treasury

Yearn.finance pleads arb traders to return funds after $1.4M multisig mishap

A Yearn contributor said the value lost came from “strictly protocol owned liquidity” in the protocol’s treasury and that customer funds weren’t impacted.

Decentralized finance protocol Yearn.finance is hoping arbitrage traders will return $1.4 million in funds after a multisignature scripting error resulted in a large amount of the protocol’s treasury being drained.

“A faulty multisig script caused Yearn’s entire treasury balance of 3,794,894 lp-yCRVv2 tokens to be swapped,” according to a Dec. 11 GitHub post by Yearn contributor “dudesahn.”

The error occurred while Yearn was converting its yVault LP-yCurve (lp-yCRVv2) — earned from performance fees on vault harvests — into stablecoins on the decentralized exchange CowSwap.

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Coinbase met with Australian banking regulators over local crypto regulations

Coinbase’s vice president of international policy told Cointelegraph the meetings took place in Canberra and Sydney and touched on the government’s token mapping efforts.

The Reserve Bank of Australia and Treasury have been holding private meetings with executives from Coinbase, with discussions revolving around the future of crypto regulation in Australia.

Responding to Cointelegraph’s request for comment, an RBA spokesperson confirmed recent reports that these private meetings had occurred, stating that Coinbase met with the RBA’s Payments Policy and Financial Stability departments this week “as part of the Bank’s ongoing liaison with industry.”

Coinbase vice president of international policy Tom Duff Gordon, who was reported to have flown in for the meetings, also confirmed to Cointelegraph that meetings took place with Treasury in Canberra and Sydney.

Gordon said that the meetings touched on the government’s token mapping efforts, and Coinbase also “shared insights on global best practices concerning licensing and custody.”

The Australian Treasury’s token mapping exercise was announced on Aug. 22, and is aimed at categorizing digital assets in a way to work them into existing regulatory frameworks.

A consultation paper was released by the Treasury on Feb. 3, for which the Treasury sought feedback from the crypto industry.

Gordon praised efforts from the Treasury, noting that “The Australian Treasury teams continue to impress us with their high level of sophistication and active involvement,” adding:

“The Australian Treasury’s token mapping exercise provides one of the most detailed and thoughtful papers we have encountered on the topic, setting a strong foundation for their forthcoming draft rules for crypto exchanges and custodians.”

Gordon expressed his desire to see the rules “later this year,” adding that he appreciated “the Treasury’s comprehensive groundwork.”

In contrast, Coinbase co-founder and CEO Brian Armstrong has been critical of the approach to crypto regulation in the United States, echoing accusations that the Securities and Exchange Commission (SEC) is “regulating by enforcement” and claiming that the SEC wants firms to register with them despite there being no way to register.

Related: National Australia Bank makes first-ever cross-border stablecoin transaction

Documents recently obtained by the Australian Financial Review under freedom of information laws suggested that crypto legislation in Australia could be dragged out past 2024 and beyond, however, as final submissions to the cabinet are not expected until late in the year.

Coinbase expanded to Australia on Oct. 4, 2022, with Coinbase Vice President of International and Business Development Nana Murugesan telling Cointelegraph at the time that the exchange was “very impressed with the open door that we’ve received in Canberra and with different policymakers.”

Derivatives data highlights crypto traders’ positive sentiment and belief in further upside

A 5.5% weekly decline in the total crypto market capitalization might have sucked the wind out of some altcoins, but it has done little to alter traders’ bullish point-of-view.

The recent weakness in the crypto market has not invalidated the six-week-long ascending trend, even after a failed test of the channel’s upper band on Feb. 21. The total crypto market capitalization remains above the psychological $1 trillion mark and, more importantly, cautiously optimistic after a new round of negative remarks from regulators.

Total crypto market cap in USD, 12-hour. Source: TradingView

As displayed above, the ascending channel initiated in mid-January has room for an additional 3.5% correction down to $1.025 trillion market capitalization while still sustaining the bullish formation.

