1 Changpeng Zhao & Brian Armstrong

FTX’s failure last month was damaging financially, politically, and reputationally. But its failure wasn’t a systemic threat to the entire industry.

That designation is shared by only two entities in crypto today: Binance and Coinbase, who are #1 and #2 in global spot trading volumes and crypto assets under custody.

In November, Binance accounted for nearly 75% of all global spot volumes. The liquidity engine for the global crypto market operates in a jurisdictionally-fluid gray area of epic proportions. It would be a mischaracterization to call Binance “unregulated,” but the legal and regulatory risks around its operations are hard to handicap. CZ has been subject to personal attacks by the media (who blame him for sparking a “bank run” on FTX), competitors (ill-advised), and other regulators, who would prefer Binance fit more cleanly under their collective thumbs.

Likewise, at the end of Q3, Coinbase counted $101 billion in assets on its platform, comprised of $40 billion in bitcoin (11% of the total supply), $25 billion in ether (16%), and $30 billion of other non-stablecoin tokens (11% of the remaining crypto market cap). Coinbase assets include all of the Grayscale Trusts’ assets (the largest publicly traded crypto securities). Like CZ, Brian Armstrong has attracted personal scrutiny from the media (who hate him for his “no politics at work” policy), competitors (again, ill-advised), and major U.S. regulators, who don’t appreciate when their “sketchy” behavior gets thrown under a public microscope.

Try as we may to convince the masses to embrace personal wallets and decentralized finance and other applications, we will probably always have centralized financial services that offer account-based services for investors and users looking to access crypto without the hassle of shepherding their own private keys.

Binance and Coinbase, and their respective founders, will be integral to any industry rebuild. As their fortunes go, so goes crypto in 2023. (No pressure, fellas.)

2 Rep. Patrick McHenry

With the Republicans taking the House in the midterm elections, there’s a stanche crypto proponent who’s readying to helm the House Financial Services committee. North Carolina Rep. Patrick McHenry will have an outsized influence over crypto policy in the coming years regardless of whether the Digital Commodities Consumer Protection Act (“DCCPA”) is passed into law in the next couple of weeks before a new Congress is sworn in (incredibly unlikely).

Even in a scenario in which DCCPA passes in 2023 without much Republican input, its primary impact will be on sending primary oversight of the major crypto exchanges and trading facilities to the CFTC. But it will still leave significant room for the interpretation of how the underlying regulated crypto assets are defined. What exactly constitutes a “Digital Commodity” vs. a “Digital Security”? McHenry himself has acknowledged that “a missing puzzle piece is the necessary role House Financial Services and Senate Banking Committees must play to provide the much-needed clarity these proposals seek to accomplish,” i.e., defining crypto assets.

McHenry has been an early leader on this front.

1. He promoted SEC Commissioner Hester Peirce’s “Safe Harbor” proposal for token disclosures and sponsored a bill that would codify its approach to regulation.

2. He co-sponsored a bipartisan “ugly baby” bill that would clearly regulate stablecoins and establish ground rules for their integration into the broader financial system.

3. He and his close ally on House Financial Services, Rep. Tom Emmer, who is now the House Majority Whip (#3 in House leadership), are likely to provide a check on SEC Chair Gary Gensler and haul him in for questioning over his approach to regulation via enforcement and a cozy relationship with FTX.

If DCCPA does *not* pass, McHenry’s role will likely become even more expansive. The Agriculture Committees (which govern the CFTC and would see a boost in its authority and responsibilities under the DCCPA) will soon be consumed by the once-in-five years renewal of the expansive Farm Bill, and McHenry will likely want a version of the House’s comprehensive DCEA Act back on the table.

Confused? Go on to Chapter 4. For now, know that McHenry is one of the most important politicians to watch in the new year. We have a lot of informed leaders in the next Congress. That’s fortunate as the stakes are very high.

