SEC Delivers A Blow To Binance; This Is Great For Coinbase (COIN)

Thesis Summary

Crypto is, once again, under attack from regulatory agencies. This time, the SEC is after staking Binance’s dollar stablecoin. (BUSD-USD), which has halted minting.

The Securities and Exchange Commission appears to be making it perfectly clear to the crypto market that it is ready to treat cryptocurrencies as securities, and it is not afraid to take action.

This shocking news follows a significant rally off the Bitcoin (BTC-USD) lows, which has renewed bullish sentiment.

But even if we are in a new bull, what will the crypto market look like after regulation? Who will be the winners and losers of this new regime?

The SEC Attacks Staking And Kraken

The first blow came late last week, as crypto exchange Kraken was forced to stop offering staking-as-a-service on its platform and agreed to pay a $30 million fine for the sale of unregistered securities.

With staking, crypto holders can earn interest on their coins. This makes cryptocurrencies, in the SEC’s mind, a security. It also puts cryptocurrency in direct competition with traditional banking products. Some speculate that this latest push against crypto is an attempt to marginalize the industry.

However, there is at least some dissent within the ranks of the SEC. Commissioner Hester Peirce spoke out against the recent actions against Kraken, saying this was “not an efficient or fair way of regulating”.

Crypto developers and investors are scrambling to evade or comply with the laws. There is no shortage of decentralized solutions for staking. One such solution I recently reviewed in my marketplace is RocketPool (RPL-USD), which saw a 40% spike in its token’s price following the Kraken news.

Meanwhile, in preparation for what’s to come, Cardano (ADA-USD) founder Charles Hoskinson has begun to talk about “contingent staking“, a form of staking which might better fit regulatory demands.

Under the model, Hoskinson noted the transaction certificate would be two-sided, meaning that both the delegate and the staking pool operator would have to sign the transaction before it is processed.

Source: finbold.com

The SEC Attacks Paxos And Binance

However, the actions against Kraken pale compared to the ramifications of the recent actions taken against BUSD.

Yesterday, Paxos announced it would stop minting BUSD, following instructions from the New York Department of Financial Services (NYDFS). This followed a report on Sunday, which stated the SEC was ready to sue Paxos for the sale of unregistered securities.

To understand the implications here, we must understand the relationship between Paxos and Binance. Paxos is the “official” creator of BUSD, which is a token backed by dollars and issued on the Ethereum (ETH-USD) blockchain. However, Paxos has a licensing agreement with Binance, and Binance mints BUSD on its own blockchain, the Binance Smart Chain. This BUSD, however, is not subject to the same regulations and constraints as the BUSD minted by Paxos on Ethereum. In fact, it was revealed that BUSD on the Binance Smart Chain was at one point left undercollateralized by $1 billion.

Though from a regulatory standpoint, you could argue it’s Paxos being attacked, BUSD is most strongly associated with Binance. It’s interesting to note, too, that Paxos has stopped BUSD minting, it is still minting USDP, which is also a dollar stablecoin.

Technically. BUSD has lost its peg to the dollar, but this is a negligible difference:

BUSD now trades at $0.9993. The peg is being maintained for now, but that doesn’t guarantee it won’t depeg in the future.

The effects have also been felt in Binance’s native token BNB (BNB-USD).

BNB is down 11% in the last 24 hours, but this is to be expected given the broader market sell-off. Ethereum, for example, is down 7% in the last day.

One thing is for certain, though; crypto is not going to take this lying down. Paxos has said it will fight “vigorously” against the SEC lawsuit. The Coinbase CEO also stepped in yesterday, announcing the company will “Defend Staking in Court if Needed“.

The Winners And The Losers

This new wave of crypto regulation may have taken the wind out of the current crypto rally, but I still view this as an overall bullish thing for crypto. Let the chips fall where they may, but at least let them fall. Clear regulations will open the door to institutional acceptance and remove uncertainty.

With that said, these regulations will create a different playing field and bring about winners and losers. The winners will be those looked on favourably by regulators. This is already becoming very clear.

Binance is a foreign company that was initially founded in China. It’s quite interesting to see Binance and Kraken get targeted while Coinbase, a publicly traded company held by banks and institutions, has been left relatively alone. Coinbase doesn’t have a stablecoin, but it does offer staking products, like Kraken, which are still up and running.

In a similar way, Tether (USDT-USD) can be seen as the foreign equivalent to Circles USDC (USDC-USD). Tether has been subjected to a lot more scrutiny by both regulators and the market, while USDC is generally seen as an innocuous stablecoin. Again, USDT has strong ties to China, while Circle is based in Boston.

Also, as has been shown by recent price action, big winners of regulation will be decentralized services and applications, which will be much harder to regulate. RPL, previously mentioned, is an example, and this also extends to decentralized exchanges like Uniswap (UNI-USD)

Takeaway

I believe there is money to be made in crypto, which is why there is an incentive for the government to regulate but not shut down crypto. Coinbase, in my opinion, stands out as a likely winner going forwards. Furthermore, as I have been discussing with my subscribers, it looks like the stock could have put in a meaningful bottom, so this pull-back could be the time to add.

While I am still bullish on Binance and BNB, I remain cautious, given the campaign that US regulators are launching against the exchange.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.