Headlines

Binance to integrate Bitcoin lightning network
SEC goes after Binance labeling SOL, ADA, MATIC, and more as securities in yesterday’s attack against crypto triggering a $780m bank run. (The Block)
SEC: Coinbase has operated as an unregistered broker since at least 2019. Coinbase IPO’d in 2021. (Twitter)
Over $35 Million Lost in Atomic Wallet Attack as Exploit Investigation Continues
Optimism 'Bedrock' Upgrade to Speed Confirmations, Cut Gas Fees, Set Path to 'Superchain'
Jump Crypto & Jane Street hit eject as they begin to wind down operations in the USA. (CoinDesk)
Jaredfromsubway.eth sandwiches traders for millions as Eigenphi breaks down the numbers with profits exceeding $6m. (Substack)
Elon pumps Milady NFT collection by almost 3x after making a meme post on Twitter. Pump and dump tokens soon followed as one pumped close to $200m MC. (Twitter)
Ethereum deposits > withdrawals as meme season comes to an end and Eth hodlers put their tokens to work. (CoinDesk)
Inflation slows to 4.9% coming in less than expected. (CNBC)
Tether decrease bank deposits from $5.3B to $481M to decrease bank exposure
Ethereum developers release patches for recent beacon chain finality issues
Optimism plans mainnet Bedrock upgrade for June 6
Tether Buys $1.5bn of Bitcoin in Q1, Commits to Deploying Up To 15% of Quarterly Realized Profits into Bitcoin
Hong Kong Finalizes New Crypto Regulatory Framework, Goes into Effect June 1
Lots of Back and Forth Between SEC and Coinbase
US Chamber of Commerce Files Brief in Coinbase vs SEC Case, Claiming SEC Acting Unlawfully
Ishan Wahi, Former Coinbase Employee Found Guilty of First Ever Crypto Insider Trading Case, Sentenced to Two Years in Prison
Coinbase Launches Offshore Derivatives Exchange
Gemini Launches Offshore Derivatives Exchange
Jane Street and Jump Reported to Be Meaningfully Pulling Back from Crypto Amid Regulatory Pressure

Binance at the Crossroads: An Examination of Regulatory Allegations and Their Implications for the Cryptocurrency Sector

In an unfolding saga fraught with gravity and far-reaching implications, the US Securities and Exchange Commission (SEC) has lodged a significant civil lawsuit against Binance, the world's foremost cryptocurrency exchange. The SEC's charges, numbering 13 in total, precipitated a 5% decrease in the cryptocurrency market capitalization overnight, indicating the enormity of the situation at hand. The cornerstone of the SEC's contention is the assertion that Binance has been operating as an unregistered national securities exchange, broker-dealer, and clearing agency. The complaint's profundity lies in its claim that certain crypto assets, including Binance's BNB, BUSD, SOL, ADA, and MATIC, constitute securities under US law. This case could prompt other platforms to delist these tokens, triggered by apprehensions of regulatory exposure.

Additionally, the SEC alleges that Binance offered and sold unregistered securities, specifically emphasizing BUSD, BNB, and certain lending and staking-as-a-service programs. The lawsuit also accuses Binance of orchestrating the commingling of billions of dollars in customer funds through entities under the control of the exchange's CEO, Changpeng Zhao.

binance security tokens june 2023 — Source

In the lawsuit's extensive 136-page filing, it is specified that Binance utilized the accounts of two Zhao-controlled entities, Merit Peak and Sigma Chain, to facilitate the transfer of tens of billions of dollars among Binance and its associated entities. In 2021, Sigma Chain received substantial sums from BAM Trading, totaling an astounding $190 million. From these funds, Sigma Chain allegedly spent $11 million on a yacht. Subsequent to the inauguration of Binance.US, Merit Peak's US bank account reportedly received over $20 billion as a "pass-through" account, which included customer funds from both Binance platforms. The majority of these funds were then transferred to Trust Company A, ostensibly relating to the purchase of BUSD. Given Merit Peak's independent entity status, the transmission of Binance customer funds to Merit Peak potentially jeopardized these funds, as this occurred without any customer notification.