That is excellent news considering the FUD — fear, uncertainty and doubt — brought down by regulators regarding the cryptocurrency industry.

Recent examples of bad news include a United States district court judge ruling that emojis such as the rocket ship, stock chart and money bags infer “a financial return on investment,” according to a recent court filing. On Feb. 22, Judge Victor Marrero ruled against Dapper Labs, refusing to dismiss a complaint alleging that its NBA Top Shot Moments violated security laws by using such emojis to denote profit.

Outside of the U.S., the International Monetary Fund on Feb. 23 issued guidance on how countries should treat crypto assets, strongly advising against giving Bitcoin a legal tender status. The paper stated, “while the supposed potential benefits from crypto assets have yet to materialize, significant risks have emerged.”

IMF directors added that “the widespread adoption of crypto assets could undermine the effectiveness of monetary policy, circumvent capital flow management measures, and exacerbate fiscal risks.” In short, those policy guidelines created additional FUD that caused investors to rethink their exposure to the cryptocurrency sector.

The 5.5% weekly decline in total market capitalization since Feb. 20 was driven by the 6.3% loss from Bitcoin (BTC) and Ether’s (ETH) 4.6% price decline. Consequently, the correction in altcoins was even more robust, with nine out of the top 80 cryptocurrencies down by 15% or more in 7 days.

Weekly winners and losers among the top 80 coins. Source: Messari

Stacks (STX) gained 53% after the project announced its v2.1 update to strengthen the connection to Bitcoin-native assets and improve its smart contracts’ control.

Optimism (OP) rallied 13% as the protocol released the details of its upcoming superchain network, which focuses on interoperability across blockchains.

Curve (CRV) traded down 21% after an Ethereum security analytics firm suggested verkle tree implementation, which could severely impact Curve Finance’s use on the mainnet, according to its team.

Leverage demand is balanced despite the price correction

Perpetual contracts, also known as inverse swaps, have an embedded rate that is usually charged every eight hours. Exchanges use this fee to avoid exchange risk imbalances.

A positive funding rate indicates that longs (buyers) demand more leverage. However, the opposite situation occurs when shorts (sellers) require additional leverage, causing the funding rate to turn negative.

Perpetual futures accumulated 7-day funding rate on Feb. 27. Source: Coinglass

The seven-day funding rate was marginally positive for Bitcoin and Ethereum, thus a balanced demand between leverage longs (buyers) and shorts (sellers). The only exception was the slightly higher demand for betting against BNB (BNB) price, although it is not significant.

The options put/call ratio remains optimistic

Traders can gauge the market’s overall sentiment by measuring whether more activity is going through call (buy) options or put (sell) options. Generally speaking, call options are used for bullish strategies, whereas put options are for bearish ones.

A 0.70 put-to-call ratio indicates that put options open interest lags the more bullish calls and is therefore positive. In contrast, a 1.40 indicator favors put options, which can be deemed bearish.

Related: ‘Liquidity’ has most affected Bitcoin’s price in the last year, according to trader Brian Krogsgard

BTC options volume put-to-call ratio. Source: Laevitas

Apart from a brief moment on Feb. 25 when Bitcoin’s price traded down to $22,750, the demand for bullish call options has exceeded the neutral-to-bearish puts since Feb. 14.

The current 0.65 put-to-call volume ratio shows the Bitcoin options market is more strongly populated by neutral-to-bullish strategies, favoring call (buy) options by 58%.

From a derivatives market perspective, bulls are less likely to fear the recent 5.5% decline in total market capitalization. There is little that federal judges or the IMF can do to severely impair investors’ belief that they can benefit from decentralized protocols and cryptocurrencies’ censorship resistance abilities. Ultimately, derivatives markets have shown resilience, paving the way for further upside.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

LinksDAO likely to put in ‘compelling offer’ to buy Scottish golf course

If the final tally remains in favor of the purchase, the LinksDAO acquisition committee is expected to pitch an offer around $900,000 to purchase the Spey Bay Golf Club.

