#59 The Context: Binance, facing scrutiny, cleans house 🧹🏠
Will it be enough for regulators?
Hi, there, hope you have had a good week. It’s not been a good one for Sam Bankman-Fried, perhaps unsurprisingly: new charges have been added to his indictment, bringing them to 12. Elsewhere the focus has been on Binance: can the behemoth work through all the regulatory issues? Hong Kong’s positive noises about crypto have led to a burst of interest in all crypto things Chinese. And we should congratulate the CoinDesk journalists on their Polk. The first of many for crypto media, hopefully.
The usual disclaimer: This newsletter collates the main themes and headlines of the week in DeFi/crypto/metaverse/web3/NFT land and tries to provide unbiased context. It's aimed at anyone who wants to keep an eye on the space. It's put together by a team at YAP and doesn't contain any promotion of our clients (if one is mentioned, we'll flag that).
The team: founder Samantha Yap and consulting editor Jeremy Wagstaff, Sam O'Donohoe, Ewan Brewster, Tiffany Mac Sherry, Becky Corbel and Delon Chan. Your feedback is, as always, welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
[tl;dr]
Binance seeks to both put its house in order and broaden its reach, hoping both might be enough to reassure regulators it’s a different to beast to FTX and others collapsed and collapsing.
Hong Kong is making tentative moves towards relaxing some retail crypto controls, but for many the tea leaves suggest that it’s China who’s dictating the pace and scope of reforms. If they’re right, Asia could lead the next crypto summer.
NFT marketplaces continue to duke it out to win customers, but not all creators of the digital assets being traded are impressed.
[The Binance Dance]
Binance has been a key beneficiary of the collapse of FTX and others, mopping up business and market share. But it still faces problems, particularly in the U.S., as the company and officials engage in a complex dance over whether and how DeFi might fit into the regulatory landscape.
On one hand Binance has sought to clean shop, shifting to a “semi-automated” process of handling the reserves that back tokens it issues, to address its own admission that it had mingled collateral in the same wallet as customer funds.
At the same time it gives off signals that it is loosening its ties to the U.S., reportedly considering severing connections with some U.S. intermediaries and reassessing its VC investments.
All this while Binance is also growing its presence overseas, such as Romania, and is considering stablecoin initiatives in Europe and the Middle East. It has agreed to buy Japanese group Sakura Exchange BitCoin and has invested in South Korea’s Gopax exchange. This week it closed derivative trading accounts of some investors in Australia as they didn’t meet the criteria of wholesale customers, its only permitted business.
This hasn’t dampened regulatory appetite for action. U.S. regulators have objected to Binance.US’ plans to buy assets from defunct crypto lender Voyager on the ground the deal might be discriminatory and unlawful.
And SEC chair Gary Gensler has pushed back on claims from DeFi players that regulators are leaving them without clear rules, saying it’s a “false narrative”, so it’s likely the dance will continue for some time.
Binance isn’t the only one spreading its wings. Coinbase, second largest exchange by trading volume, has announced its own Layer-2 blockchain, Base, to open up a fresh revenue stream to its mostly trading and exchange business.
Sources: Stories by Emily Nicolle, Yueqi Yang, Kiuyan Wong and Zheping Huang of Bloomberg; Jack Schickler and Nelson Wang of CoinDesk; Nina Bambysheva of Forbes; Scott Chipolina of the FT; Jacquelyn Melinek of TechCrunch); Osato Avan-Nomayo of The Block; Romania Insider
[China’s test bed]
China, which has taken a hard line on crypto, is attracting attention and fuelling at least some of the market’s recent frothiness (Bitcoin, for example, is nearing $25,000 for the first time in seven months, and China’s only approved, public and permissionless blockchain, Conflux has seen its token rise from 5 to 34 U.S. cents in a week). Are there any grounds for such optimism?
Hong Kong has started a consultation process on its proposed new licensing regime, which would allow licensed exchanges to serve retail investors.
This wouldn’t happen without China’s approval, something confirmed by the friendly visits in recent month to crypto gatherings by Chinese officialdom, but it doesn’t necessarily follow that China itself could be about to soften its own position.
More likely they’re using the city as a testing ground for digital assets, an interpretation that has led to mainland crypto-related companies to return to Hong Kong.
