Good morning. Here’s what’s happening:
Prices: Bitcoin and other cryptos rally, despite new SEC action.
Insights: Binance and FTX have both been accused of co-mingling assets, but there are differences.
Bitcoin Regains Lost Ground
With a few zigzags along the way, bitcoin shook off the Securities and Exchange (SEC) Enforcement Week to climb back up above $27,000 on Tuesday for the first time since the weekend.
The largest cryptocurrency by market capitalization was recently trading at $27,200, up 4.3% over the past 24 hours. BTC sank near $25,400 on Monday in the hours after the SEC announced a lawsuit against Binance, the world’s largest crypto exchange by trading volume. But bitcoin started edging upward by the end of the day and continued its path even as the SEC announced a second lawsuit against Binance rival Coinbase on Tuesday, and later in the day, asked a Federal court to grant a temporary restraining order to freeze assets tied to Binance.US.
“The fact that the market has rebounded leads me to believe that this was at least partially priced in,” Joshua Franklin, CEO and co-founder of digital asset information services platform The Tie, wrote in an email to CoinDesk. “No one is surprised by Gensler's actions.”
Ether also spent much of Tuesday on the upswing to trade near $1,900, a 4% gain from Monday, same time. BNB, Binance’s exchange token, which dropped about recently rose about 2% a day after plunging more than 10%. ADA and SOL, the tokens of smart contracts platforms Cardano and Solano, regained slivers of ground lost amid lawsuit aftershocks with the former rising about a half a percentage point and the latter more than 1%. Layer 2 platform Polygon’s MATIC was down about 1.5%. In its filing, the SEC identified those tokens among 13 as unregistered securities.
The CoinDesk Market Index, a measure of crypto market performance, was up 4.8%.
Fueled by AI euphoria and recent gains among several tech giants, including chipmaker Nvidia, the technology-heavy Nasdaq Composite and S&P 500 both rose slightly with the former hitting its highest point in 10 months and the latter in more than a year.
The Tie’s Franklin noted that institutional investors remain ambivalent months after crypto exchange FTX’s spectacular collapse in November and the increasingly harsh U.S. regulatory environment.
“Many funds that invested in FTX got burned, and some partners that led their firms' FTX deals were fired,” Franklin wrote. As a result, many VCs are feeling nervous to enter crypto. There is a similar trepidation among institutional allocators like pensions and endowments that broadly were burned on their earlier crypto allocations.”
Franklin added that even hedge funds that were not-too-long ago accelerating their participation in the crypto space faster than any other institutional group, have also applied “the brakes,” amid concerns about regulation, a lack of credit and “viable venues to trade on in the U.S.,” limited custody options and angst about doing business with digital asset firms that may not survive in the wider crypto contagion.
“These are just a few of the many concerns that they have,” Franklin said, although he added more optimistically that “we are seeing significantly more positive developments in Europe and Asia.”
|Avalanche||AVAX||+5.0%||Smart Contract Platform|
|Polygon||MATIC||−2.2%||Smart Contract Platform|
|Cardano||ADA||−0.3%||Smart Contract Platform|
Binance and FTX's Alleged Co-Minglings Aren't the Same
Binance is facing a Securities and Exchange Commission (SEC) lawsuit alleging poor financial controls and misuse of customer funds. Weeks prior, internal control issues took center stage in a Reuters report accusing it of commingling customer and company funds, which the company's chief communications officer has refuted.
Comparing and contrasting the accusations that Binance co-mingled funds with those against FTX, which also co-mingled funds, might be tempting.
However, these comparisons are superficial. While they could both be described as co-mingling, the process and implications are different.
In its complaint, the SEC suggests that billions of dollars of customer funds were accessible to entities connected to Binance CEO Changpeng “CZ” Zhao, namely market makers Merit Peak and Sigma Chain. Among the allegations from the SEC, $200 million was reportedly transferred from BAM Trading, a Binance-related entity, to Sigma Chain, another entity controlled by CZ, and a Binance bank account sent CZ $62.5 million.
If true, it’s hard to call this anything but co-mingling.
But missing here is any mention of BNB, its native exchange token.
Center to FTX’s co-minging problem is FTT, and how it played a role at Alameda Research.
As CoinDesk reported last November, a large portion of Alameda's assets consisted of FTT tokens, which were issued by FTX. This arrangement raised massive questions about the interconnectedness of the two entities, particularly given that the value of the FTT token is partly sustained by FTX's own activities.
Alameda, a market maker and investor, was a material stakeholder in the crypto economy at the time; thus, the market was dutifully concerned about how much of Alameda’s investing power was printed out of thin air.
This isn’t the case for BNB. Binance isn’t an investor like Alameda was, and BNB doesn’t compose the material portion of anyone’s balance sheet.
Sure, Sam Bankman-Fried also later admitted to not segregating customer accounts, which later formed part of the prosecutors’ case against him. And this sounds a lot like what CZ is being accused of. However, Binance's accusations revolve more around the alleged diversion of customer funds and interference in U.S. operations, while the issues with FTX/Alameda pertain to blurred lines between the two entities and the non-segregation of customer funds.
Similar, but different things.
And we’ll see in the coming weeks how much of CZ’s empire this takes out.
The Non Fungible Conference (Portugal)
Brussels Blockchain Week (Belgium)
The crypto markets remained down as the SEC announced it was charging Coinbase for operating as an unregistered securities exchange, broker and clearing agency. The announcement came less than a day after the SEC charged Binance with multiple securities violations. Ashley Ebersole, 0x Labs Chief Legal Officer, weighed in on the details. Plus, Vetle Lunde, K33 Senior Analyst, dove into how the markets are reacting to the developing news.
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