The decentralized autonomous organization-operated golf startup, LinksDAO, may soon put in an offer to purchase the newly marketed Spey Bay Golf Club in Scotland worth about $900,000. 

LinksDAO — self-described as a “global group of golf enthusiasts” that is on a mission to build the “world’s greatest golf community” — officially opened the proposal vote on Feb. 20, which came after a few weeks of informal deliberation.

It would be the DAO’s first ever golf course purchase.

While voting officially closes on Feb. 22 at 12pm Eastern Time, over 88% of the 4,100 LinksDAO tokenholders had already voted in favor of the proposal at time of writing.

If the final tally remains in favor of the purchase, the LinksDAO acquisition committee will meet with the relevant parties required to construct a “compelling offer” for the purchase of the club “with the full intent of successfully purchasing the golf course,” the proposal stated.

The current voting tally of LinksDAO tokenholders on the proposal to put in an offer for the Scottish golf course. Source: LinksDAO

The authors of the proposal — “Bez,” “Jim,” “cbruce” and “nickwalkermsu” — explained that while much of the DAO’s research efforts have gone into finding a suitable golf course purchase in the United States, “this listing was too special to ignore.”

“In our search for our first golf course to purchase, we have identified a promising property in Scotland called Spey Bay Golf Club. This vote is to determine if we should move forward with submitting an offer and working to purchase the course.”

The authors added that the course is “playable today,” and that its high ceiling to low price ratio makes it a worthy investment.

“Even a price of triple the ‘guide price’ would be cheaper than most mediocre courses we have assessed thus far in the US,” the authors explained.

As such, LinksDAO compressed the voting window to 48 hours in order to act swiftly on the potential purchase and hopefully get good price for the club:

“The timing of the sale requires us to act now should we decide to participate in the process. […] We intend to execute this purchase while maintaining velocity on our efforts to acquire course(s) in the US.”

LinksDAO is expecting to pitch an offer in the vicinity of $900,000, which is roughly its current market value, according to Golf Business News.

The 18-hole golf course is located in Fochabers, about a three-and-a-half-hour drive away from Scotland’s capital city of Edinburgh.

The DAO explained the potential purchase would be financed with capital from its fundraise and that it would transfer funds from its treasury to a corporate bank account to support ongoing operations.

The authors of the proposal noted that this would occur within 30 days of the purchase.

LinksDAO officially established itself as a DAO in January 2022, which came on the back of a $10.5 million fundraising effort where more than 9,000 of its “leisure” and “global” membership NFTs were sold on OpenSea in a short 24-hour period.

There are now 5,302 owners of LinksDAO memberships, which are issued on the Ethereum network, according to nonfungible token marketplace OpenSea.

The average floor price of the memberships is 0.29 Ether (ETH), or about $480 at current prices.

Related: Types of DAOs and how to create a decentralized autonomous organization

While it is not known how much is in the LinksDAO treasury, the LinksDAO market cap is currently $4.34 million, according to CoinGecko.

NBA superstar Stephen Curry is a notable figure to have invested in a LinksDAO membership. However it is not known whether he is still a token holder.

Sell or stake: Ethereum staking giant Lido mulls choices for its $30M ETH

While LidoDAO’s current inflows of about 1000 stETH a month are sufficient to cover operating costs for the time being, it’s worried that may not last.

The decentralized autonomous organization behind Lido — the largest Ethereum staking pool — is deliberating whether it should sell or stake the $30 million in Ether (ETH) from its treasury.

A proposal was submitted on Feb. 14 by the DAO’s financial unit, Steakhouse Financial, that considers four choices, one of which contemplates staking part or all of its ETH on Lido in the form of Lido Staked ETH (stETH).

Another would see LidoDAO selling a part or all of its 20,304 ETH for a stablecoin, with the purpose being to extend the DAO’s runway.

The four proposals submitted by Steakhouse Financial to the LidoDAO asking how it should manage its treasury. Source: Lido

The proposal comes as ETH staking withdrawals will soon be enabled through Ethereum’s Shanghai and Capella upgrades, which are expected to take place sometime early this year, according to the Ethereum Foundation.

