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:
- Can Microsoft crack Web3? The jury is still out
- EU’s smart contract proposals risk undoing solid foundations laid by MiCA
- LME Nickel debacle highlights the vital importance of underlying collateral
Can Microsoft crack Web3? The jury is still out
No matter what your personal feelings are towards Microsoft, it’s hard to argue against its success in web2. From relatively humble beginnings, the firm has become the world’s largest software company and one of the most valuable companies – full stop – of all time.
Therefore, if the stories are true and Microsoft really is working on a non-custodial wallet for its Edge browser, it is huge news for the crypto and DeFi sectors. Names such as Microsoft add the sort of legitimacy and credibility that money can’t buy – and that is something that is sorely needed after what has been a difficult year for the sector.
However, for us, the jury is still out on when the legacy web2 companies have the business model to dominate and thrive in the brave new web3 world. The likes of Microsoft and Alphabet have built multi-trillion dollar businesses off the back of harvesting user data and selling it to third parties.
Web3, on the other hand, is the drive towards the total decentralization of the internet. And in this world, the old ways of doing things are unlikely to work. With the resources at its disposal, one would expect perhaps that the likes of Microsoft will be as successful in the world of tomorrow as it was in the world of yesterday. However, at the moment, it’s far from clear how they will achieve that.
EU’s smart contract proposals risk undoing the solid foundations laid by MiCA
The European Union has really led the way when it comes to the regulation of the crypto asset industry. On the whole, its landmark Markets in Crypto Assets (MiCA) paper, published last year, was warmly received by the crypto community, even if there were concerns about whether the proposals would hinder the stablecoin market.
MiCA’s licensing and client safeguarding proposals went well beyond the requirement to combat money laundering insisted upon by most regulators. And in doing so, many experts agreed that the proposals would help give the sector the clarity entrepreneurs need to build with confidence.
While MiCA was welcomed as a fair and even-handed approach towards crypto regulation, the EU’s Data Act risks needlessly hobbling the DeFi community. EU politicians have proposed that each smart contract has a ‘kill switch’ to terminate transactions. Smart contracts themselves are decentralized, so instilling this type of control undermines the very nature of DeFi.
We believe there are other ways to capitalize on the innovation of DeFi whilst satisfying regulatory requirements. For example, Swarm is built on self custody so we cannot seize client assets or do anything with them in the background. We are however able to remove access for users so they cannot interact with whitelisted assets and wallets on the platform, should lawmakers have concerns over nefarious activity.
Coming back to EU proposals for smart contracts, this is just the start of the process and politicians will meet at the end of this month to discuss. One would hope that this is merely an oversight that will be rectified throughout the course of rigorous discussion and debate.
LME Nickel highlights the vital importance of underlying collateral
It sounds like something out of a Hollywood movie, where a trading exchange – in this case the London Metal Exchange – thinks it is holding billions of dollars-worth of an expensive commodity in one of its warehouses only to find a fake consignment filled with bags of stones. But unfortunately it’s true.
Looked at in isolation, this looks simply like the latest drama to hit a scandal-stricken area of the metals market. But for us, this serves as a lesson to the crypto and DeFi markets about the importance of attesting where the underlying collateral sits, be it supporting tokens on chain or trading in traditional markets.
Larry Fink, the boss of Blackrock, the world’s asset manager, waxed lyrical recently about the potential of asset tokenization. As the first blockchain platform in the world to launch tradable stocks and bonds on DeFi, clearly we agree.
For us, the tokenization of real world assets, such as stocks or commodities, is the future but processes need to be as trustless as possible, either through automation or with institutional partners that have a long standing in the market.
As has been learned from LME nickel and the numerous scandals last year with centralized crypto players, the best way to prove an asset is where it should be, is to redeem it. By setting new standards for having asset-backed tokens in DeFi, we are expanding the ecosystem and rebuilding trust in the market. That is something that we sorely need.
