Weekly Top Stories - 10/4

This week in the newsletter, we write about market-impacting events this week, the SEC filing notice that it intends to appeal the July 2023 Ripple ruling, and Eigenlayer's much anticipated token launch.

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Geopolitics Weigh on Risk Assets

Markets battered amid rising geopolitical tensions and US economic challenges. Q4 was off to a challenging start as escalation in the Israel-Gaza war in conjunction with domestic economic concerns in the US led to a sell-off in global equities and crypto markets. Specifically, Israel's government vowed to retaliate after Iran fired a barrage of missiles across several sites in Israel on Tuesday (which was itself in response to Israeli strikes against Hezbollah that saw the killing of leader Hassan Nasrallah, according to Tehran officials). The US military aided Israel in thwarting the missile attack with no reports of deaths inside Israel. Following the attack, Iran's Foreign Minister Abbas Araghchi said, "Our action is concluded unless the Israeli regime decides to invite further retaliation. In that scenario, our response will be stronger and more powerful." Fears of an aggressive response from Israel, including targeting of export terminals or Iran's nuclear or oil facilities, sent energy prices higher.

Meanwhile, in the US, widespread destruction caused by Hurricane Helene, higher-than-expected ADP private payroll data, and a massive portworkers' strike further weighed on markets. The death toll from Helene climbed above 200 as millions across affected states in the Southeast are still left without power. Separately, port workers of the International Longshoremen's Association walked off the job on Tuesday in a dispute over pay and port automation projects that threaten jobs. The strike by the union workers blocked shipments across major shipping docks on the East Coast and along the Gulf, though late on Thursday the ILA agreed to postpone the strike until January 15, easing near-term concerns.

After starting the week at around $64k, Bitcoin slid to a low of $60k on Tuesday before ending the day slightly higher at nearly $62k. Bitcoin continued to trade in a narrow range, testing the $60k level several times, before closing at $61k on Thursday.

OUR TAKE:

Late September enthusiasm for the forthcoming "Uptober", the month when Bitcoin has historically generated its strongest returns, waned throughout the weak. Data from CoinGlass showed 86% of crypto traders were bullish going into the month, which led to more than $450m of long liquidations on Tuesday as spot prices declined. The confluence of these major market events this week drove declines across most risk assets, though we note that Bitcoin fared relatively well as it successfully held above the $60k level. Bitcoin and other crypto assets tend to exhibit more downside beta with equities, especially around major geopolitical events such as this week's escalation in the Middle East, but it is worth noting that Bitcoin has historically outperformed both gold and the SPX in the 60 days following the event, as highlighted by Blackrock in its recently published 'Bitcoin: A Unique Diversifier' report. Furthermore, hopes for "Uptober" remain intact, as October gains have predominantly begun in the second week of October.

While geopolitical uncertainty remains, specifically around whether and to what extent Israel will retaliate against Iran, the outlook for Bitcoin and cryptos looks constructive through the rest of the year. Seasonality and cyclicality are both seen as supportive of Bitcoin. Central banks are concurrently easing monetary policy, and historically rises in Global M2 have been supportive of rising Bitcoin prices. U.S. banks and brokerages are beginning to onboard the Bitcoin ETFs for offer to their end-clients and the FTX estate is expected to begin cash payments to creditors over the next several months (dependent on next week's court hearing to confirm the restructuring plan), which could see fresh cash invested in digital assets. The U.S. presidential election will also be an important catalyst, although our view is that the outcome will likely range from neutral/slightly positive to very positive for digital assets, as we view Harris as likely to be slightly more supportive of digital assets than Biden's administration. - Charles Yu

SEC Files Notice of Appeal in Ripple

On Wednesday, the SEC filed a notice of appeal in SEC v. Ripple et al. The Securities & Exchange Commission filed a notice in the U.S. District Court of the Southern District of New York Wednesday that it intends to appeal the final ruling to the 2nd Circuit Court of Appeals. While it's not yet clear exactly which aspect of the final ruling the SEC intends to appeal, it's likely that the SEC will appeal SDNY Judge Torres' decision that secondary sales on exchanges of XRP tokens did not constitute "investment contract" securities under Howey. The Ripple case has been a key test of the SEC's sweeping application of existing securities laws and legal precedents to cryptoassets, and Torres' summary judgment ruling on secondary sales has been seen as a key victory for the crypto industry.

