14 Feb 2023

The SEC sharpens its knives

In the past week, the SEC has targeted both staking as a service and Paxos' white-labeled stablecoin BUSD. What are the implications for the market?
Source: Cryptocompare
This weekend, the SEC issued a Wells Notice to Paxos, announcing plans to sue Paxos over its issuance of the stablecoin Binance USD (BUSD). In the aftermath, Paxos has announced that it will cease issuance of new BUSD tokens from February 21. Still, Paxos will manage the BUSD reserves and will operate with redemptions until at least February 2024. Paxos will facilitate redemptions for either cash (U.S. Dollars) or USDP, Paxos’ own stablecoin. In a nutshell, this enforcement impacts Binance and BUSD. No new BUSD tokens will be issued, and massive redemptions will likely ensue. This has strategic implications for Binance. Last year, Binance’s focus was directed toward consolidation. Binance lifted fees for its largest spot markets, and also delisted several stablecoin pairs, and consolidated all stablecoin pairs apart from USDT into a BUSD pair. Nonetheless, USDT pairs still represent a majority of the trade volume on Binance (58% per Kaiko), and Binance will likely respond by restructuring its alternative stablecoin pairs back towards a pair structure similar to the previous form or seek to find a new stablecoin issuer for BUSD. This enforcement action seems primarily targeted at Binance and not Paxos, in light of Paxos' public statement related to USDP conversions. This should give hope to Circle in avoiding a similar fate with its USDC stablecoin. The NYDFS explicitly pointed out that it had approved Paxos-issued BUSD on the Ethereum blockchain and that it had not authorized any Binance-Peg BUSD on any blockchain.
Implications for the crypto market
Since Binance removed fees and consolidated its stablecoin pairs into BUSD, BUSD’s market share has grown from 16% to 27.6%, while USDT’s market share has declined slightly from 63.6% to 60.1%. These recent developments will likely reignite a larger USDT dominance in the BTC spot market, while BUSD volumes have likely peaked.
Source: Binance
In the offshore derivatives market, BUSD pairs play a minor role. Only 4.5% of all BTC perp OI is in BUSD pairs, whereas 5.3% of the ETH perp OI is in BUSD pairs. These pairs will likely see sharply declining OI, but it might be reflected in rotation over to linear USDT perps or inverse perps. This is unlikely to represent a critical large structural change to the market, for now. Enforcement against USDC or the non-U.S. domiciled USDT, could have more dramatic implications, but the focus on BUSD over USDP could suggest that this path is less likely.
The SEC has had an active week, as Kraken agreed to cease its staking operation for U.S. customers in addition to a $30m settlement to the SEC. Kraken has since automatically unstaked and paid U.S. customers in all staking protocols apart from ETH, where the unstaking will occur after the Shanghai Update, estimated to late Q1, or early Q2. Centralized stakers are making staking simpler and more available for small users. To stake alone, you need both a validator node and 32 ETH. Crypto exchanges offer seamless staking regardless of your deposit size. From a user perspective, access to staking on the same platform used for purchasing crypto lowers the bar to entry significantly. Nevertheless, the SEC has charged Kraken for failing to register this service with the SEC. The SEC argues that Kraken has received coins from the U.S. public and offers a 4% to 21% return while not disclosing the risks. In an interview with CNBC, Gensler indicated that other centralized crypto services offering staking should take notice. This was followed by Coinbase’s CLO writing publicly that Coinbase does not view Coinbase’s staking services as securities, with Coinbase’s CEO Brian Armstrong adding that Coinbase will gladly take this to court if needed. Coinbase and Kraken combined currently represent nearly 20% of all staked ETH.
Source: Dune Analytics
Coinbase’s share price plunges, while decentralized staking services see strength
Coinbase’s share price has fallen by 27% from Monday, February 6, after several consistent bad trading days amidst the enforcement activity by the SEC. Per Coinbase’s Q3 report published in November, 78% of Coinbase’s monthly transacting users, equaling 6.6m users, interacted with non-investing products (primarily staking and Learn), and subscription and services revenue grew by 43% quarter over quarter. Shareholders are bracing for a similar SEC probe toward Coinbase targeting its staking service, which would have a noticeable impact on Coinbase’s revenue.
Source: Tradingview
Decentralized liquid staking protocols, on the other hand, saw strength following Kraken’s settlement, manifesting its role as a useful service for simplified and liquid crypto staking.
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