While converting the ETH to Staked ETH may lead to more protocol rewards, the DAO is wary that too much staking may risk it not having enough Ether on hand “in case of need.”

Assets currently held in LidoDAO’s treasury. ETH currently accounts for about 9% of the DAO’s over $350 million treasury holdings. Source: Lido

Regarding operating expenses, Steakhouse Financial said it may be necessary to swap Ether for a stablecoin in order to “preemptively secure additional runway.”

Steakhouse Financial noted that with LidoDAO’s current inflows at about 1000 stETH per month, the DAO is making approximately $1.3 million to 1.5 million per month with the price of ETH hovering between $1,100 and $1,700 over the past few months.

The monthly inflow of stETH on Lido has steadily increased since January 2021. Source: Dune Analytics

Steakhouse Financial said those figures alone should be “sufficient to cover monthly operating expenses.”

However, they’re still deliberating whether it is worth converting excess stETH into a stablecoin to better prepare for any change in market conditions that may lead to increased operating expenses.

A business development representative from LidoDAO said that they’re not particularly thrilled with the current state of the stablecoin market:

“Considering all the FUD and rumors, both DAI due to USDC collateral and USDC itself pose potential risk if they become frozen. That being said I have issues with the liquidity of LUSD and USDT has yet its own issues.”

It appears as though most LidoDAO members are in favor of partially selling and staking a portion of the 20,304 ETH locked in its Aragon smart contract.

Related: Lido overtakes MakerDAO and now has the highest TVL in DeFi

The proposals come as the total value locked (TVL) of stETH fell 6.66% from Feb. 6 to Feb. 13.

The TVL of Lido is currently $8.13 billion, according to on-chain metrics platform DeFiLlama.

Aussie treasurer promises crypto regulation next year amid FTX debacle

A spokesperson for Australian Treasurer Jim Chalmers said they are closely monitoring the fallout from FTX’s collapse.

The Australian government has doubled down on its commitment towards a robust regulatory framework for crypto following the catastrophic collapse of FTX last week.

A spokesperson for Australian Treasurer Jim Chalmers said the Treasury said it is now planning on regulations to improve investor protection next year, according to a Nov. 16 report from the AFR.

The spokesperson made the announcement in light of the FTX’s fall last week, stating that it was closely monitoring the fallout from the FTX collapse, “including further volatility in crypto-asset markets and any spillovers into financial markets more broadly,” adding:

“These developments highlight the lack of transparency and consumer protection in the crypto market, which is why our government is taking action to improve the regulatory frameworks while still promoting innovation.”

The call for fast-tracked regulation comes as 30,000 Australians and 132 companies have fallen victim to Sam Bankman Fried’s fallen empire.

Michael Bacina, digital asset specialist at Piper Alderman lawyers, told Cointelegraph that regulation was the only way forward to re-establish the much-needed trust in trading platforms:

“Regulatory certainty is key to rebuilding trust in relation to centralized exchanges, and while law cannot eliminate bad behavior, it can set powerful norms and standards which make that behavior easier to find.”

While Danny Talwar, the head of tax at crypto tax platform Koinly Australia, added that a robust regulatory regime may fill in the holes where retail investors are left to be exploited:

“Following the FTX fallout highlights the need for sensible regulations within the crypto world, both domestically and across the globe, in order to eliminate uncertainty and remaining grey areas and provide clarity around digital assets — especially for retail consumers.”

“[But] the challenge will be ensuring that regulation does as intended to effectively protect consumers without suppressing industry growth,” he added.

As for what the regulation may entail, Talwar noted that while Australian trading platforms must comply with the Australian Transaction Reports and Analysis Centre (AUSTRAC), recommendations have been put forward to establish a market licensing regime.

The regime would include “capital adequacy and auditing standards to demonstrate the operational integrity” of trading platforms, which Talwar stressed is of great importance given that many exchanges are offering high-yield products at a heightened risk in order to gain a competitive edge.

