despite the recent negative attention for stablecoins such as UST/Luna, the technology still fulfils a really important part of the crypto ecosphere and the wider financial system. Uncorrelated assets backing these tokens are essential for the stability of the broader stablecoin system. This is true of TradFi where currencies underpin the economic infrastructure in the same way stablecoins are growing to form that function for crypto. 

The challenge, evidently from events in the past week, is building a system that is inherently sturdy. The UST debacle is evidence, if anything, that a set of robust standards and principles for stablecoin issuance are needed. The UK Government should be applauded for taking a step toward providing that. The policy detail remains to be seen, but it will no doubt provide some essential clarity for the sector. 

Oxford University NFT money laundering study gets it right – Timo Lehes

Oxford University’s Faculty of Law has published a paper on the risks around money laundering in the NFT market. 

The paper makes a really important observation on the problem of NFTs and money laundering. It does the right thing in not raising a moral panic over the issue, but instead addresses the lack of regulatory coverage, constituting a key problem area for the sector.

Oxford posits that NFTs fall into a legal blackhole with regards to AML at an EU level. Essentially they fall into a regulatory gap where no rules exist for a very new technology. While attempts have been made to incorporate virtual assets into certain existing frameworks such as FATF and MiCa, the issue is the proposals still exempt non fungible assets from the rules.

The NFT sector has incredible potential beyond just artwork and gaming. But if the EU doesn’t make clear rules and incorporate them into new and existing legal frameworks, the money laundering and fraud issues will only persist. 

$90 million fund launched to finance DeFi – Philipp Pieper

EVM scaling mechanism Aurora has launched a $90 million fund to help finance DeFi apps on the Near protocol. 

Perhaps not the biggest or highest-profile of funding launches, the news is very notable at a time of extreme pressure in crypto markets. We’ve seen valuations for the sector plummet in recent weeks and months. Incoming funding is increasingly going to be an issue, as it would be in any sector (and indeed is in tech and other areas) affected by market losses. 

What is really important here is that funding and money are still flowing despite some vocal critics announcing the demise of crypto as a concept. Research by The Block on VC capital flows suggest blockchain infrastructure projects are becoming a magnet for funding as investors see the value in using this technology to improve market efficiencies. 

Times like these tend to shake out the “bad apples”, leaving the well-funded and organised projects to move forward. It is an unfortunate but inevitable part of the market cycle that we have witnessed in previous crypto bear markets.