US Regulators Are Targeting Crypto While Ordinals Are Bringing NFTs to Bitcoin & Nostr Shows Us a New Way to Tweet

Hey stackers!

February was an eventful month in the Bitcoin and crypto world. If I were to sum it up in one sentence, I would say we’re in the “they will fight you” stage! 

We saw the final contingency from the FTX fall out in Q4 last year. Like I said back then, anti-crypto politicians - yes, I’m looking at you, Mrs. Warren - are using this event to hurt the industry. US regulators are using this moment as well and fining companies who are eager to push crypto adoption forward. 

Now, we can do two things about this. Either we give up or sit down and work on even better solutions. Every pushback in the industry has resulted in amazing new products and an even better market! 

I’m an optimist and see these events as the stepping stone for many new crypto users and investors who want to participate in the problem-solving.

The Bitcoin maxis were right, Ethereum’s move to PoS has opened it up for regulatory capture

Ethereum’s Merge, a.k.a. the move to Proof of Stake (PoS), has been praised quite intensely in the news. It’s been used as Wall Street’s scapegoat for a failing ESG narrative. 

You read more and more headlines in the news explaining how hard it is to be an ESG investor and why they should shift their focus to more specific use cases in alternative markets. 

Once again, the focus shifts to blockchain and the PoS consensus mechanism. It’s no secret that it uses less energy than Bitcoin’s consensus mechanism, Proof of Work. Still, I didn’t believe the Bitcoin maximalists back in September when they warned us about possible regulatory capture as a result of the Merge.

We saw this in the first months after the Merge, where validators would censor more and more blocks. At the peak, we saw a capture of 79% OFAC-compatible blocks.

Source 

Since then, the number has decreased to 43%, but this is still a high number compared to what decentralized protocols should offer. Luckily more and more private node runners are coming on and securing the network. 

However, it opened the gates for regulators to try capturing one of the most extensive networks in the crypto ecosystem, which we see now. 

Gary Gensler is openly talking about declaring everything, but Bitcoin, a security, something the Bitcoin maximalists have warned us about for quite some time now. 

Unfortunately, a technically challenging Merge was abused by political interest groups to (potentially) over-regulate an emerging market.

The SEC is going after stablecoins

With that OFAC capture and increasingly more pressure due to the FTX fallout, it was only a matter of time before the SEC reacted. We saw this in February with their witch-hunt after stablecoins and centralized crypto exchanges. 

On Feb. 9, the SEC announced a $30 million settlement with the crypto exchange Kraken for failing to register its crypto staking program. The SEC claimed it was a security. Kraken had no option but to pay the fine and move on. This sentence seemed quite harsh compared to how the SEC reacted to FTX. 

Following the action, Gary Gensler warned other crypto firms to “come in and follow the law.” However, a dedicated crypto law has undoubtedly not been issued yet. 

A few days later, they announced a potential lawsuit against Paxos and their relationship with Binance US. In case you don’t know, Paxos is the issuer of Binance’s stablecoin BUSD. 

Since its issuance in 2019, they have claimed to fully back BUSD with reserves held in either fiat cash or United States Treasury bills. BUSD was reportedly authorized and regulated by the New York State Department of Financial Services (NYDFS).

The SEC doesn’t see it this way and has found ground to sue Paxos. The main issue appears to be Binance US itself, which in the SEC’s words, seems to operate out of an offshore tax haven and, by doing so, bypass US securities law. 

This reaction sparked a chain of events. One of which was Coinbase’s announcement that they would happily defend crypto in US courts. The other was a statement by SEC Commissioner Hester Peirce herself, in which she said this process is not an efficient or fair way of regulating. 

Gensler penalizes those companies which were eager to make an impact on retail investors and chose to ignore real dangers with FTX. He seemed to counteract this by organizing an interview with New York Magazine. 

Instead of safeguarding investors by stating what crypto companies can or can’t do, Gensler likes to spend more time in interviews and hyping his brand. 

This is not the last time we’ll see such actions, and it makes you wonder if the SEC has an action plan at all or if they continue to blindly prosecute individual actors based on their liking.