3 Sheila Warren

One of the reasons for optimism with this new Congress has to do with the fact that their familiarity with crypto has spiked due to the industry’s education investments in D.C. Last year, we had the Blockchain Association’s Kristin Smith and a16z’s Katie Haun in our top 10 list because we knew this was a year when real legislative proposals would pick up steam. Their firms were at the forefront of public policy efforts in D.C. at the end of 2021.

Though she remains influential, Katie’s departure from a16z to start her own firm, Haun Ventures, split the policy team between two firms. Meanwhile, the Blockchain Association (BA) performed admirably but had to grapple with a larger number of restless members even as several larger firms (Coinbase, Binance.US) defected.

Fortunately, a complementary trade organization emerged as another leader in D.C. The Crypto Council for Innovation (CCI), which counts a smaller, but higher maintenance group of member companies (Coinbase, a16z, Paradigm, Fidelity, Block). Sheila Warren, a former World Economic Forum executive, has assembled a killer staff and positioned CCI at the center of the critical DCCPA discussions.

BA’s Kristin manages a larger and noisier 100+ company membership, but Sheila’s group has more firepower. The stakes couldn’t be much higher for CCI going into 2023 given the potential rifts that exist between the major exchanges and investors among its member organizations. If CCI can maintain a united front on behalf of its members, and continue to thread the needle to get good crypto legislation passed, it could lead to an industry boom.

Tighter regulation is coming. New laws are likely in 2023. And as the US goes, many other countries will follow. The success of CCI (and BA) will influence the next decade of industry development. Now that FTX is out of the picture, I am optimistic about the results.

4 Citizen Journalists: From Molly White to Autism Capital

“Web3 is Going Just Great...and is definitely not an enormous grift that’s pouring lighter fluid on our already smoldering planet.” So reads researcher Molly White’s blog header. “What if all this is about who gets Gisele now that they took out Tom Brady?” So read an early shitpost from the most unlikely authoritative source of information through the FTX bankruptcy, Autism Capital.

Molly is an informed and savvy crypto skeptic. Autism Capital was literally a self-proclaimed “simp account” for FTX’s founder before pivoting to investigative journalism. Both have outperformed the legacy media by a country mile in reporting on important stories within the crypto sphere this year. And both point to continued outperformance of citizen journalists in an information landscape that’s heavy on narrative and light on truth.

Web3 Is Going Just Great tracks the daily dumpster fires that have plagued crypto this year, and there might not be a more savage reality checker on crypto. It’s effective because it’s simple, highlighting myriad startup failures, hacks, and frauds day to day. It’s easy to dismiss “FUD” from industry critics who ignore the benefits and potential of crypto, but the reality is that critics get more oxygen and attention when the markets are down than when things are up. It’s not fun to get dragged on the internet, but a discerning entrepreneur might parse feeds like Molly’s and create solutions to the most pernicious problems and embarrassing weaknesses in crypto infrastructure. That’s been the path to unicorn status for a decade now: solve hard problems.

On the other hand, I did not have Autism Capital on my draft list of people to watch in 2023 (I know that may surprise you). It turns out that consistency, audience, and information flow are a helluva drug, though. Pseudonymous crypto Twitter troll accounts have, at times in the past, gone from breaking big bankruptcy stories to running leading media and data businesses. I’m with Mike Solana: give Autism Capital the Pulitzer. Many of the most meaningful parts of the FTX saga, including CZ’s movement of funds to dump FTX’s FTT token, were broken by Autism Capital and similar accounts. Meanwhile, the legacy media kissed the ass of a benefactor that just happened to defraud millions of his users.

5 Anatoly Yakovenko

The Merge was a watershed moment for developers and investors in the Ethereum ecosystem. The Ethereum Virtual Machine (EVM) is likely entrenched as a foundational piece of industry infrastructure, the only L1 that seems certain to be a long-term fixture in the industry.

When it comes to blockchain scalability beyond the EVM, you can basically narrow down four complements to Ethereum: EVM-compatible blockchains (including rollups like Arbitrum, Optimism, and zkSync), Cosmos-style “app chains,” Aptos/Sui “Move” chains, and Solana.

