Welcome to the Jun edition of the DeQuantifi newsletter. Based on your feedback, we have changed the format, so that this newsletter will now focus on a summary of crypto news from a UK and European perspective. Feature articles will now be published as separate whitepapers that will also be sent to your inbox if you are a subscriber to this newsletter.
This month, we look into the SEC actions against Binance and Coinbase, as well as bringing you our usual roundup of the month’s crypto news.
SEC Suing Binance and Coinbase
The big news for June is that the Securities and Exchange Commission (SEC), the US regulator responsible for financial securities, is suing both Binance and Coinbase.
The SEC filed 13 charges against Binance on 5 June, including the following:
- Binance operated an illegal exchange in the US by failing to register Binance.US as an exchange with the SEC
- Binance failed to restrict US investors from accessing Binance.com. The SEC alleges that Binance.US was not independent from Binance, and that Binance subverted their own controls to allow high value US investors to use Binance.com
- Binance sold unregistered securities, including BNB, BUSD, and staking-as-a-service
- Binance mishandled customer funds. The SEC allege that between 2019 and 2021, over $12 billion of customer assets were redirected to entities (Merit Peak, for example) controlled by Changpeng Zao, the founder and CEO of Binance
In response, the whole crypto market dipped, and volumes on Binance.US dropped by 78%, with Wintermute and Keyrock exiting the exchange. Binance responded to the allegations by calling for Gary Gensler, the SEC chairman, to recuse himself, alleging that he offered to serve as an advisor to Binance prior to becoming the SEC chair.
The very next day, the SEC charged Coinbase with selling unregistered securities via its staking-as-a-service program. Whilst staking only represents 3% of Coinbase’s revenues, Coinbase stock still dropped 12% in the immediate aftermath.
The immediate impact on the crypto industry was that suddenly, tokens had been identified as securities:
- Taken together, lawsuits from the SEC identify 68 tokens as securities. Robinhood and eToro delisted a number of tokens on response (Robinhood delisted ADA, SOL, MATIC, and eToro delisted ALGO, MANA, DASH and MATIC)
- As an aside, documents submitted in the SEC’s court battle with Ripple show that Bill Hinman, the SEC’s former director of corporate finance, said that ETH isn’t a security, it should be classified as “other”
Markets
BTC was pushed over $30,000 by traditional asset managers signalling greater interest in crypto. Blackrock filed for a BTC ETF, closely followed by Invesco and Wisdom Tree. In addition, EDX Markets, a crypto-exchange aimed at retail brokerages backed by Charles Schwab, Fidelity, and Citadel went live, offering trading in BTC, ETH, LTC and BCH.
Tether (USDT) depegged to $0.996 due to an imbalance in Curve 3Pool. Curve 3Pool is one of the major DeFi liquidity pools for stablecoins. USDT made up over 70% of the pool, which also contains USDC and DAI, implying that USDT is being swapped for USDC and DAI by traders. And the bad news for Tether didn’t stop there. The media reported that part of Tether’s reserves were in the form of Chinese commercial paper (CP). Tether responded by saying that this was no longer the case, and that the CP was rated A1 or better.
Figures for May show that crypto-exchange volumes were down 23.2% from the previous month, continuing a downward trend. However, miners had a very good month due to ordinals (which we reported on last month), with transaction fees making up around 13% of the revenue of $916 million
Legal & Regulatory
The liquidators of FTX says that FTX owes its customers $8.7 billion, making the affair one of the biggest frauds in history.
Republican senators McHenry and Thompson have drafted a bill that proposes that crypto tokens are defined as commodities, reflecting how many Republicans feel about Gary Gensler’s (the SEC chair) approach to crypto-regulation.
Meanwhile, in Europe, the EU announced new legislation that would require banks holding crypto to meet strict capital requirements. The legislation still needs to be passed by the EU Council.
Companies & Products
a16z (Andresson-Horowitz) is opening an office in London led by Sriram Krishnan. a16z says it chose London because the “UK government is willing to create policies encouraging startups to pursue decentralisation”.
MatterLabs has released ZK Stack, which allows developers to build their own L2 or L3 networks. This follows similar moves by its competitors, Arbitrum and Optimism. So why, are these companies giving their technology away all of a sudden? Industry experts say that there is a realisation that there not be a single L2 chain, but multiple chains built on a common technology allowing them to interoperate and share liquidity.
TradFi companies continue to get involved in crypto. The CBOE (Chicago Board Options Exchange) received approval for its crypto-derivatives clearing business. Deutsche Bank applied for a digital assets license with BaFin, the German regulator, intending to operate custody services for crypto.
Crime
Atomic Wallet, a popular crypto wallet, was attacked by the North Korean state-sponsored hacking group, Lazarus. Elliptic, the blockchain analytics firm, estimates that the hackers were able to steal more than $100 million worth of crypto. Atomic Wallet responded to the attack by saying that “less than 0.1%” of users were affected, saying that it was working with blockchain analysis firms Chainalysis and Crystal to track the missing funds. Atomic Wallet have pointed out that the users private keys are stored locally on their devices, and that the company itself does not have access to those keys. It is interesting to note that Least Authority found security vulnerabilities in Atomic Wallet whilst conducting a security audit in Feb 2022.