Related: Australian prudential regulator releases roadmap for cryptocurrency policy

Bacina also stated that the “measured approach” taken by the Australian government could also position the country to become an industry leader in digital asset regulation:

“When Australia brings in technology-enabling custody rules for centralized holders of crypto-assets, we will either be a leader in the space, or catching up, depending on how fast other jurisdictions, like Singapore and Europe, move to make rules.”

The Treasury is also looking to provide greater protection to investors by establishing a “token mapping” system, which will help identify how certain digital assets should be regulated, according to an Aug. 22 statement by Assistant Treasurer Stephen Jones.

Australia’s new government finally signals its crypto regulation stance

Australian Treasurer Jim Chalmers said that his government will improve the way Australia’s system manages crypto assets and provide greater protections for consumers.

Three months after being elected into power, the Australian Labor party has finally broken its silence on how it’s planning to approach crypto regulation. 

Treasurer Jim Chalmers announced a “token mapping” exercise, which was one of the 12 recommendations in a senate inquiry report last year on “Australia as a Technology and Financial Center.” The report was warmly welcomed by the industry which has been anxiously waiting to see if the ALP government would embrace it.

Aimed at being conducted before the end of the year, the token mapping exercise is expected to help “identify how crypto assets and related services should be regulated” and inform future regulatory decisions.

Cointelegraph understands that Treasury will also undertake work on some of the other recommendations in the near future, including a licensing framework for crypto asset service providers dealing in non-financial product crypto assets, appropriate requirements to safeguard the consumer crypto asset custody, and a review of the decentralized autonomous organization (DAO) company-style structure.

In a statement from Treasurer Jim Chalmers, along with Assistant Treasurer and Minister for Financial Services Stephen Jones, and Assistant Minister for Competition, Charities and Treasury Dr. Andrew Leigh, the Albanese-led government says it wants to reign in on a “largely unregulated” crypto sector.

“As it stands, the crypto sector is largely unregulated, and we need to do some work to get the balance right so we can embrace new and innovative technologies

The statement noted that more than one million taxpayers have interacted with the crypto ecosystem since 2018, and yet, “regulation is struggling to keep pace and adapt with the crypto asset sector.”

The politicians claimed that the previous Liberal-led government had previously “dabbled” in crypto asset regulation through crypto secondary service providers “without first understanding what was being regulated.”

“The Albanese Government is taking a more serious approach to working out what is in the ecosystem and what risks need to be looked at first.”

Speaking to Cointelegraph, Michael Bacina, partner at Piper Alderman, said the token mapping exercise will be an “important step” to bridge the significant education gap within regulators and policymakers.

“Australia punches above its weight in blockchain right now but we have seen regulatory uncertainty lead to businesses leaving Australia,” he said.

Related: Australia’s world-leading crypto laws are at the crossroads: The inside story

“A sensible token mapping exercise which helps regulators and policy makers understand in depth the activities they are looking to regulate and how the technology interfaces with those activities should help regulation be fit for purpose and both support innovation and jobs in Australia while protecting consumers,” he added.

Caroline Bowler, CEO of BTC Markets said the move mirrors calls from many in the industry for “proportional, appropriate regulation” of the sector. 

“The additional benefits of token mapping are many. It will provide greater clarity to crypto investors; aid companies in developing their own blockchain-based innovations; provide guidance to digital currency exchanges; as well as assist regulators in shaping an appropriate regulatory regime,” she said. 

However Dr. Aaron Lane, a senior lecturer at the RMIT Blockchain Innovation Hub, believes the token mapping exercise is something of a delaying tactic by the Labor government:

“Progress is progress — but it is disappointing that we are not further along the path to greater regulatory certainty for industry and greater protections for consumers.”

“Unfortunately, they’ve needed to buy themselves time with a token mapping exercise to allow them to get up to speed,” he added.


Australia’s new government finally signals its crypto regulation stance

Australian Treasurer Jim Chalmers said that his government will improve the way Australia’s system manages crypto assets and provide greater protections for consumers.

