Notes 3/16: Ethereum Withdrawals, Circle Woes

The Securities Exchange Commission (SEC) chief Gary Gensler upped the regulation ante against staking yesterday by, once again, claiming that Proof of Stake (PoS) tokens are securities.

“Whatever they’re promoting and putting into a protocol, and locking up their tokens in a protocol, a protocol that’s often a small group of entrepreneurs and developers are developing, I would just suggest that each of these token operators … seek to come into compliance, and the same with the intermediaries,” he said.

Gensler’s comments add to the pressure on ether, Ethereum’s native token and the most prominent PoS network right now. The New York Department of Financial Services (NYDFS) has also filed a case against a cryptocurrency exchange last week in which it alleged that ether was a security.

A Date for Withdrawals

Meanwhile, developers at Ethereum have set April 12 as the date to begin ether withdrawals following a successful run on a test network. Approximately 17.46 million, representing around 14.6% of ether’s current supply, is locked in staking platforms right now.

The withdrawal process has been designed to prevent mass redemption of the token, an event that could multiply selling pressure on ether and instigate a sharp price drop. Thus, only 1800 validators will be allowed to completely withdraw their staked holdings, and exit the network, in a single day. [As of this writing, there are 450,336 validators active on Ethereum’s network].

Validators will also have the option to effect either a full or partial withdrawal. The former will enable withdrawal of rewards only and the latter will allow stakeholders to take away the entire quantity of staked ether and rewards. Their decisions will depend, to a large extent, on ether’s price during and after the process of withdrawal is complete.

A Bear Investment Case

Investors are moving into the ether trade because they expect its prices to increase and the token to become a Wall Street asset after the event is complete.

That is an optimistic assessment since ether, like most cryptocurrencies, lacks a fundamental value proposition for investment. Attractive staking yields provided one during an era of low interest rates in mainstream finance.

But the Fed’s aggressive interest rate hikes since last year have annulled that use case for the token. What’s more, mainstream assets provide a regulated alternative to ether’s increasingly fragile regulatory status. In the current scenario, shorting ether might be a better trade for investors.


Last week’s events have shaken investor confidence in USDC.

A little over $4.5 billion worth of USDC has been redeemed since the stablecoin lost its peg to the US dollar on Friday, writes online publication The Block. USDC’s circulating supply is down to 37.5 billion from around 43 billion a week ago. Adding to these problems is the theft of $33 million worth of the stablecoin from a DeFi lending platform this week.

The decline in USDC’s circulating supply and market capitalization masks increased distrust of the stablecoin. That distrust is not a function of opacity – Circle publishes monthly attestations of reserves – but of inherent problems that underpin the stablecoin’s operations.

Circle’s Problems

First, there’s the problem of the susceptibility of Circle’s reserves to a run. Recent bank failures were caused due to improper management of investments in safe instruments like U.S. treasuries and short-term assets like municipal bonds.

Circle has backstopped its current circulating supply with identical assets, making it possible that it could face a similar set of circumstances in the future. Treasuries are supposed to be the most liquid markets in the world. But reports indicate that last week’s events have made investors wary and sapped liquidity from the system.

Then, there’s the ever-present crypto problem of obtaining accurate data about the ecosystem. Binance’s stablecoin BUSD was symptomatic of these problems and USDC is not immune to it either. USDC reserves do not account for the numerous derivatives that wrap the token in their offerings. The quantity and circulating supply of these tokens is open to question as are the yields promised for the stablecoin at various services.

BTFP As Savior

Paradoxically enough, recent events may have provided even more clarity for the future.

The Federal Reserve’s Bank Term Funding Program (BTFP), which issues loans of up to one year to struggling banks at low interest rates, accepts as collateral the same mix of assets to be held by depository institutions as those that caused problems at Silvergate and Silicon Valley Bank in the first place. It also values them at par, instead of their current market price.

While the program fails to address the cause of recent bank failures, it ensures solvency for regulated stablecoins during times of crisis. If Circle [and stablecoins] can make it to the other side of the current crypto chasm, they could become stable in the true sense.  

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