The SEC Gets Nasty

ByteFolio Update 61 | ByteTree's Crypto Leaders

ByteFolio brings together ATOMIC, ByteTrend and Token Takeaway to create ByteTree’s model portfolio, known as ByteFolio. This is a selection of crypto tokens, which are weighted according to their risk/reward characteristics. ByteFolio has a modest turnover and will not suit traders. It will appeal to investors who wish to diversify beyond bitcoin, with the aim to beat it.

The big news over the last week has been the issuance of lawsuits to the two most prominent exchanges in the US, Coinbase and Binance, by the Securities and Exchange Commission (SEC). The news came out on Tuesday and Monday, respectively, yet the market only really seemed to take notice on Friday afternoon, when altcoins started dropping sharply across the board.

Bitcoin and Ethereum were minimally affected. This is because they are not included on the list of coins and tokens that the SEC deems to be securities (a list which includes MATIC, SOL, ADA and FIL, among others that we’ve looked at here). That means Coinbase can continue to offer them on its trading platform. But because Coinbase is not registered as a securities trading platform, it cannot trade securities. So, if lots of coins and tokens are defined as securities, Coinbase is seen to be violating securities law by providing a platform for them to trade on. I think this is how it works anyway.

The problem is that the US securities laws are designed around trading in equities and commodities, which have different characteristics to crypto. The very essence of crypto is that it blends functionality, in many cases removing middlemen. Many cryptos are the “ticket price” to using a particular blockchain. That is similar to the postal service. Should stamps be considered currency or commodity? What about stamp collections? What about the printers of the stamps? What if I can borrow against my stamps?

In Europe and elsewhere, there is at least a constructive debate about crypto as a separate asset class. In the US, there is a long-running argument about whether they are securities or commodities when it is very reasonable to suggest they aren’t necessarily either. It is like discovering a goat and arguing whether it is a bald sheep or a dog with horns because all you have ever known is sheep and dogs. It needs to be treated separately and have criteria developed which allow a simple way of assessing them on a case-by-case basis. The criteria currently used is the Howey Test, which was developed before suitcases had wheels, let alone the dawn of the internet age.

Our guess is that various funds holding altcoins on US exchanges have been obliged to step away altogether by risk departments. It’s very difficult to explain the time lapse between the announcement and the market slump otherwise. Why sell everything on a Friday night/Saturday morning when the world is either at a party, asleep, or both? It would only really make sense if you had just received funds out of storage and immediately put on the sell orders.

Logic would suggest that this is a buying opportunity, on the lines that the money that was invested in these altcoins will move to more friendly jurisdictions and re-deploy, although it’s not as straightforward as that, of course. For the time being, we’re in watching and waiting mode.

It is, however, remarkable that BTC and ETH have barely budged. Since the start of the year, we have been going through an unprecedented regulatory storm, one that has brought down the three most prominent US crypto-related banks and whose thunderbolts are now aimed at the largest exchanges. As it stands, the US looks like it is trying to get rid of crypto altogether, and it also looks like crypto doesn’t give a damn.

It also presents a huge opportunity to other jurisdictions which are prepared to take a more constructive approach. We highlight a few examples below.

No changes to the portfolio this week, which takes a step backwards in BTC terms as ETH gives back some of its recent relative gains. ETH will be much more closely attuned to price behaviour in altcoins, and it also hit the 0.70 level, which was a natural resistance level.

Action:

No action.

Movers

US Exchange Withdrawals

The US Securities and Exchange Commission (SEC) lawsuits against Binance, Binance.US, and Coinbase have prompted a withdrawal of around $4 billion in deposits from these cryptocurrency exchanges. Data from Nansen show that between Monday and Thursday, there was a combined net outflow of $3.1 billion via the Ethereum network and $864 million in Bitcoin. Despite the significant outflows, the exchanges managed to process withdrawals smoothly.

Binance, the largest crypto exchange, experienced a net outflow of $2 billion on the Ethereum blockchain, while Coinbase saw $1 billion in net outflows. Binance.US also faced significant withdrawals. In response to the SEC's tactics, Binance.US has suspended USD deposits and plans to transition temporarily into a crypto-only exchange.

Decentralised Exchanges

This week’s regulatory crackdown by the SEC on cryptocurrency exchanges has sparked a surge in trading volumes on decentralised exchanges (DEX). The median trading volume across the top three DEXs has increased by 444%. Uniswap v3 (Ethereum), Uniswap v3 (Arbitrum), and PancakeSwap v3 (BSC), which account for 53% of the total DEX trading volume, all saw sharp increases in inactivity. Additionally, Curve, a DEX focused on stablecoin trading, experienced a 328% spike in trading volume.

Investors have traditionally turned to DEXs to trade tokens that were not listed on major centralised platforms. It seems, however, that far from dousing crypto trading, the SEC’s actions have simply moved the activity elsewhere, the time-honoured consequence of prohibition.

Regulatory Arbitrage

With the SEC declaring the US closed for crypto business, the opportunity is wide open for countries inclined to take a more conciliatory approach. TechCrunch reportsthat US VC tech giant Andreessen Horowitz is to set up its first overseas office in London. This is a company that has already committed a cool US$7.6bn to crypto start-ups globally. “The office will focus on supporting the development of crypto, blockchain technologies and associated Web3 start-ups”, according to the article. Good news for the UK. One man’s meat is another man’s poison, as they say.

Shakers

TRON (TRX)

Despite the regulatory challenges and the SEC's crackdown on the crypto industry, TRON has shown remarkable progress internally. The blockchain has experienced a surge in daily transactions, reaching an all-time high of 12.5 million on 10 June. Additionally, TRX supply has been decreasing consistentlyfor 274 consecutive days, reducing the total supply from approximately 100 billion to 90 billion. In fact, TRX supply recorded a net supply change of -7.4 million yesterday, and it has kept that daily token burning range since February this year. Furthermore, TRON has partnered with Oraichain, a Layer-1 network focused on decentralized Artificial Intelligence, to launch a $100 million AI development fund. This initiative aims to support developers in creating AI-based applications on the TRON network, utilising cutting-edge tools like OpenAI's ChatGPT.

While positive developments are taking place within the TRON ecosystem, the SEC’s charges against Justin Sun and his companies for the unregistered offer and sale of TRX and BTT tokens in March have instilled fear among token holders and prospective investors. Other than the regulatory uncertainty surrounding the ecosystem, the overall health of the TRON blockchain remains robust.

Circle (USDC)

Singapore is also open to crypto business. Circle - the company behind USDC, a leading stablecoin with a market cap of $28.3bn - has achieved a significant milestone by obtaining a Major Payment Institution (MPI) license from the Monetary Authority of Singapore (MAS). This license grants Circle Singapore the authority to provide digital payment token services, cross-border money transfers, domestic money transfers, and other related services. This regulatory approval highlights the growing acceptance and recognition of stablecoins as a crucial component of the crypto industry.

Stablecoins, like USDC, play a pivotal role in the crypto ecosystem by acting as a bridge between traditional financial systems and the world of cryptocurrencies. Obtaining regulatory approvals, such as the MPI license obtained by Circle Singapore, is significant as it ensures compliance with financial regulations and instils trust in stablecoin transactions. As more companies gain regulatory approvals and licenses, the trading and use of stablecoins will become more frictionless and accessible. This paves the way for wider adoption and acceptance of stablecoins as a reliable means of value transfer and a key tool for facilitating transactions in the digital economy.

ByteFolio Performance

ByteFolio Asset Allocation