All four groups will be covered in detail later, but the person to watch most closely in the “battle for second” to the EVM, is Anatoly Yakovenko, Solana’s co-founder.

Anatoly’s famous quip about the culture at Solana (“we eat glass”) will be useful going into a vicious down-trending market. Solana may yet face more significant headwinds from the unwinding of FTX-Alameda’s sizable SOL position. It will have to work harder to retain its momentum with developers. A lot is riding on the Solana phone, too. Solana is making a big bet that a proprietary hardware solution will help siphon off crypto users who wish to break from the Android and iOS devices that hold them hostage and prevent them from accessing crypto services that violate their parent companies’ sweeping terms of service.

I saw firsthand how hard it was to kill Anatoly and his team in the last bear market. In my eyes, that’s the leading predictor of long-term success in crypto. As such, I’d expect the Solana core team and ecosystem to persevere once again. But can they ascend to new heights?

6 Barry Silbert & The Winklevii

Everything seems to come full circle in crypto. In a throwback to 2013, Digital Currency Group Founder & CEO, Barry Silbert, and Gemini founders, Cameron and Tyler Winklevoss, will be three of the people to watch closest in the new year.

Back in 2013, it was all sunshine and rainbows. A mere month after Fred Wilson led Coinbase’s Series A, the Winklevii announced their plans to create the first bitcoin ETF. Months later Barry’s SecondMarket followed up with the launch of its Bitcoin Investment Trust. (SecondMarket became DCG, the SecondMarket broker-dealer became Genesis Trading, and the parent and sponsor of the Bitcoin Investment Trust became Grayscale Investments in 2015.)

This year, things are decidedly different. Barry’s Genesis Capital reportedly owes $900 million to Gemini’s Earn customers, and the twins are leading the largest Genesis creditor group that’s looking to recoup their funds. A sizable percentage of Genesis Capital’s outstanding loans (assets) are with Genesis’s parent company DCG, so absent a recapitalization of DCG and/or speedy out-of-court settlement with creditors, these industry OGs may very well become embroiled in enormous, high-stakes litigation. The fate of DCG and Gemini, not to mention ongoing industry contagion, hang in the balance.

7 Stani Kulechov Stani

Kulechev is one of crypto’s top innovators, having founded the top crypto lending protocol, Aave, and one of the most promising early decentralized social protocols, Lens.

Despite its price decline this year (in line with the broader crypto markets), Aave remains a pioneer and stalwart in DeFi. It is second by market cap (to Uniswap), second in TVL (to MakerDAO), and ubiquitous across EVM-compatible chains.

Among other things, Aave pioneered the flash loan, which allows users to borrow large amounts of crypto for specific transactions without providing upfront collateral. These have generally been useful financial primitives for improving efficiencies in DeFi markets, as arbitrage opportunities have been made available to any developer who can afford to pay network gas fees, not just institutional-sized market makers.

Aave performed exceptionally well during moments of peak fear in the centralized crypto markets this year. In July, distressed lender Celsius paid down its Aave loans to avoid programmatic liquidation during its bankruptcy preparations. In November, Aave users were able to earn 73% on their Gemini USD deposits amidst the fear surrounding Gemini’s delayed Earn withdrawals, a risk-adjusted return that acted as an open prediction market when a centralized service was offline.

Lens Protocol might be even more exciting. It’s one of crypto’s first decentralized social graph protocols and has seen strong growth (and hackathon interest) since its launch in May. We’ll talk more about them later, but composable social protocols like Lens present a vast array of new high-potential creator benefits, and their intersection with identity and DeFi will be profound.

If I had to bet on a “last man standing” in DeFi, it would be Stani.

8 Alexey Pertsev & Tornado Cash Devs

Tornado Cash, the DeFi mixing service that uses zero-knowledge proofs to help users execute fully private transactions on Ethereum, may have been too successful for its own good. Although it counted just 12,000 unique protocol users, investigators believe it may have been used to help launder over $1 billion worth of crypto, some of which supported hacking groups in rogue states such as North Korea. Indeed, an analysis by Nansen showed that usage of the Tornado Cash contracts spiked this spring following the $600 million hack of Axie Infinity’s Ronin bridge. Not great!

