Welcome to The Node. This is Daniel Kuhn and Prachi Vashisht, here to take you through the latest in crypto news and why it matters. In today’s newsletter:
The takeaway: CoinDesk’s George Kaloudis writes about “Operation Choke Point 2.0,” and how crypto’s banking crisis isn’t as bad as it seems.
Banking on It
At a Voyager Digital bankruptcy hearing, William Uptegrove, an attorney for the U.S. Securities and Exchange Commission, said agency staff members believe that Binance.US is operating as an unregistered securities exchange. He didn’t say whether the SEC is planning to sue the exchange, which would require a majority of SEC’s five commissioners to vote in favor of an enforcement action. Further, he said Voyager Digital’s sale of VGX tokens violated federal securities laws. Elsewhere, Bankless host David Hoffman said on Friday that staking platform Lido along with other crypto ventures received a Wells Notice from the SEC, a claim he later retracted and apologized for spreading. In other news, crypto’s banking troubles are continuing as Silvergate Bank disabled its Silvergate Exchange Network, or SEN, a popular system for companies to transfer funds. Meanwhile, Bybit will halt wire transfers, including SWIFT messages, beginning on Friday, and BCB Group, a London-based payment processor, is planning to introduce fiat-to-crypto rails in the second quarter to take advantage of SEN’s void, CEO Oliver von Landsberg-Sadie told CoinDesk.
Down Bad
Singapore police have started investigating Terraforms Labs, the company behind the failed terraUSD (UST) stablecoin. Police also confirmed that co-founder Do Kwon, who is a fugitive from South Korea and wanted by Interpol, isn’t in the city-state. Last month, the SEC sued Terraform, alleging the company and Kwon of misleading investors about UST’s stability. Meanwhile, Hong Kong crypto lender Babel Finance’s plans to issue a crypto-backed stablecoin in unison with a DeFi platform to repay creditors following a $766 million loss last year. Finally, Multicoin Capital’s hedge fund lost 91.4% of its value in 2022, according to the firm’s annual investor letter seen by CoinDesk. The fund’s performance was hurt by the now-bankrupt crypto exchange FTX and its holdings in FTT and Solana-based tokens.
Alt Chains
EOS is gearing up for a consensus mechanism upgrade to become compatible with the dominant smart contract blockchain Ethereum. The EOS Network Foundation, which in January published a blog saying the network has arguably little to show for the $4 billion initial coin offering the network raised in 2018, is leading development. Meanwhile, on Monday, BNB Chain-based decentralized exchange PancakeSwap announced the release of its version 3 is slated for the first week of April. The upgrade will offer features such as improved liquidity provision and trading incentives.
Sound Bites
“I don’t think we’re out of the woods yet. Clearly inflation is still both rampant and here.”
Silvergate Bank is the bank for crypto businesses that tend to have problems maintaining banking relationships.
Crypto exchanges in particular liked Silvergate because a) they give access to banking in the first place and b) Silvergate ran the Silvergate Exchange Network (SEN), which was recently disabled. SEN allowed 24/7 instant settlement between Silvergate bank clients at any time. This attracted a lot of crypto exchange clients like Binance.US, Kraken and Gemini.
To be clear, the regulators and politicians didn’t actually say that crypto exchanges and companies shouldn’t be banked, but they injected uncertainty. And the funny thing about Silvergate is that it didn’t run into issues because it was making loans using bitcoin and crypto as collateral, like other notable bankruptcy cases. It ran into issues because of a bank run. A bank run which was encouraged by the government.
Silvergate’s recent woes remind me of two critical points.
First, banks and crypto can coexist (yes, even in a hyperbitcoinized world) and in my view they will and should. Just because the option to opt out of using a bank exists with bitcoin or some other crypto doesn’t mean that everyone will shun banks entirely. In fact, honest banking can be a net positive.
The world that bitcoin and crypto can encourage is a world where those third parties are more honest. More honest banks in the business of keeping your money safe and providing responsible lenders access to future capital (i.e. credit) is better than fewer honest banks.
Hand-wavy, I know. But potentially true.
And second, crypto companies needing banks to “skirt the banking system” highlights exactly why the banking system needs to be skirted (or at least somehow broken up). Right now, we see what an implicit promise of future bank regulation from the U.S. government can do to an industry. And while I don’t think this is a good thing, it can be if not overdone.
If the result of the promise of future bank regulation is a higher bar for banking access for crypto companies that leads to more thorough diligence which somehow results in fewer bad companies in the ecosystem, ultimately retail will be safer and the system less sensitive to future crypto shocks.
Maybe that is what happens. So, for now, I choose cautious optimism.
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