Three months after being elected into power, the Australian Labor Party (ALP) has finally broken its silence on how it’s planning to approach crypto regulation. 

Treasurer Jim Chalmers announced a “token mapping” exercise, which was one of the 12 recommendations in a senate inquiry report last year on “Australia as a Technology and Financial Center.” The report was warmly welcomed by the industry which has been anxiously waiting to see if the ALP government would embrace it.

Aimed at being conducted before the end of the year, the token mapping exercise is expected to help “identify how crypto assets and related services should be regulated” and inform future regulatory decisions.

Cointelegraph understands that Treasury will also undertake work on some of the other recommendations in the near future, including a licensing framework for crypto asset service providers dealing in non-financial product crypto assets, appropriate requirements to safeguard the consumer crypto asset custody, and a review of the decentralized autonomous organization (DAO) company-style structure.

In a statement from Treasurer Jim Chalmers, along with Assistant Treasurer and Minister for Financial Services Stephen Jones and Assistant Minister for Competition, Charities and Treasury Andrew Leigh, the government led by Prime Minister Anthony Albanese says it wants to reign in on a “largely unregulated” crypto sector:

“As it stands, the crypto sector is largely unregulated, and we need to do some work to get the balance right so we can embrace new and innovative technologies.”

The statement noted that more than one million taxpayers have interacted with the crypto ecosystem since 2018, and yet, “regulation is struggling to keep pace and adapt with the crypto asset sector.”

The politicians claimed that the previous Liberal-led government had previously “dabbled” in crypto asset regulation through crypto secondary service providers “without first understanding what was being regulated:”

“The Albanese Government is taking a more serious approach to working out what is in the ecosystem and what risks need to be looked at first.”

Speaking to Cointelegraph, Michael Bacina, partner at Piper Alderman, said the token mapping exercise will be an “important step” to bridge the significant education gap between regulators and policymakers.

“Australia punches above its weight in blockchain right now, but we have seen regulatory uncertainty lead to businesses leaving Australia,” he said.

Related: Australia’s world-leading crypto laws are at the crossroads: The inside story

“A sensible token mapping exercise which helps regulators and policy makers understand in depth the activities they are looking to regulate and how the technology interfaces with those activities should help regulation be fit for purpose and both support innovation and jobs in Australia while protecting consumers,” he added.

Caroline Bowler, CEO of BTC Markets said the move mirrors calls from many in the industry for “proportional, appropriate regulation” of the sector. 

“The additional benefits of token mapping are many. It will provide greater clarity to crypto investors; aid companies in developing their own blockchain-based innovations; provide guidance to digital currency exchanges; as well as assist regulators in shaping an appropriate regulatory regime,” she said. 

However, Aaron Lane, a senior lecturer at the RMIT Blockchain Innovation Hub, believes the token mapping exercise is something of a delaying tactic by the Labor government:

“Progress is progress — but it is disappointing that we are not further along the path to greater regulatory certainty for industry and greater protections for consumers.”

“Unfortunately, they’ve needed to buy themselves time with a token mapping exercise to allow them to get up to speed,” he added.


LidoDAO says no to selling $14.5M in LDO tokens to Dragonfly Capital

The proposal aimed to secure a two-year runway for LidoDAO to carry out its functions in the Lido Finance protocol without worrying about further fundraising.

LidoDAO, the governance body that controls Lido Finance, has voted to reject a proposal that would have sent 1% of the LDO token supply to Dragonfly Capital in exchange for about $14.5 million in Dai (DAI).

LDO is the native token on the Lido Finance protocol, which issues the Lido Staked Ether (stETH) token. DAI is the dollar-pegged stablecoin issued by the Maker Protocol. If it had passed, crypto venture capitalist Dragonfly Capital would have received 10 million LDO tokens at $1.45 each.

A total of 609 votes were cast across three options, but the proposal was ultimately rejected with 43 million total tokens in favor of rejection. Nine whales whose collective 40.3 million tokens comprised the vast majority of the weight of the votes.