The lawsuit further alleges that Binance misrepresented its trading controls, failing to implement the anti-manipulative controls that the exchange purports to possess. According to the SEC, Binance's protective measures against "wash trading" and self-dealing were virtually non-existent and ineffective in monitoring such activities occurring on Binance.US. It was presented that Sigma Chain partook in wash trading from September 2019 through June 2022, artificially inflating the trading volume on the US platform.

Binance responded to these severe allegations with a public statement expressing disappointment with the SEC. Despite the allegations, the exchange pledged its commitment to collaborate with regulators to attain regulatory clarity. In a public blog post following the news of the lawsuit, Binance alleged that the SEC refrained from engaging productively, despite their recent extensive attempts to negotiate a settlement to resolve the investigations. The allegations of fraud, market manipulation, and the commingling of user funds through Zhao-controlled entities were firmly denied by Binance, which has previously refuted these allegations, claiming such measures were solely to facilitate user purchases.

The landscape of the global cryptocurrency market continues to be shaped and reshaped by the actions of regulators and the entities they oversee. The SEC's allegations against Binance underscore the complex dynamics of regulatory frameworks in the rapidly evolving cryptocurrency space. The outcome of this case could not only determine the future of one of the largest cryptocurrency exchanges but also set a precedent for how regulators approach the industry at large.

As we delve into the legal skirmishes between the U.S. Securities and Exchange Commission (SEC) and cryptocurrency exchanges, we encounter a tale of two enterprises: Binance, which recently faced new allegations, and Coinbase, coming under the SEC's scrutiny for the first time. Our analysis will illustrate the legal allegations and subsequent ramifications by meticulously unpacking each case and providing relevant data context.

SEC Targets Coinbase, Too

While Coinbase is likewise accused of operating as an unregistered broker, securities exchange, and clearing agency, the allegations raised against this platform involve different securities, including SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO. Moreover, Coinbase has reportedly listed tokens such as AMP, DDX, LCX, OMG, POWR, RLY (since delisted), and XYO, which the SEC had previously deemed as securities in enforcement actions.

The allegations also imply that Coinbase's staking offerings—presently available for XTZ, ATOM, ETH, ADA, and SOL—qualify as unauthorized securities sales. Moreover, the SEC argues that Coinbase collaborated with issuers to rectify "problematic statements" to avoid attracting SEC attention.

The charges laid out this week exemplify SEC Chairman Gary Gensler's frequent proclamation that the majority of cryptocurrencies should be classified as securities. This argument previously resulted in charges against Bittrex, a cryptocurrency exchange that filed for bankruptcy in May after being considered the most aggressive U.S. exchange in terms of token listing. In May 2022, Bittrex's listing hit an all-time high with over 1,000 instruments.

Coinbase also notably ramped up its listing efforts in 2021, with its 130 instruments at the start of the year growing to over 400 by year's end. This figure does not account for the thousands of tokens accessible via the Coinbase Wallet, which works with decentralized exchanges (DEXs) such as Uniswap and Sushiswap. Interestingly, the SEC included NEXO in its list of unregistered securities provided by Coinbase, a token exclusively available through the Wallet feature.

Bitcoin Halvening Narrative Picks Up

Bitcoins are created each time a miner discovers a new block as a reward for helping validate transactions and secure the network. The number of bitcoins generated per block decreases by 50% approximately every 4 years. This is colloquially referred to as “halving” and is written directly into the BTC code. This transparent, unalterable, algorithmic, hard-capped monetary policy stands in stark contrast with the traditional fiat currencies of today which are inflationary and regularly manipulated behind closed doors without consent from its citizens.

Because of this, the amount of bitcoins that will ever exist is slightly less than 21 million and therefore will ultimately act as a disinflationary currency. Currently, 6.25 BTC are created every ~10 minutes equating to roughly 1.8.% inflation. This makes BTC one of the scarcest things on Earth, rivaling gold production. ~91% of the total supply has already been mined since 2009 meaning the current circulating supply of bitcoin is ~19.4 million.

