There’s a fresh attempt to regulate crypto afoot in Congress. Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) have proposed a new version of the bill they introduced last year. According to CoinDesk, the bill draws a demarcating line between securities and commodities. That might help settle a long simmering dispute between the Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) for authority to regulate cryptocurrencies.
Investor tokens that do not provide financial interest in a business will not considered securities, even if their operations are dependent on the efforts of third parties and managers, according to the bill. This means stablecoins like Circle’s USDC, which earns substantial income from investing client deposits into treasuries, are in the clear.
The bill requires disclosures twice a year from crypto businesses. Whether that will come to pass is doubtful because crypto has put up a plethora of excuses in the past to justify its non-disclosures. It also proposes the setting up of a crypto self-regulatory organization (SRO), along the lines of the National Futures Association (NFA), overseen by the SEC and CFTC.
A Mild Reaction
The revised bill follows an op-ed in the Wall Street Journal by the former chairs of SEC and CFTC, Jay Clayton and Timothy Massad respectively, that called for an “incremental approach” to crypto regulation, instead of a wholesale rewrite of securities regulations to accommodate crypto as an asset class. The op-ed rehashes many of the same measures – establishing an SRO, requiring basic disclosures of crypto tokens – proposed by the Senators to address the “information asymmetry” problem between investors and token issuers.
Ordinarily news of attempts to regulate crypto elicits cheers and a price pump from investors, observers and crypto enthusiasts because it points to growing acceptance and awareness of the asset class among lawmakers. Yesterday’s news, however, failed to generate much reaction. “I don’t see much appetite in Congress for something as large as this,” Massad said on CoinDesk’s morning show and added that it will be very hard to build consensus around the bill in an election year.
Gaps In The Bill
That might be the least of the many problems for the bill. Even if it does manage to squeak some progress in Congress this year, the chances that it will be accepted by stakeholders in its current form are zero. This is because the bill aims to bring order to an ecosystem that is changing daily due to advances in technology and enforcement action by regulators. For example, the bill’s definition of a security may become redundant depending on the outcome of a case between Coinbase and the SEC currently wending its way through the court system.
CoinDesk writes that Lummis and Gillibrand are “pushing” for a definition of decentralized finance (DeFi) that doesn’t stray into centralized territory. That disqualifies almost all projects in the so-called DeFi ecosystem because they are shepherded by a core group of developers who are paid in project tokens. The currently rickety construction of DeFi also relies on a large group of centralized intermediaries – bridges, relays, oracles – to perform basic operational tasks.
The request for disclosures from crypto tokens has the potential to decimate the entire ecosystem because most tokens, despite their claims to the contrary, are money-making schemes that accomplish no task or provide no service.
Finally, the possibility that crypto organizations will come together to form an SRO are remote. There have been earlier attempts and they have failed. After all, what serious business will choke off riches and lucrative cash flows from unregulated tokens with volatile prices to fall in line with regulators? Apart from Bitcoin, the regulatory status of all cryptocurrencies, including Ethereum’s ether – the world’s second-biggest cryptocurrency by market capitalization, is unclear. This means that exchanges might have to potentially delist almost all tokens in an SRO.
Ethereum’s Lido Problem
The staking frenzy at Ethereum shows no signs of abating. According to statistics from analytics site Dune, approximately 23.8 million ether, amounting to roughly 20% of the total ether supply, has been staked. The rush of validators – systems responsible for attesting and proposing new blocks of transactions on Ethereum – also continues.
In the last one week, the number of active validators on Beacon Chain, Ethereum’s main chain, has jumped from 649,595 to 661,362. Plus, there are 84,596 validators in queue, waiting to get into the network. The increase in numbers is surprising since staking yields are down from earlier and those waiting in queue have to pay considerable gas fees to be included in the network.
Lido’s Staking Numbers
One thing that is certain, however, is that Lido, the biggest staking platform for Ether, is not contributing to the surge in validator numbers. The number of validators in its network has remained constant at 238,000 since the Shanghai upgrade that enabled withdrawals of staked ether.
Still, the amount of staked ether on its network has surged. How? Glassnode, an analytics firm, has suggested that investors have simply upped their staking amount on the same platform. Another potential source might be the decision by its decentralized autonomous organization (DAO), a cabal of venture capitalists and rich investors, to unload the entire ether holdings of its treasury into staking to generate $2 million in annual income for their wallets.
A natural corollary to the soaring numbers of staked ether on Lido is the familiar centralization problem that has plagued Ethereum since its inception seven years ago. Ethereum founder Vitalik Buterin has expressed concern but Lido’s management seems unconcerned and is charting its own course.
After staking its treasury holdings, the platform has amped up the risk profile for stETH – its native token that is issued in exchange for staked ether – by deploying it as collateral at online lending platforms to boost its yield.
stETH As Collateral
To be sure, that is an old trade in which users use stETH as collateral to take out loans in ether and stake them, again, at Lido to get stETH again. It worked well in crypto’s good times when there was plenty of liquidity and staked ether was locked in contracts. The enabling of withdrawals this past April has changed that situation.
Liquidity for both ether and stETH is down right now. A manufactured meme coin mania, similar to the one that occurred in May, doesn’t seem to be on the horizon, meaning yields for ether are stable. Added to this is the inherent risk of online lending marketplaces in DeFi, which work on a system of interdependencies between worthless tokens that could easily set off a run.