The other two options were each in favor of the proposal, either with a one-year lockup on the LDO tokens or with no lockup.

This vote was for the first half of the total 20 million LDO token allocation stipulated in the proposal. The second portion of 10 million LDO tokens could be sold to LidoDAO’s treasury, but it is unclear whether that vote will take place following this first rejection. Lido’s treasury is currently valued at about $228 million at the time of writing.

The July 18 proposal issued by DAO member Jacob Blish aimed to secure a two-year runway for LidoDAO to carry out its functions in the Lido Finance protocol without worrying about further fundraising. Blish stated:

“This will ensure Lido and its core contributors are able to continue the important work needed for the protocol in the long term and to flourish as an autonomous, self-governing collective.”

Blish added that the proposal specifies the accumulation of stablecoins to ensure that Lido can remain in a  “steady state to ensure survivability and security for Lido independent of further market actions.”

Lido community members appear nonchalant about the outcome of the vote, as the project’s Discord and Twitter accounts have been silent since the results came in. With the rejection, the proposal will go back to the drawing board and possibly be voted on again.

Dragonfly Capital, led by Haseeb Qureshi and Bo Feng, has at least 57 companies in its crypto and Web3 investment portfolio. The firm closed a $650 million funding round in April.

Lido allows Ether (ETH) investors to stake their coins in preparation for the Ethereum network’s transition to proof-of-stake (PoS) consensus expected by September.

Related: Lido co-founder discusses the future of Ethereum at EthCC

The LDO whale, who swung their considerable weight of 17 million tokens to reject the proposal, has voted in favor of another ongoing vote at LidoDAO that will add a developer to one of the project’s multisignature wallets if passed. This proposal is designed to increase the security of the protocol’s funds.

US Treasury study finds CBDCs a plus for commercial bank stability

Access to CBDCs reduces banks’ need to insure against liquidity risks and gives policymakers greater information about trouble in the financial system, according to the study.

The introduction of a central bank digital currency (CBDC) may increase the stability of a banking system, according to a paper released Tuesday by the United States Treasury Office of Financial Research. 

This finding counters concerns that a CBDC may encourage runs on weaker banks.

According to the Tuesday paper, researchers often claim that the public may in times of financial stress “pull funds out of banks and other financial institutions” meaning that a “CBDC could make runs on financial firms more likely or more severe.”

The authors, however, argued that a well-designed CBDC could mitigate that risk and also offered two arguments that favored the role of CBDCs in increasing financial stability. 

First, the authors created a mathematical model in which banks performed maturity transformation. That is, they borrowed money for shorter periods than they made loans for to insure against liquidity risk. This could create financial fragility in case of an adverse event, and that could lead to a bank run.

In the authors’ model, however, access to a CBDC “intuitively” makes “experiencing a liquidity shock” less costly to depositors, so banks can provide less insurance against this risk. Thus, a CBDC leads to greater stability of the financial system:

“In this way, the adjustments in private financial arrangements in response to a CBDC may tend to stabilize rather than destabilize the financial system.”

The second argument was based on a so-called information effect. Banks in weak positions may try to hide that fact from regulators to avoid intervention. Hiding unfavorable information could also make the crisis worse because of delayed response.

Related: BIS: 90% of Central Banks are researching the utility of CBDCs

However, the nature of CBDCs will allow policymakers the ability to identify situations where funds are being converted and not simply withdrawn from a bank — thus spotting problems sooner which can lead to a faster resolution:

“By allowing a quicker policy reaction to a crisis, this information effect is another channel through which CBDC may tend to improve rather than worsen financial stability.”

The authors point out that other researchers have suggested imposing caps, fees or other restrictions on CBDC during crises. The authors argue against this approach, noting:

“Policies that limit the use or attractiveness of CBDC risk losing many of its potential benefits as well.”

They also argue that the benefits of the greater information available to policymakers in the presence of a CBDC may have a variety of beneficial uses.