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Welcome to The Node. This is Daniel Kuhn, here to take you through the latest in crypto news and why it matters. In today’s newsletter:  

CoinDesk just launched The Airdrop, a Web3 newsletter breaking down the biggest news related to internet culture, NFTs, DAOs and the metaverse 

Regs Over the World

European Central Bank officials said EU banks should start capping crypto holdings before the Basel Committee on Banking Supervision’s stringent new rules takes effect. “The BCBS standard is not yet legally binding…However, should banks wish to engage in this market, they are expected to comply with the standard,” the ECB said. This comes as Germany’s third-largest public company Siemens issues a digital bond – worth ~$64 million – using Polygon. The move, made possible under the Electronic Securities Act updated in 2021, is expected to reduce paperwork, expand the investor pool and remove the "intermediary” bank. Elsewhere, Abu Dhabi has pledged $2 billion for a tech sandbox with Web3 ambitions called Hub71 while El Salvador plans to open a “Bitcoin Embassy” in Texas. Finally, George Soros’s hedge fund reportedly increased its exposure to crypto at the end of last year, including debt purchases from miner Marathon Digital Holdings and a short position on beleaguered Silvergate Bank, according to an SEC filing dated Dec. 31.

Bankruptcy Battles

Celsius Network debtors tapped NovaWulf Digital Management to help sell off assets as the shuttered crypto lender continues its corporate reorganization. The plan follows a court-approved sales process Celsius lawyers put forward in January, and comes as Celsius creditors take to the court to recover millions from ex-CEO Alex Mashinsky, his wife and former businesspartners. Notably, the creditor's 150-page legal document accuses Celsius management of making “negligent, reckless and sometimes self-interested investments” before declaring bankruptcy last July. Elsewhere, subpoenas have been sent to “FTX insiders” including Sam Bankman-Fried, his father Joseph Bankman, his ex Caroline Ellison and colleagues Gary Wang and Nishad Singh demanding documents about Binance’s failed takeover offer and other information. FTX is also negotiating the return of $400 million that a little-known, SBF-backed hedge fund cashed out into a JPMorgan account.

Platforms Platform

Paxos, the stablecoin issuer under regulatory pressure, has burned more than $700 million Binance USD tokens as it winds down the third-largest stablecoin. BUSD briefly lost its peg to the U.S. dollar, as Binance CEO Changpeng Zhao tried to distance his firm from the eponymously-named offering. Separately, Binance and Huobi froze $1.4 million of assets allegedly sent from Tornado Cash and connected to last year’s Harmony bridge attack. In other tech platform news, Cardano’s “Valentine” upgrade is expected to improve the popular blockchain’s interoperability with other networks – if Cupid's aim is true. Cardano’s ADA token jumped on the news. This comes as the second-largest NFT platform, Blur, has issued a native token. Eligible airdrop recipients have 60 days to claim their “care packages.” Finally, Singapore-based DBS Bank has released some info about activity on its white glove exchange DDEx, showing bitcoin trading is up 80% year-over-year.

"The greatest mistake you could have made is to be an onshore regulated company in the crypto space." 

– Former head of portfolio management at Paxos Jesse Austin Campbell said on CoinDesk TV's "First Mover" 

The Takeaway: How Bad Is the SEC?

After a year in which frauds and charlatans stole or destroyed tens of billions of dollars in investor funds, the U.S. SEC has cracked down on entities that many crypto veterans would consider “the good guys,” and on services that are far less obviously dangerous than those that ran wild in 2021 and 2022. That’s especially true of moves against the U.S.-based exchange Kraken, which agreed to shutter its U.S. staking services a pay a $30 million fine. For many, the action feels woefully misplaced: Kraken has been a pillar of the crypto ecosystem for a decade and has been a consistently honest actor. 

The particular tool in question may not have been structured ideally – it seems it was more vulnerable to attack as a “security” because it wasn’t a straight fee-based pass-through for stakers. But the core service being provided was fundamentally valid and useful for the ecosystem, and entirely distinct from the “lending platforms” like Celsius Network and Voyager Digital that blew up last year. The parallel actions against the BUSD stablecoin feel only slightly less misdirected. The SEC reportedly plans to sue Paxos, the issuer of the Binance-branded stablecoin, which the regulator considers an unregistered security. Paxos says it will halt issuance of the token. Binance, the largest offshore crypto exchange, doesn’t have quite the pedigree of Kraken, particularly since it’s a lightly regulated entity. But Binance has been a broadly good actor for half a decade.

More to the point, BUSD may be the victim of some fuzziness around the concept of a “stablecoin.” Both regulators and crypto insiders are likely still traumatized by the incredibly violent collapse last spring of terraUSD, a “stablecoin” built on faulty ideas about algorithmic price stabilization. But BUSD is a backed stablecoin, with dollars in a bank guaranteeing redemptions. The obvious read here is that there’s some political expediency at play. These actions come after a year in which the SEC failed to spot or prevent massive frauds – cracking down on Kraken and Paxos is hard not to see as making a show of enforcement. Dissenting SEC Commissioner Hester Pierce is among those who share that general view.

But there’s little point whining about the SEC’s post-facto virtue-signaling – the agency has the power, and seems unlikely to change its stripes any time soon. There’s more alpha in engaging with the realpolitik of its operative logic than in grousing about how unfair it is. That’s especially true because, well, there really was a lot of embarrassing and damaging crypto fraud last year. As Bloomberg’s Matt Levine points out, even the most reasonable counterpoints to misplaced regulation are going to fall on deaf ears once people lose enough money. It’s hard to dispute that the 2021 bubble led investors, builders and the media to feed retail hype and treat a series of con men-like heroes. The whiff of money blunted critical faculties and pumped hopium into the vents. 

So while the SEC’s crackdown is likely to put a lot of misplaced burdens on entities that are substantially blameless, the crypto industry as a whole still needs to look inward and reckon with its own responsibility – and ask how it can better marginalize frauds on the front lines the next time mass crypto-mania returns. Clearly, we can’t rely on regulators to get it right for us.

– David Z. Morris

@davidzmorris

david.morris@coindesk.com

Expensive Bouquet

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