The deflationary aspect of BTC, some argue, incentivizes users to hoard BTC rather than spend it, undercutting its purpose as a currency. This has, thus far, largely proven true as the “digital gold” and “HODL” narratives have proliferated. With users HODLing, each new halvening programmatically creates added scaricty to the BTC supply, which many believe creates a “supply shock” that jumpstarts the next bull cycle. Looking at the chart below, it is had to argue with them.

BTC halvening and price action may 2023 — Source: CoinDesk

Currently, there are ~19.4 million BTC in circulation with the next halving due in ~April 2024. Different studies speculate that between 3-4 million BTC has already been cut from circulation forever due to accidental loss, destruction, and the death of individuals who alone control the keys to their BTC. With BTCs becoming increasingly scarce, will the 2024 halving repeat prior cycles? Only time will tell.

Ethereum Staking Up, ETH on CEXs Down

Encouragingly, the amount of ETH deposited in the beacon chain surpassed the quantity withdrawn since the Shanghai upgrade on April 12, currently standing at a net of 2.22M ETH. The recent data highlights the increasing confidence users have in Ethereum's potential as a productive asset and underscores their commitment to treating ETH as a long-term, yield-bearing, and a deflationary investment.

ETH on CEXs may 2023 — *Source: Glassnode*

The amount of ETH held on centralized exchanges reached its lowest point in seven years, accounting for only 14% of the total circulating supply. This significant decrease can be traced back to November when users swiftly withdrew their assets from crypto exchanges due to the collapse of FTX. The trend regained momentum in March, triggered by several banking failures resulting in a sense of distrust in the financial markets. As such, non-custodial staking solutions such as Lido and Rocketpool, benefited from the assets exodus from custodial exchanges.

Ethereum’s Next Step?

The cryptocurrency landscape continues to evolve in the face of unprecedented market turbulence. As investors attempt to chart a course through these choppy waters, it is essential to identify emerging trends and anticipate potential market influencers.

Delving into the internal dynamics of the cryptocurrency sector, one cannot overlook the significance of the imminent Ethereum's EIP-4844 implementation. Also referred to as "proto-danksharding," this update is integral to Ethereum's scalability solutions. Scheduled for a late Q3 or early Q4 launch in 2023 as a constituent of the Dencun upgrade, EIP-4844 holds the potential to revolutionize Ethereum usage by substantially reducing costs associated with Layer 2 (L2) transactions ("The Ethereum Improvement Proposals," n.d.).

Under the proposed update, transaction costs for Ethereum layer-2 could plummet by at least 90%, with some projections even indicating a potential cost reduction by up to 99%. This shift is expected to draw a significantly larger user base to Ethereum, primarily by facilitating access through roll-ups.

The Mechanism: Data Blobs and the Reduction of L2 Costs

EIP-4844's groundbreaking approach to reducing costs hinges on a novel introduction - "data blobs". These innovative components temporarily house data associated with L2 transactions until they are validated by the Layer 1 (L1) network.

This strategy offers a marked departure from the existing "CALLDATA" mechanism, wherein data remains stored indefinitely on the mainnet. The high costs currently associated with L2 transactions are primarily driven by L1 data storage, which contributes to over 90% of the expenses. With the advent of data blobs under EIP-4844, L2 transaction fees are expected to nosedive by a minimum of 90% ("Layer 2 Scaling," n.d.).

Despite its inherently technical nature, the implementation of EIP-4844 will yield a straightforward outcome for users. They will experience a significant reduction in costs associated with L2 transactions, making Ethereum a more accessible and cost-effective platform for a broader demographic.

ETH proto-danksharding fee reductions — *Source: IntoTheBlock*

Ledger Drama

Ledger, the manufacturer of one of the most popular hardware wallets for cryptocurrency, has released a new firmware update that has many users concerned. The update includes an optional ID-based recovery service that allows users to store their seed phrase with Ledger. While Ledger has assured users that the service is secure, many are still worried about the implications of this new feature.

What is the ID-based recovery service?