For background, the SEC first sued Ripple and its two founders in December 2020, alleging that they had illegally raised $1.3bn through an unregistered securities offering (private sales to institutional investors) and that secondary sales of XRP tokens through crypto exchanges were also unregistered securities offerings. After years of litigation, in July 2023 Judge Torres ruled partially in favor of Ripple's motion-to-dismiss, agreeing with Ripple that neither secondary XRP token sales on exchanges ("programmatic sales") nor Ripple's airdrops of XRP to employees for bonuses were "investment contract" securities, but agreeing with the SEC that Ripple's primary sales of $728m to "sophisticated individuals" were unregistered securities offerings.

In the final ruling, Torres declined to order disgorgement by Ripple of the proceeds of the institutional sales because the SEC failed to show that Ripple's alleged unregistered securities sales caused investor harm. (The "sophisticated investors" likely profited handsomely). This could also form the basis of an SEC appeal, although the secondary sales question is the key precedential matter for both the SEC and the crypto industry. No date or timeline for the appeal is available at this time.

Also on Wednesday, the SEC's Director of Enforcement, Gurbir Grewal, a key figure in the current SEC's crusade against the crypto industry, announced that he will leave the SEC on October 11.

OUR TAKE:

Judge Torres' ruling that secondary sales of XRP tokens on crypto exchanges did not constitute unregistered securities offerings was a key blow to the SEC's litigation strategy against the crypto industry. Across the many litigation matters it has filed against the industry, the SEC has alleged that at least 66 cryptoassets are unregistered securities. This contention, that many cryptoassets were issued in violation of the securities laws, is essential to the SEC's legal approach to the industry. It forms the basis not only of actions against issuers like Ripple but also exchanges like Coinbase and Kraken. Were that basic underlying contention to be struck down by the courts, as it was in Ripple by Judge Torres, the entire foundation of the SEC's litigation strategy could crumble.

However, just weeks after Judge Torres' July 2023 decision in Ripple, another judge in the SDNY reached the opposite conclusion in SEC v. Terraform Labs. On July 31, 2023, Judge Rakoff denied Terraform Labs' motion to dismiss, specifically rejecting his colleague Torres' analysis in Ripple that there was a distinction between primary issuance to institutions and secondary trading on exchanges. In December of 2023, Rakoff ultimately sided with the SEC, saying that there was "no genuine dispute" that the crypto assets in question were securities under Howey.

All this to say that courts - even one specific court (SDNY) - have reached conflicting opinions on the question of whether, or which, crypto assets have been offered as "investment contracts" under Howey and should be considered securities offerings, subject to all the registration requirements for issuers and venues as are other securities. Terraform Labs has not yet appealed the ruling in its case, but if it did, that appeal would also be heard by the 2nd Circuit Court of Appeals. Of the 13 active Circuit Judges currently serving on the 2nd Circuit Court of Appeals, 6 were appointed by Republican Presidents (Bush, Trump) and 7 were appointed by Democratic Presidents (Obama, Biden).

It's worth noting that, should Former President Trump win the Nov. 5 U.S. presidential election and ultimately appoint a new SEC chair who ushers in a wholesale realignment of that agency's approach to digital assets, it's possible that this appeal, as well as other litigation against the digital assets industry, could be withdrawn. If the Ripple appeal is ultimately heard by the 2nd Circuit, it would be the highest court to rule on such a key issue to both the SEC and the industry and raise the stakes on the multiyear legal battle. - Alex Thorn

$EIGEN Token Starts Trading on Major Exchanges

On Monday, the EIGEN token started trading on major exchanges like Binance, Coinbase, OKX, and Kucoin. Before Monday, EIGEN tokens airdropped to users by the Eigen Foundation were non-transferable. The token debuted on spot exchanges at an initial price of ~$4 USD. This was in line with the pre-market price of EIGEN on perpetual futures exchanges like Aevo and Hyperliquid. EIGEN's price has since dropped to $3.50 USD at the time of writing. About 11% of the token's total supply was unlocked on Monday and the fully diluted value of the token is around $5.8bn at the time of writing.

The majority of EIGEN tokens (55% of supply) distributed to Eigenlayer investors and early contributors remain locked. These tokens will become unlocked at a rate of 4% each month starting May 2025, which marks the one-year point since the token was launched on Ethereum. Though locked, it appears EIGEN tokens held by investors and early contributors can still be staked on Eigenlayer and the rewards earned from this activity can then be freely traded. This detail has disgruntled certain users who claim this information was not publicly known until a few weeks before the EIGEN unlock.