And on the mainland itself, there are signs mainstream players see the wind changing: Tencent’s cloud business announced an MoU with web3 infrastructure provider Ankr, as well as strategic collaborations with smart contracts platform Avalanche, zkEVM zk-Rollup Scroll and Sui, a Layer-1 blockchain.
Sources: Stories by Sarah Zheng and Kiuyan Wong of Bloomberg; Oliver Knight of CoinDesk. Original sources: Tencent Cloud press release; SFC Consultation Paper (PDF).
[tidbits]
Non-profit Proof of Stake Alliance has issued two white papers examining the status of deposits in U.S. securities and tax law, to offer “a framework for meaningful legislative codification or elucidation” of liquid staking. (One of the POSA members, Lido, is a Yap client.)
CoinDesk has won a George Polk award for breaking and leading the FTX story. A first for crypto media, and as good as sign as any that the sector has come of age. Worth watching the video just for Ian Allison's frenetic description of how he got the scoop.
OpenSea and Blur continue their NFT marketplace battle, with the former saying it was temporarily eliminating its listing (‘marketplace’) fee, although the main battle is still over whether to enforce payment of royalties to creators, who aren't happy: “Marketplaces out here (are) pitting creators against users”, said one.
Meanwhile Spotify has launched a pilot where users can access special playlists by connecting their NFT wallets. Spotify is playing down the pilot, but it follows an experiment last year which allowed some artists to promote NFTs on their profiles.
Ethereum takes another step to the Shanghai upgrade with the announcement that the Shapella hard fork will go live on the second-to-last testnet on Feb 28. The only step after that is to test the fork on a public testnet, Goerli. Once the Shanghai upgrade is done, stakers can withdraw assets.
Documents suggest that the public face of OneCoin, a notorious crypto-ponzi scheme, may have been murdered on orders from a Bulgarian drug lord. A CoinDesk story has called “particularly suggestive” that Terra founder Do Kwon had allegedly fled to Serbia, “which shares a long border with Bulgaria.”
And lest we forget, the Bank of International Settlements has tried to figure out (PDF) who lost money on the latest crash. Answer: probably everyone who isn’t a whale. Especially those in developing countries. “In nearly all economies in our sample, a majority of investors probably lost money on their bitcoin investment. The median investor would have lost $431 by December 2022, corresponding to almost half of their total $900 in funds invested… Notably, this share is even higher in several emerging market economies like Brazil, India, Pakistan, Thailand and Turkey.”
[reading]
How the crypto crash brought bad karma to a New York yoga studio: the FT’s Joshua Oliver tracks the decline of crypto traders who can no longer afford their Airbnb/Youtube watching/yoga shaping lifestyle
[Tweet of the Week]
[Events]
Buidl Week / EthDenver | February 23rd - March 5th 2023 | Denver, Colorado, USA
GDC San Fran | March 20th - 24th 2023 | San Francisco, California, USA
[DeFi Definitions]
An occasional segment exploring one particular aspect of DeFi.
This week "Validators" by Andrew Wickerson.
A validator is a participant in a Proof-of-Stake (PoS) blockchain, chosen to confirm transactions and verify block information. To understand further, one has to consider Proof-of-Work (PoW) and Proof-of-Stake (PoS) consensus mechanisms.
In PoW, miners solve complex cryptographic puzzles to verify transactions using large amounts of computational power, receiving block rewards in exchange.
In PoS, there are no miners. Instead, a validator is chosen randomly to check transactions, verify activity, vote on outcomes and maintain records. They receive transaction fees in rewards for this. To become a validator, a participant must first deposit 32ETH into the network, known as staking. Of course, it is simply not feasible for everyone to deposit 32ETH which has led to the invention of platforms such as Lido which allow people to deposit less ETH and earn rewards by creating pools. While the selection process is random, those who deposit a larger stake have a greater chance of being selected. As long as the stake is higher than what the validator receives from transactions fees we can trust that the validator is acting with good intentions. Furthermore, validators will lose part of their stake if they approve fraudulent transactions.
After Ethereum’s imminent Shanghai upgrade, ETH validators will have the chance to access their staked ETH and unlock their staking rewards since staking started in 2020.
This newsletter is prepared by YAP Global, an international PR Consultancy focusing on helping cryptocurrency, Decentralised Finance (DeFi) and Web3 brands through impactful storytelling. Find out more about us here.