Reality check

Howdy. We don’t usually like starting with doom and gloom, but crypto’s total market cap dipped below $1 trillion last week. Now one company—Saudi Aramco—is worth over 8x all cryptocurrencies combined. Days left in SeptemBear: 11.

Today: Ethereum centralization, regulatory tea, and miners’ dependence on Russia. Here we go.

—Angelina & Vincent

Who’s Got the Power in Post-Merge Ethereum?

When we first heard about the Merge, an increase in decentralization was one of the biggest selling points to suggest such a massive undertaking would be worth it. But now, less than a week after ethereum's transition to proof-of-stake (PoS), that increase in decentralization is nowhere to be found.

In fact, seven entities now hold two-thirds of all staked ETH, according to Martin Köppelmann, cofounder of DeFi platform Gnosis. Lido and Coinbase—which both offer staking pools—confirmed 420 of the first 1,000 transactions on the new network.

Here’s why that’s a problem. Unlike proof-of-work (PoW), ethereum’s new PoS consensus mechanism allows nodes to put aside their mining rigs and instead stake 32 ETH to validate transactions.

• Both of these mechanisms are designed to avoid what’s known as a 51% attack—the crypto phenomenon in which one node gains control of more than 50% of the node power on a network, essentially putting the future of that network into the hands of one entity instead of multiple nodes.

FYI, that kind of attack doesn’t just happen. At the time of the Merge, the Ethereum Foundation estimated that it would take $25 billion to buy enough rigs to overwhelm ethereum’s new PoS system.

Still, these trends toward centralization present new challenges: mostly for regulation and neutrality.

On regulation: A potential consolidation of power on the ethereum blockchain would likely attract more regulatory interest, given that regulators have largely let bitcoin be because it’s deemed “sufficiently decentralized.”

On neutrality: Ethereum’s recent centralization may raise questions about whether it can maintain “credible neutrality,” writes CoinDesk’s Daniel Kuhn. For example, ethereum validators could decide to blacklist wallets associated with the sanctioned Tornado Cash protocol.

Decentralization, on the other hand, could ensure that companies that offer staking pools like Lido or Coinbase won’t be put in the awkward position of having to either make a unilateral decision for ethereum or see a CEO go to jail for 20 years. —Vincent

Regulatory Tea With the Treasury

Six months after President Biden’s executive order on the future of digital asset regulation, details still remain scarce. But a trio of crypto reports released late last week have begun to shed some light on this administration’s crypto plans. The biggest takeaways:

• The Fed will continue experimenting with a central bank digital currency, provided it’s of national interest (the White House and Congress are likely to make that call).

• The U.S. Treasury will continue fighting crypto crime by strengthening its anti-money laundering tactics and combating the financing of terrorism.

• The SEC and CFTC will continue to “aggressively pursue investigations and enforcement actions against unlawful practices” of crypto businesses. This directive comes amid the recent turf war between the two agencies about who regulates what.

Talk or action? The reports are clear about this: The federal government sees considerable risk in crypto and will step up its enforcement game accordingly. Otherwise, things remain murky—it’s a lot of “crypto could be good, but it could be dangerous too.”

Most importantly, the biggest questions in U.S. crypto remain unanswered: Which tokens fall under securities law? And who’s in charge—the SEC or the CFTC? It appears we’re going to have to wait until after midterms for Congress to decide. —Angelina

Wartime Crypto Miners Continue Operating in Russia

While more than 1,000 businesses have scaled back their activities in Russia since its invasion of Ukraine earlier this year, the crypto mining industry continues to lean heavily on Russia's cheap electricity amid the worst global energy shortage in history.

What about sanctions? BitRiver is the only mining firm to be sanctioned by the Treasury Department during the war. That sanction suggested that miners “help Russia monetize its natural resources.”

Which brings us to today: With two years until the next bitcoin halving (when mining difficulty will increase), miners have no choice but to keep operating in the country, Nikita Vassev, founder of a Russian mining conference TerraCrypto, told CoinDesk. —Vincent

In other news:

• Popular crypto exchange Huobi started delisting seven privacy tokens yesterday, including Monero (XMR) and Zcash (ZEC), in the wake of broader regulatory scrutiny.

• Binance erroneously paid out $19 million in Helium (HNT) tokens to users, resulting in a massive sell-off.

• ETHPoW already fell victim to a replay attack.

• This month, BTC experienced the largest inflow of coins to exchanges since October 2021, suggesting sell pressure lies ahead.

• The hunt for Do Kwon continues. South Korean prosecutors reportedly asked Interpol to issue a “red notice” for Terra’s co-founder.

And that’s what you need on your radar today in crypto. Respond to place your bets on the SEC vs. CFTC regulatory showdown. See you Friday.