In response to these criticisms, the Foundation and Eigen Labs, the development team behind EigenLayer, both issued statements on Tuesday, October 1, clarifying the treatment of investor staking rewards. They confirmed investor staking rewards are not subject to a lock-up period and total EIGEN rewards to all EIGEN stakers per year are limited to 1% of the total EIGEN supply. They also noted in their disclosures that employees of the Foundation and Labs have been prohibited from participating in staking for one year.

OUR TAKE:

The sharp rise and fall in EIGEN value in the early days of its debut on spot exchanges is characteristic of many other token debuts like TIA, ZRO, SEI, SUI, SAGA, and JTO. All of these tokens debuted on exchanges with a low circulating supply and high fully diluted value. Each was also heavily farmed in lead up to their respective airdrops and largely financed by VCs. Given this, the initial price activity of EIGEN over the past few days is no surprise.

Additionally, the potential for continued sell pressure on the token from investors selling their staking rewards is not unusual. When debuting the TIA token, the Celestia team also adopted similar policies for allowing holders of locked tokens to access some liquidity in advance through rewards in issuance. While any intentional effort on the Eigen Foundation or Labs' part to obfuscate the details about their investor staking policies should rightly be called out, the Foundation and Labs team's follow-up communications added much-needed clarity and the policies themselves are not atypical when compared to how other highly anticipated crypto projects have designed their protocol rewards.

EIGEN is debuting with key advantages when compared to similar tokens, the first of which is simply the fact that the token is debuting with much anticipation into a near-term market that is looking for positive catalysts in which to invest. Also, the EIGEN unlock is expected to be closely followed up with the rollout of major features on Eigenlayer like permissionless token support and AVS intersubjective rewards, which are expected to boost usage of the protocol. The extent to which the Eigen Foundation and Labs teams can successfully reach these development milestones in the forthcoming months will be important to the ongoing success of the protocol, especially as other restaking competitors like Karak and Picasso seek to take market share. - Christine Kim

Charts of the Week

It has been 16 days since Sky (formerly MakerDAO) launched its USDS stablecoin. In this short time, the circulating supply has reached 986.8 million USDS, however, growth has stalled over the last two days. The new stablecoin runs in tandem with the pre-existing DAI stablecoin, and users are free to use whichever token they prefer. DAI holders also have the ability to convert their existing DAI to USDS on a 1:1 basis. There are two catalysts to watch out for as it relates to the growth of USDS: 1) Sky's use of its revenue-sharing savings module to bolster demand and 2) USDS utility expansion as applications integrate the new token.

An active proposal in the Sky forum seeks to change rates on the DAI savings rate (DSR) which applies to DAI, the Sky savings rate (SSR) which applies to USDS, and the stability fees on all ETH, stETH, and WBTC vaults. The DSR and SSR are revenue-sharing savings vaults that allow Sky stablecoin holders to stake their tokens and receive a portion of DAO (decentralized autonomous organization) revenue in return; in the case of Sky, the revenue is stability fees (interest) paid on users minting DAI and USDS. The proposal, if passed, would put the SSR 100 basis points higher than the DSR; this would further incentivize DAI users to migrate over to the new USDS stablecoin. It would also be the first time since March 2024 that stability fees on these vaults and Sky savings rates have been raised.

Deeper integration of USDS into DeFi should also provide tailwinds for its adoption. DAI, which has been around for more than four years, has deeper liquidity and more expansive utility than that of USDS. This means some users who hold DAI may not be able to migrate over to USDS yet as the token can't support their needs. Aave onboarded USDS on October 2, 2024, but the pool can only support 50 million USDS of supply and 45 million USDS of borrows (compared to DAI's 338 million supply cap and 271 million borrow cap).

A caveat of the growth of USDS is that it won't necessarily lead to net growth in the combined circulating supply of Sky-issued stablecoins. This is due to the fact that existing DAI holders can migrate their DAI tokens over to the new USDS contract. The total supply of DAI and USDS sits at 6.06 billion combined units, up 626.05 million units since USDS launched.

Other News

• PayPal executes first business transaction using its PYUSD stablecoin

• Swift set to begin live bank trials of digital asset transactions in 2025

• Franklin Templeton's onchain money market fund launches on Aptos

• World Liberty Financial says 'thousands' signed up for whitelist within the first day

• Arbitrum One surpasses 1 billion transactions since 2021 launch

• China's former vice finance minister calls for deeper study of crypto amid global policy shifts

• Top SEC enforcement official Gurbir S. Grewal steps down

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