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US Regulators Target Paxos, Coinbase Could be Next

Paxos will no longer issue Binance USD stablecoin due to regulators’ crackdown on crypto. Coinbase prepares for a fight against the SEC on its staking service. DeFi players are concerned about the regulators’ actions against their protocols. Correlation between crypto and Nasdaq turns positive ahead of US inflation release.

February 13, 2023 - The US regulators are moving on with an attack against the crypto industry after the charges against Kraken’s staking service. The SEC notified Paxos Trust Company for allegedly violating investor protection laws in issuing Binance USD (BUSD) stablecoin, which means selling and listing an unregistered security. BUSD is the third largest stablecoin with a market cap of ~US$16bn. Moreover, the New York Department of Financial Services (NYDFS) ordered Paxos to stop issuing BUSD. In our view, the regulators actions were expected due to last year’s events. It seems that the SEC is going to apply a rigid interpretation of the Howey Test going forward.

The Coinbase CEO Brian Armstrong said the company will defend its staking service in court if needed, anticipating an attack from regulators. In a blog post, Coinbase explains that its staking service does not pass the Howey Test to determine whether an asset is a security, which has four criteria: (i) an investment of money; (ii) in a common enterprise; (iii) with a reasonable expectation of profits; and (iv) earned through the efforts of others. The new round of the regulators’ crackdown on crypto is concerning DeFi players, as well. According to the head of business development at Lido DAO, Jacob Blish, the most significant risk would be if the SEC eventually concluded that no US citizen cannot interact with crypto staking services, including decentralized protocols. We think this is possible given the precedent of the SEC interpretation of staking as a security.

Meanwhile, the correlation between the crypto market and the tech stocks has turned positive. The 90-day correlation coefficient between the crypto market cap with Nasdaq has risen from -0.12 to 0.74 in four weeks, reaching the highest since early November, according to Coindesk analyses, using data sourced from charting platform TradingView. This is likely caused by the increasing sensitivity of crypto to macro data, specially, the release of the US inflation data tomorrow, which the market expects to decline to 6.2% in January from December's 6.5%, according to Reuters compiled estimates. We believe that a lower-than-expected figure could offset the negative impact of the US regulators crackdown on crypto for the time being.

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