The Daily: Paradigm-backed Ethereum Layer 2 Blast is winding down, and more

The following article is adapted from The Block's newsletter, The Daily, which comes out on weekday afternoons.

Happy Friday! Bitcoin topped $87,000 earlier today, nearing its highest level since January, but has since fallen and is now trading around $84,400.

In today's newsletter, Paradigm-backed Layer 2 Blast is winding down its network, BitGo CEO Mike Belshe warns that the Clarity Act's failure left capital markets exposed to risk potentially worse than Lehman, the ECB outlines three models for putting central bank money onchain, and more.

Meanwhile, Robinhood's crypto chief says the SEC's innovation exemption poses a constraint on bringing stock tokens to the U.S., and Drift opens exploit recovery claims.

P.S. Don't forget to check out The Latent, our sister website covering AI. Get The Latent Daily here and all other The Block newsletters here.

Paradigm-backed Layer 2 Blast to wind down network as costs exceed revenue

Ethereum Layer 2 Blast is winding down its network, saying operating costs exceed revenue and it sees no credible path to making the chain economically sustainable.

• Blast now has a little over $32 million in total value locked, down from more than $2 billion ahead of its February 2024 mainnet launch.
• The project is asking users to withdraw their assets to Ethereum mainnet. It will first begin withdrawing its Lido assets, a process expected to take about a week, with withdrawals temporarily unavailable during that period.
• Once that process is complete, withdrawals will resume with a 24-hour delay. Users can withdraw through Blast's normal interface until Oct. 26.
• After Oct. 26, users will need to interact directly with Blast's bridge contracts on Ethereum to withdraw their assets.
• Blast went live in November 2023 following a $20 million funding round led by Paradigm and Standard Crypto. The BLAST token fell 17% on Friday, reducing its market cap to around $23 million.

BitGo CEO says Clarity Act failure left markets exposed to risks worse than Lehman

BitGo CEO Mike Belshe said the Clarity Act's failure left U.S. capital markets exposed to risks from firms combining exchange, brokerage and custody functions.

• Belshe said these one-stop shops create custody and counterparty credit risks without a market structure to mitigate them.
• He warned that a custody failure at a major firm could affect the entire market, particularly because crypto includes bearer assets where losing a private key can mean losing the assets.
• Belshe compared the concentration of functions to Lehman Brothers, but said the potential impact could be worse if a major exchange offering all these services failed.

ECB outlines three models for bringing central bank money onchain

The European Central Bank is looking at three ways to bring central bank money onchain, Executive Board member Isabel Schnabel said Thursday.

• One model would have the central bank issue reserves directly on a programmable platform. Another would connect the ECB's existing settlement system to DLT platforms through an interoperability layer.
• A third approach would tokenize reserves held at the central bank and issue private settlement tokens fully backed by those reserves.
• The ECB is already working on DLT infrastructure. Its Pontes project launched last month to provide tokenized central bank money for DLT-based transactions, while Appia is examining different architectures for tokenized markets.

SEC proposes crypto custody framework for investment advisers, funds

The SEC proposed a new framework for how investment advisers and regulated funds can custody crypto assets, including allowing advisers to self-custody assets in limited circumstances.

• Advisers could self-custody client and regulated fund crypto assets when they determine that no permitted custodian is available.
• Commissioner Hester Peirce clarified that this means advisers acting as custodians for client assets, rather than investors directly holding their own crypto.
• The proposal would also allow state trust companies to serve as custodians for client and regulated fund crypto assets.
• The public comment period will remain open for 60 days. SEC Chair Paul Atkins said more regulatory proposals are coming.

Ethereum Foundation launches private payments system for AI models

The Ethereum Foundation and Open Anonymity Project launched zkAPI, a system that lets users pay for AI models and other metered APIs without revealing their identities.

• Users deposit ETH or USDC into an Ethereum vault and authorize spending with zero-knowledge proofs, preventing the API provider and payment server from linking requests to a payer.
• zkAPI is live on Ethereum mainnet and implements a design published in February by Ethereum co-founder Vitalik Buterin and Ethereum Foundation dAI lead Davide Crapis. The protocol is described as experimental and does not provide network anonymity.

In the next week

• U.S. services PMI and ISM services data are due Monday, followed by the trade balance Tuesday and FOMC meeting minutes Wednesday. Weekly jobless claims are due Thursday, with the University of Michigan preliminary consumer survey on Friday.
• Euro area final services and composite PMI data are due Monday, followed by retail sales Tuesday. ECB Monetary Policy Meeting Accounts and the Eurogroup meeting are set for Thursday, with several ECB officials scheduled to speak throughout the week.
• Hyperliquid (HYPE), BTW (BTW), DoubleZero (2Z) and Ethena (ENA) are among the largest crypto token unlocks.

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