Analysis of the Ethereum Markets
After the SEC Actions
Staking and stablecoin alternatives investors may start to transition into
The crypto markets went through their initial significant decline of the 2023 year, soon after the announcement of Kraken being fined $30 million and required to discontinue their US staking services. The SEC pursuit to try and regulate the crypto industry didn’t stop there, Paxos, the issuer of Binance USD, received a Wells notice from the SEC, which indicates that the agency plans to take legal action against them unless they can provide convincing reasons not to. While so far restrictions from the US agencies are directed at two specific companies, crypto users are already speculating about possible future restrictions. This article aims to analyze the market reactions towards these two recent regulations events.
2023 started with crypto assets experiencing their best month in over a year, shortly followed by regulation news that directly affected the stablecoins market and the Ethereum ecosystem in general.
An increase in market liquidity at the beginning of the year started to positively impact the supply of stablecoins within the ecosystem, which was regarded as a favorable indication for the crypto industry as a whole. This pattern was in addition correlated to the rising prices of several crypto assets like ETH and BTC. Furthermore, the recent regulations crackdown on Paxos forced the company to stop the minting of the BUSD stable coin, allowing its market cap to diminish by time when redemptions are made.
In reaction to the news the market started to unwind BUSD positions turning into other options to safeguard their assets. In this case it was Tether’s USDT, the oldest big stablecoin in the market.
Paxos is the entity responsible for both mining and redeeming BUSD. They were instructed by the New York Department of Financial Services (NYDFS) to discontinue minting additional BUSD. As a direct result the market capitalization of BUSD will solely diminish over time.
BUSD currently holds around $15 billion in market value, this places it as the third most significant stablecoin, following tether (USDT) and Circle’s USD Coin (USDC). As depicted on the graph above, most recently BUSD has experienced a continuous decrease in market value, while USDT, one of its main competitors, experienced market growth during the same period. This could be attributed to users migrating into new options in order to safeguard their assets.
Moreover, the Ethereum staking ecosystem may soon face a similar outcome when redemptions become available after the Shanghai fork. It is probable that other options will gain popularity since Kraken is planning to end its staking service, which could lead to an advantage for Liquid Staking Derivatives (LSDs).
Currently, there are more than 120,000 stETH addresses, which are backed by roughly $2 billion in liquidity distributed among various DeFi applications. With the potential regulatory ambiguity for centralized staking services, it is probable that some of the capital from the unstaking queue of the Shanghai fork will be redirected and reinvested into LSDs like Lido and RocketPool.
Recent SEC actions show that staking services could be considered similar to institutional lending programs. This raises the question of whether staking can be classified as a security. Genesis and BlockFi were fined by the SEC because their lending services were categorized as security. The Howey Test defines an asset as a security if it is anticipated to generate profits from the efforts of others.
It could be contended that staking assets are more complex than the Howey Test suggests since individuals may face consequences, or “slashing,” for either being inactive or having harmful intentions. Therefore, the potential for profit could derive, to some degree, from the platform ensuring a positive staking process. It is likely that the SEC held this same belief in regards to Kraken’s staking venture. Essentially benefiting more decentralized staking services like LSDs or solo staking providers.
In general, it appears that the SEC is taking action against cryptocurrency companies once more. While measures such as those taken against Kraken and Paxos may discourage innovation and adoption within the United States, they may also transfer opportunities abroad and to individuals. Although this creates ambiguity for the cryptocurrency sector in the short term, it should lead to more decentralized networks in the long run.