The ID-based recovery service is a subscription-based service that allows users to store their seed phrase with Ledger. The service works by splitting the seed phrase into three encrypted fragments and sending each fragment to a different "backup service provider." When a user needs to recover their funds, they can do so by passing an identification check with Ledger.

Why are people concerned about the ID-based recovery service?

There are a few reasons why people are concerned about the ID-based recovery service. First, it is a closed-source service, which means that users cannot verify the security of the code. Second, Ledger has a history of data breaches. In 2020, the company's database was hacked, and the personal information of over 1 million users was stolen. Third, the ID-based recovery service could be used by law enforcement to seize cryptocurrency.

Following a week+ of intense backlash, the Ledger team ultimately decided to delay the rollout of the new service, even hosting an AMA to discuss the pause. The primary focus of this session was to address the reasons behind the deferred launch of the company's contentious Ledger Recover service and to field questions from the community about the recent firmware update designed to support it.

Following an intense wave of backlash, Ledger's executive team opted to suspend the update and subsequently disclosed an "open source roadmap." This plan provides a framework for increasing the verifiability of the company's products, signaling their commitment to transparency and trust in this critical moment.

However, it's important to note that not all aspects of Ledger's codebase can be subject to this open-source transition. Specifically, components associated with the secure element chip - a feature commonly employed in credit cards and passports - remain proprietary, thus ineligible for open-source status. This demarcation underlines the intricate balance between operational transparency and security that firms like Ledger must navigate in the evolving cryptocurrency landscape.

China's Paradigm Shift: Navigating the Crypto Landscape

While the United States seeks to strengthen its regulatory grip on the world of digital currencies, China appears to be forging its own unique path. Despite the 2021 mainland ban on cryptocurrency trading, the Securities and Futures Commission (SFC) in Hong Kong has recently promulgated new rules requiring all local cryptocurrency exchanges to register and to limit their offerings to assets listed on major indices like the Nasdaq Crypto Index8 (NCI). The stipulation, effective June 1, 2023, doesn't apply to mainland Chinese citizens, who remain proscribed from trading cryptocurrencies ("Hong Kong to regulate all crypto exchanges").

Concurrently, Beijing has recently published its "Web3 Innovation and Development White Paper", which envisages Web3 as the forthcoming phase of the internet evolution. The Chinese government promises considerable annual funding — a minimum of 100 million yuan until 2025 — to metamorphose Beijing's Chaoyang district into a cutting-edge hub for the global digital economy ("China pledges billions in annual funding").

As the globe's second-ranking economy, China's decisions hold considerable sway over worldwide crypto adoption. The recent actions represent a drastic deviation from its former antagonistic attitude towards digital currencies. In 2013, the People's Bank of China imposed regulations prohibiting Chinese banks from holding or transacting in digital currencies like Bitcoin, thereby stifling residents' ability to buy cryptocurrencies since yuan deposits were no longer an option. This harsh stance was furthered in 2017, when all platforms offering Initial Coin Offerings (ICOs) were outlawed ("China's ICO ban: Understand the reasoning"). Fast-forward to 2021, China began the process of dismantling Bitcoin mining and cryptocurrency trading, fully actualizing the ban by late September 2021, a development that might have contributed to Bitcoin's network hash rate plummeting by 50% during May 2021.

Despite this historical context, the recent mollification of China's stance towards cryptocurrencies has stirred speculation about potential increased liquidity for these assets, owing to a wider market of potential traders.

While these changes don't ensure an immediate spike in liquidity for the crypto sector, they do provide the means for a vital segment of the industry to persist in investing and trading digital assets. Moreover, they appear to validate the game theory perspective related to Bitcoin and other cryptocurrencies, suggesting that even governments originally dubious about crypto will need to adapt to the burgeoning asset class ("China's new stance: A game changer").

China's evolving position on cryptocurrencies lends credence to predictions that the impending swell in crypto value, often referred to as the "bull cycle," is likely to originate from the East. As investors, we are encouraged to remain observant and agile as we navigate this dynamic landscape. The global cryptocurrency sector continues to grow and mature, and this transformation offers myriad opportunities for both individual and institutional investors.

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