But bigger questions surround whether Tornado Cash’s usefulness to criminals makes it a de facto accessory for illicit activity or whether the developers that prop up the protocol bear any responsibility for its misuse.

That brings us to Alexey Pertsev, the Dutch co-founder (and Russian expat) who has been jailed since August and will remain jailed until February without official charges on suspicion of money laundering. It is unclear whether Dutch prosecutors plan to argue that the mere act of writing Tornado Cash code to process private transactions will be punished as an act of money laundering under European law around transaction surveillance, or if private chats that have allegedly been obtained between the Tornado Cash founders demonstrate that there was knowledge or explicit assistance of specific illicit schemes.

I would usually say this is a tough case to weigh in on without all the relevant facts. I believe software is protected speech, and individuals have the right to transaction privacy, but I also don’t want my stolen crypto seamlessly funding North Korean nuclear programs.

That said, it’s maddening that authorities have failed to outline formal charges, and the impression you are left with is that this detention is designed to deter similar development efforts, not punish specific illegality. The line is blurry, and after the prosecution and plea bargain of Virgil Griffith last year, I am not optimistic this will end well for Alexey in the short term. I hope I am wrong!

9 DAO Members

One of the best parts of running a company is dealing with all of the legal stuff (said no one ever). Employment contracts, customer terms of service, incorporation filings, taxes, IP registration, and corporate governance negotiations are some of the glorious upshots of starting a company that no one ever tells you about.

Sounds exciting?

Well, what if I told you it was possible to take on all of the headache and expense of a startup with none of the upside or limitations of liability? Welcome to DAO governance!

It is admirable that various protocol communities have been experimenting with new models of governance, delegation, and financial management. We certainly support that innovation (at least indirectly) through our Governor platform, and we engage frequently with various DAOs during procurement for various projects under our Protocol Reporting segment. But the waters out there are murky and uncharted. Whenever a DAO gets into murky legal waters, voting members would do well to keep in mind their “joint and several” liability under what are legally considered unincorporated associations.

Serving as a DAO delegate or voting with your tokens is often a thankless job. And now some regulatory agencies are starting to test the boundaries of their authorities and are more aggressively targeting DAOs as entities subject to potential enforcement actions or other legal liabilities related to problems within their communities. (See the “Ooki DAO” section later on in this report.) If DAOs are going to have a fighting chance at innovating safely, we’ll need better safeguards for their contributors. Quickly. My guess is that will happen most readily at various state levels in 2023, but rules remain ambiguous beyond that for some time.

10 IRS Agent Smith

Policymakers worldwide are looking at crypto and licking their chops. Never mind this year’s market collapse, the boom of 2021 minted millionaires by the thousands, and odds are good that some of the retail day traders and NFT flippers had “difficulty” accurately reporting their tax liabilities. A negative consequence of last year’s infamous infrastructure bill was its inclusion of crypto as a “pay-for” – the U.S. government claimed that better tax collections from crypto investors would yield a $28 billion increase in receipts or 5% of the total bill’s expenditures.

Now there are 87,000 new IRS agents on the prowl. (Thousands of them are armed.) And under civil asset forfeiture law, which is essentially state-sanctioned theft, it may become easier for authorities to seize crypto assets without any conviction or filing of criminal charges. The IRS Criminal Investigation unit has already seized $3.8 billion in crypto between 2018 and 2021. I’d expect that number to rise considerably.

In truth, tax reporting for crypto is pure nightmare fuel. Tracking cost basis accurately is nearly impossible. Accounting for fees, trading slippage, and multiple wallets and exchange accounts is hard enough. Throw in NFTs, hacks, token farms, and more exotica, and the authorities will come for their pound of flesh in some way, shape, or form in the U.S., Europe, and everywhere else that crypto is traded.