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Welcome to The Node. This is Daniel Kuhn, here to take you through the latest in crypto news and why it matters. In today’s newsletter:  

New Laws

French luxury brand Hèrmes has won its lawsuit against NFT artist Mason Rothschild, who was accused of trademark infringement and misleading consumers with his luxury metaverse fashion brand “Metabirkins” based on Hermès’ flagship handbags. The jury awarded $133,000 in damages to Hermès, setting an important precedent for NFT-related intellectual property law. Meanwhile, Dubai has banned anonymity-enhancing cryptos like monero (XMR) under new regulations the United Arab Emirates published Tuesday. That comes as executives of banks including Lloyds Bank and NatWest Group told U.K. lawmakers they are proactively blocking customers’ access to crypto due heightened risks, in a Treasury Select Committee meeting. Meanwhile, Kazakhstan, a rising crypto mining hub, passed legislation to curb the industry’s energy use. Finally, the U.S. Securities and Exchange Commission issued an investor alert Tuesday about the rising trend of self-directed individual retirement accounts (IRA) investing in crypto and is increasing scrutiny of broker-dealers working with crypto. 

FTXpensive

Law firm Sullivan & Cromwell billed $7.5 million for 19 days work on the FTX bankruptcy case in November, Tuesday court filings shows. The firm, whose appointment raised qualms from U.S lawmakers and FTX founder Sam Bankman-Fried, has more than 150 staffers earning as much as $2,165/hour – allegedly a discount. Also, on Tuesday, SBF appealed a judge’s decision to reveal the identities of his two unnamed bail bond co-signers citing safety risks. Media companies including the Wall Street Journal, Bloomberg and CoinDesk have sued for this information, saying “the public’s interest…cannot be overstated.” Another beleaguered crypto industry titan, Kyle Davies, has allegedly refused to comply with a subpoena related to the collapse of the hedge fund Three Arrows Capital he co-founded (though he apparently has time to start a new crypto exchange). Finally, SALT Lending, which paused withdrawals in November due to unspecified exposure to FTX, has raised a $64.4 million Series A from accredited investors and plans to restart operations. Less than three months ago, online investing platform Bnk To The Future walked away from an acquisition of SALT.

Macro Mirco Movements

U.S. institutions are likely behind January’s 38% bitcoin rally, crypto services provider Matrixport said in a research report Wednesday. Many analysts believe U.S. Federal Reserve Chairman Jerome Powell’s recent statements that a "disinflationary process" has started have contributed to risk assets like bitcoin rising. Meanwhile, an Ethererum test network successfully simulated withdrawals of staked ETH for the first time, bringing the second-biggest blockchain another step closer to fully transitioning to proof-of-stake. The Zhejiang testnet, the first of three planned, went live last week to provide developers with a dry run of the long-awaited Shanghai upgrade expected next month. Last, prominent Cardano-based decentralized exchange SundaeSwap has floated its first on-chain governance proposal to set new voting procedures while Chiliz, the blockchain-based sports collectibles platform, has validated the genesis block of its new EVM-compatible blockchain built for NFTs, gaming and online events. 

How Flare Network Is Driving the Development of Real-World Applications through Its EVM Layer-1 Oracle Network and Smart Contract Platform

Layer-2 networks and scaling solutions have been getting a lot of attention from crypto enthusiasts and analysts of late, but what about the much-needed innovation in  decentralized application (dapp) functionality?

The total size of the application-based industry is approaching $500 billion in market capitalization (with DeFi comprising a $48 billion TVL), but its growth has been limited by factors such as UI/UX and, fundamentally, the lack of utility for most people. To grow further, blockchain needs more applications that are more relevant for more people. Continue reading.

*This is sponsored content from Flare

"We're not insulated from the broader macro and economic environment."

– Kraken's head of strategy Thomas Perfumo, on CoinDesk TV's "First Mover" 

The Takeaway: Use Your Head

JPMorgan seems to have confirmed what everyone already knows: the emergent world of artificial intelligence (AI) is the top trend of 2023. In a recently released survey of 835 institutional traders, some 53% cited AI and machine learning when discussing the technologies most likely to reshape finance over the next three years. The tech behind Web3 – namely blockchain and distributed ledgers – ranked third, down a peg from last year when JPMorgan had AI and crypto tied for second in its annual e-Trading Edit report.

There are several ways that AI is already influencing the markets. As Barron’s reported, a bevy of AI-related stocks have ripped in a way reminiscent of crypto’s legendary bull runs. But that doesn’t mean crypto isn’t also having its fun. CryptoSlate composed an index of 73 AI-linked cryptos representing some $4.63 billion in value. The total index is up 87% in the past seven days alone, with some specific tokens seeing triple digital returns. 

Much of this recent action was kickstarted by the release of OpenAI’s ChatGPT, a chat platform some are convinced could pass the Turing Test, designed to measure whether a machine can be taken for as a human. The tool is impressive – it can write smart contracts, compose poetry and is threatening Google’s monopoly on search. Last month, Microsoft invested $10 billion in OpenAI to bring its technologies into its industry-defining software suite. 

But look no further than Google’s response to OpenAI to see some of the challenges AI has yet to surmise. Today, in a livestream from Paris, Google showcased its own AI chatbot called Bard (based on its proprietary software LaMDA, or Language Model for Dialogue Applications), which among many things also “hallucinated” that James Webb Space Telescope took the first photo of an exoplanet (an honor earned by the European Southern Observatory’s Very Large Telescope in 2004). Investors were seemingly less than impressed.

Bard is expected to be rolled out across Google’s technology suite within weeks, possibly in much used apps like Google Maps and search. The threat of AI has reportedly scrambled Google co-founders Larry Page and Sergey Brin back into action after stepping back from daily activities years ago. And while there are technical hiccups to overcome, it seems possible artificial intelligence could lead to a new age of innovation.

The opportunity is apparent in crypto, too. The Alethea image generator is using a token to offset costs of NFTs and offer user incentives. Fetch.ai helps people build decentralized and autonomous software, with possible applications in the “internet of things.” Artificial Liquid Intelligence records property rights for blockchain AI assets. Platforms like these could one day create cheaper or less privacy-intrusive AI platforms and help share in the wealth created by the next big technological shift – rather than Microsoft and Google reaping all the rewards.

But the soaring prices of AI crypto tokens is a worrying indicator, a reminder that crypto’s primary use case today is speculation. “There is a risk that this whole ‘new trend’ is going to end up in an empty hype, as there are many speculators that would seek to make use of short-term price pumps,” financial market consultant Valentina Drofa told CoinDesk’s Shaurya Malwa. Crypto AI needs a showcase of its own. 

– D.K.

@DanielGKuhn

daniel@coindesk.com

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