The securities have not been and will not be registered under the U.S. Securities Act of 1933, as amended or with any other regulatory authority of any State or other jurisdiction of the United States or Canada and (i) may not be offered, sold or delivered within the United States or Canada, or to, or for the account or benefit of any U.S. Person or Canadian, and (ii) may be offered, sold or otherwise delivered at any time only to transferees that are Non-United States Persons and Non-Canadians.

November 8, 2022

Mariana; Meta; MiCa

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:

  • Project Mariana – groundbreaking for regDeFi
  • Meta’s NFT play leaves big questions
  • MiCa timeline slows as regulatory arms race heats up

Project Mariana could be a huge step forward for regDeFi

A cooperation between major financial regulatory institutions – dubbed Project Mariana – is looking to explore cross-border tokenized currency trading and settlements using DeFi protocols. It includes: Eurosystem, Singapore and Switzerland BIS Innovation Hub Centres together with the Bank of France, Monetary Authority of Singapore and Swiss National Bank.

The project is one of the first between such influential institutions, aiming to deliver a proof-of-concept for using automated market makers (AMMs) to settle cross-border transactions. It is working to a mid-2023 delivery for this proof-of-concept, a fairly aggressive timeline for such a big project. 

Swarm for its part is already heavily ensconced, and properly regulated in this market. We’ve already largely implemented the architecture envisioned by Project Mariana and can testify to the fact that it works – and TradFi institutions want to be involved. 

The importance of it in terms of development of the DeFi space cannot be understated. Even just having such institutions make a tangible move to look at AMMs is a huge moment in and of itself. 

Automated market making and the use of liquidity pools are one of the most exciting innovations of DeFi. Their use in institutional finance is going to be a revolutionary step – one that will fundamentally intertwine the DeFi and TradFi ecosystems.

Meta’s NFT play makes sense, but leaves some big questions

The news that Meta plans to allow NFTs to trade across their platforms comes at a very interesting moment – both for Meta and for NFT technology itself. It is a route for the firm looking for a way into the Web3 space. 

Its stablecoin play – Libra/Diem – ultimately failed because it couldn’t navigate the regulatory oversight demanded of the project. Instead they’re looking to wallet infrastructure as a route into DeFi. 

The offering raises some big questions about how NFT creation and ownership will work in practice within its sandbox. What is the degree of user lock in? Once you’ve got a Meta wallet can you use that same wallet to plug into other DeFi applications, or will there be limitations?

Will the wallets be decentralised, and how much will self custody factor in? If the keys to the wallet aren’t independent, will the owner ever really ‘own’ the asset being bought? What can Meta do with those assets in the background? 

Big tech firms such as Meta still rely heavily on data mining. This raises questions about how decentralised such a product on its platform can truly be, and exposes a potential criticism that these are NFTs in name only. It raises questions over the need for blockchain technology in such a centralised environment, if at all.

There will soon be regulatory principles through legislation such as MiCa that it will have to satisfy too, particularly with regards to hosted wallets and reporting requirements. 

Consumers will need to be aware of risks associated with tokens and their rights to a product that exists within Meta’s walled garden. It failed to meet the thresholds on its past project, and could come up against new regulations again as the situation develops. 

Ultimately it is understandable that Meta would want to play into this market. But its modus operandi must be questioned and scrutinised for its true Web3 credentials.

MiCa timeline slows as regulatory competitors get their act together

EU legislators have pushed back the vote on MiCa to February, slowing down the process at a time when the pace of regulatory advancements should be accelerating. 

MiCa is a highly complex set of rules being brought in to codify significant aspects of the crypto sector at a critical time in the market’s development. It is welcome progress that we expect will disseminate into other corners of the globe in due course.

But there is now a clear regulatory arms race underway. The Monetary Authority of Singapore just facilitated a successful trade for JPMorgan on a public blockchain, a tantalising look at what’s possible for the DeFi sector in tandem with TradFi.

But TradFi is only going to move to large-scale adoption once those regulatory frameworks are in place. Delay at this point just hampers progress. Regulated DeFi is the only way that the sector can expand with institutional capital. 

What’s clear is lawmakers aren’t going to allow the permissive situation we’ve had until now, as they become increasingly leery of losses sustained by market participants that don’t have sufficient protections. The direction of travel is clear as major financial centres make their play. It is an exciting time for those of us in the sector ready to go with a regulation-first approach.

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