DeFi protocol gets a global rating

In what is a first for DeFi, if not the entire crypto sector, the DeFi protocol Compound Treasury announced that it has received a credit rating of B- from S&P Global Ratings. According to Compound, this is the first time a major credit agency has issued a rating for an institutionalized DeFi protocol.

The S&P Global Ratings provides a scale of investment suitability, ranging from AAA (extremely strong) to D (in default). A score of B- indicates, “the issuer can meet financial commitments, though vulnerabilities to business, financial and economic conditions persist.”

S&P revealed that in arriving at Compund’s rating they had to consider “the uncertain regulatory regime for stablecoins, such as USDC. stablecoin-to-fiat convertibility risks and the Compound Treasury’s “limited capital base” along with a 4.00% per annum return obligation” in making the decision. However, the rating agency also said that the Compound protocol’s record of zero losses measured in USDC partially mitigates the risks of the offering.

Compound Treasury’s general manager Reid Cuming commented, “S&P’s rating helps our institutional clients more easily understand the opportunity and risks of crypto-powered cash management.” It is continuing to have discussions with S&P regarding the rating and said, “Compound Treasury’s ratings could be upgraded in the event of greater regulatory clarity for digital assets or a longer track record of solid performance.”

The Compound Treasury and its yield is supported by its underlying DeFi lending Compound protocol. To date, some 301,650 liquidity providers have deposited $6.94 billion worth of digital assets into the protocol, while 9,275 borrowers have taken out $1.83 billion worth of loans. Compound Treasury’s yield is above that of savings accounts at major US banks, however at the moment, the yield from Compound Treasury is only available to accredited investors or those meeting significant income and net worth thresholds. 

Microstrategy’s rescue plan for BTC

When the Federal reserve is about to make a statement, especially about interest rate rises, the Bitcoin community shudders. We have just seen this on 4th May. Yet, today, 5th May brings us a market that is green from end-to-end, with some altcoins making double digit gains (Tron surged by 14%).

Data shows that on 3rd May BTC/USD bounced between support and resistance after hitting $37,600, but a bounceback above $39,000 came fast enough. Still, something special needs to happen to lift Bitcoin above $40,000 and get over the hurdle of resistance at $43,000.

For the moment it is staying rangebound as the markets prepare themselves for Fed-induced volatility. Bulls looked to history for comfort, pointing out that the start of the Fed’s previous cycle of key interest-rate hikes in 2015 proved a turning point for BTC price strength, culminating in the December 2017 all-time-high.

Popular trader and analyst, Rekt Capital, said, “BTC is now testing a multi-week resistance.” Rekt also said that if Bitcoin could break out from the daily chart following the uptick above $39,000 then the multi-week downtrend is over and BTC/USD will see an upside.

The Microstrategy strategy

Other voices have been predicting that BTC will fall into the $20,000-$30,000 zone. But one company has a plan to avert that disaster and is being quite vocal about its contingency plan should it look like this might happen. The company is Microstrategy, which has the world’s largest Bitcoin corporate treasury. It says it will simply buy more Bitcoin to prevent that from happening.

Phong Le, the firm’s president and chief financial officer, revealed the conditions under which it would receive a margin call on its Bitcoin-collateralized loan: “As far as where Bitcoin needs to fall, we took out the loan at a 25% LTV, the margin call occurs 50% LTV. So essentially, Bitcoin needs to cut in half or around $21,000 before we’d have a margin call.” He added, “That said, before it gets to 50%, we could contribute more Bitcoin to the collateral package, so it never gets there.” He also stated that the firm had no intention of selling any of its considerable BTC holdings, and it appears to be prepared to support the crypto asset should there be any dramatic market capitulation.

Non-custodial wallets are under threat

What is the difference between a custodial and non-custodial wallet? The prime difference between custodial and non-custodial cryptocurrency services is that the private key is managed by third parties in the former, whereas it is handled by users in the latter case.

The EU is proposing some regulatory changes regarding these wallets managed privately by users. On March 31, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) approved provisions to Europe’s Transfer of Funds Regulation that restricts Virtual Asset Service Providers (VASPs) from transacting with unhosted wallets without verifying their owners’ identities beforehand. Furthermore, VASPs will be required to report all crypto transactions worth more than 1,000 EUR to relevant anti-money laundering authorities.

As Brian Armstrong, CEO of Coinbase says, “Imagine if the EU demanded your bank to report you to the authorities every time you paid your rent, simply because the transaction was over 1,000 Euros.” Armstrong also said that the regulation amounts to treating “every person who holds crypto differently from fiat.” And if you use Coinbase, or indeed any other centralized exchange, if you are being sent a transaction that is above €1,000 in value, “Coinbase will be required to collect, store, and verify information on the other party, which is not our customer, before the transfer is allowed.”

Patrick Hansen of Unstoppable Finance remarked, the upshot of such a piece of regulation would mean that transactions between non-custodial wallets and centralized exchanges “would become way more costly and burdensome” due to the data collection requirements.

Furthermore, Hansen pointed out that the databases storing names, home addresses, and other sensitive personal data would become the target of hackers and criminals, which could lead to increased incidents of hacking, phishing, and physical violence targeting crypto users. He also warned that the provisions of the regulations could have even more drastic effects in the future, namely that the EU Commission could “potentially move to impose an outright ban on transfers between VASPs and non-custodial wallets in the future.”

Fortunately, the legislation has not yet been passed, and a debate on it will start this April. Hansen is hopeful: “Individual voices from the council and commission make me optimistic that we can still achieve changes.” If the legislation does pass, cryptocurrency businesses will still have nine months to adopt plans to adopt and implement the regulation, and 18 months until they must ensure full compliance.

Should DAOs become the form of governance for DeFi?

According to the latest annual report from KuCoin Labs, “If DeFi aims to reduce regulatory risk, the form of DeFi governance will gradually become a DAO.”

The report further predicts that decentralized finance (DeFi) will still be a significant trend in the crypto industry in 2022. It points to the fact that the DeFi ecosystem has been “plagued by criminal whales” and that this has raised the prospect of increased risk. This situation has prompted calls for the regulation of decentralized finance; calls that come from inside the ecosystem in addition to pressure from external bodies.

With regulators more keenly scrutinizing DeFi, Kucoin predicts the industry may turn to DAO governance to reduce regulatory risks, and that is because “a DAO that puts community interest first can carry out “true governance decentralization.” It forecasts that the industry will see a shift in DeFi governance being coordinated using different mechanisms.

In relation to that, Kucoin’s report suggests, “the fundamental operational principles of DAOs are reasonable enough to be employed as foundations for the creation of legal entities.” However, this may not happen immediately. Rather, it is likely that we will not see a DAO expansion this year, but that there will be a refinement of the mechanisms instead, in preparation for adoption by companies and corporations.

To give a real life example of the use of DAOs in governance, we can look at the Marshall Islands in the Pacific. The islands now recognize DAOs as legal entities, meaning that they can register and operate legally within the island nation’s jurisdiction. It could be said that this represents proof that the DAO governance structure is indeed starting to become more prevalent in the blockchain world.

Ultimately, it concludes that 2022 is not likely to be the year where we see a breakthrough in DAO expansion, but rather we will see the refinement of their mechanisms that can pave the way for future adoption on corporate or company-size levels.