Ordinal Inscriptions are bringing NFTs to Bitcoin & That’s a good thing!

While most of the crypto world has to worry about possible charges by the SEC, Bitcoiners seemed to focus on expanding the ecosystem. 

For a long time now, Bitcoin critics have claimed that the network can only be used to store Bitcoin and nothing else. They didn’t do their homework. Layer two solutions like the Lightning Network or sidechains like Liquid have been around for a while. 

However, 2023 is the year where we see an increase in Bitcoin NFTs thanks to Ordinals. It’s not the first NFT project on Bitcoin, however. In 2014, we saw Counterparty as the first option to bring their collection Rare Pepe to Bitcoin, followed by Stacks in 2017. 

Ordinal Inscription, or Ordinals in short, are different from other Bitcoin NFT projects in their implementation. Instead of linking to an image in a block, the Ordinal is inscribed or attached directly to a Satoshi, the smallest unit in Bitcoin. This means that you inscribe the image or content directly onto the Bitcoin blockchain. 

This led to an outrage among some Bitcoin maximalists who generally see NFTs as something terrible. Instead of understanding the problem it solves, we can directly inscribe information and content onto the Bitcoin blockchain forever! However, their outrage wasn’t with the technology itself but with the higher fees and full blocks we saw for a period of 10 days. 

However, these maxis miss the most crucial part of Ordinals: more people are excited to get back to Bitcoin and actually use the technology! 

Quite a few NFT holders from Ethereum burnt their NFTs and sent them over to Bitcoin. Ordinals are responsible for getting people interested in Bitcoin again. 

It’s beyond me how this is not a net positive for Bitcoin in the long term. I’m very excited to see how wallet providers will improve their integrations and if the Bitcoin NFT market will have similar impacts as we saw with Ethereum in 2021.

Bitcoin Twitter is moving onto Nostr - the new censorship-resistant social media protocol

Last but definitely not least, I want to talk about Nostr. It’s the new place where Bitcoin Twitter is hanging out. The reason for this is straightforward. 

Nostr, short for “Notes and Other Stuff Transmitted by Relays,” is a three-year-old decentralized protocol with which you can build whatever you want. It integrates into the Lightning network, the micropayment layer solution on top of the Bitcoin blockchain. 

The great thing about nostr is that it’s an open protocol, meaning users or developers can build with it whatever they want and use it for whatever reason. It’s run by offering users to run or join relays. Think of them as connection points in the network, and everyone can broadcast messages or notes to these relays. 

Instead of relying on one central authority, you can now choose who’s seeing or able to engage with your content. This turns nostr into a censorship-resistant protocol because the user is back in charge. If he doesn’t like how one particular relay handles his notes or requests, he can tell his followers to join him on another relay. 

Also, a user can choose between a wide variety of different clients. 

• Do you want to have a Twitter alternative? Damus or Snort would be available for you. 

• Do you want to turn nostr into a Telegram messenger? Guess what, that’s possible as well. 

You can use the protocol as you want to because you’re not bound to a central database with an email and password but a public and private key.

The real kicker is the rewarding structures you can integrate with Lightning. Currently, the most significant usage of nostr is as a Twitter alternative. Instead of engaging with great content by liking a post, you can send some Satoshis over the Lightning network to the content owner.

Source

On nostr, we call this a zap, and it’s been growing incredibly in the past couple of days. We can also see the same function of relays. Therefore relay runners can also monetize the infrastructure they offer to users. It becomes a value-for-value platform which is a great way to monetize content again, other than relying on subscriptions or advertising. 

We’re definitely in the early days of nostr, but it’s exciting to already see a massive influx of people from oppressed regions in the world. Apple already had to shut down the app in China because it went against the idea of the CCP. For the first time in a while, users in China can speak freely and enjoy the reward for their courage with zaps and donations from fellow nostr users worldwide. 

I look forward to seeing an improved UI and more time for nostr developers to improve the product. One thing is for sure: this protocol is here to stay!

Your stacker in sats,

Patrick Lowry