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.

September 14, 2022

SEC; The Merge; EU NFTs

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:

  • SEC ramps up crypto coordination
  • Success for The Merge could catalyse institutional adoption
  • EU working on NFT counterfeiting project

The SEC continues to ramp up crypto oversight

Noises from the SEC and Gary Gensler suggest that US regulators are beginning to gather pace on crypto oversight. On Friday it emerged that the SEC would be setting up a new office to deal with crypto filings, while Gensler has asked SEC staff to begin to calibrate crypto compliance. 

These moves point the market in one direction – that of greater attention and oversight of the crypto sector. Gensler is fairly hawkish on the de facto status of cryptos, stating that the vast majority are functionally securities. This would have the implication of bringing them within the existing framework of securities in the US. 

While the implications of that for some crypto assets and projects are difficult to divinate, our view has always been that the sector should be brought within key regulatory environments as much as possible. This would avoid the onerous and potentially limiting process of creating whole new frameworks. 

Existing regulations in the financial sector make sense and provide protection to investors, consumers and businesses without imposing overly hefty requirements. New layers of rules would hamper significant progress being made and inhibit some of the really key innovation being made, particularly in sectors such as DeFi. 

Success of The Merge could be a catalyst for institutional adoption

We’re now a matter of hours away from The Merge of the Ethereum blockchain. The significance of the moment cannot, at this juncture, be understated. Although it’s hard to say exactly what will happen once the merge completes, what is clear is that we are truly breaking new ground in crypto for the first time in a while.

The Merge is an important milestone to pass through. It allows for future upgrades on Ethereum that will kickstart the network on a path to greater scalability. For example, “The Surge”, due to take place in 2023, will address sharding, which will enable higher transaction volume that institutional investment brings. One of the key concerns preventing institutions from putting meaningful volume onto the blockchain has been finding a layer one network that can support its level of trade flow.

It is important to manage expectations though. The problems the merge is trying to solve won’t be remedied straight away. If anything, it acts as a kickstarter to future improvements.

Moving to proof-of-stake is estimated to reduce Ethereum’s energy consumption by more than 99.9%. Whether institutions now class Ether as an ESG asset depends on criteria. The reduction in consumption is a huge improvement. However, it is still not an energy capture asset and there are other ways to invest in emission-cutting instruments. For example, powering bitcoin using flare gas actually reduces the amount of CO2 emitted into the atmosphere.

If energy efficiency is part of a company’s ESG criteria, arguably Ethereum 2.0 would fit the bill. All electronic trading requires the use of power. If future financial markets are going to be built on the blockchain, which we think they will, it would be better to build these on proof-of-stake networks over their proof-of-work counterparts, which are far less energy efficient.

The successful transition to a proof-of-stake consensus model will be a more attractive investment opportunity for institutional investors for ESG, scalability and operational reasons. 

The EU is taking NFTs and running with them

The European Union Intellectual Property Office is exploring a very interesting idea around using NFTs to protect intellectual rights and prevent counterfeiting. 

Exploration of the NFT phenomenon, since it emerged in 2021, has been highly focused on the digitala artwork aspects of the tech. And while this EU initiative would have implications for that area of the innovation, it would by no means be its only remit. Ownership of an array of asset classes, as Swarm Markets has routinely said, are more than capable of being represented digitally via NFTs. 

But the EU’s manoeuvre into the space has potentially major implications. Codified and regulated approaches to the use of NFTs for ownership verification could do nothing short of putting rocket boosters under the idea. 

Imagine EUIPO-verified NFT ownership and you can see an entire ecosystem of property rights digitally recorded, verified and approved by a major global authority. Innovators, business and users give these ideas life, but ultimately it is governments that approve and enable such ideas through regulation and oversight.