What happened
Shares of crypto companies dropped on Monday as the U.S. government continues to crack down on major parts of the industry.
Shares of Coinabse Global (COIN -5.10%) fell as much as 6% in early trading, Silvergate Capital (SI 9.76%) dropped 6.5%, and Lido DAO (LDO -6.97%) was down 11.3% in the last 24 hours. They were down 1.5%, 5%, and 11.3% respectively at 12:30 p.m. ET.
So what
Last week, the U.S. Securities and Exchange Commission (SEC) shut down exchange Kraken's staking platform, arguing that it was a security. Today, the New York Department of Financial Services said it will sue Paxos for selling stablecoin (a token pegged to a traditional currency) BUSD as an unregistered security.
Coinbase was seen as one of the most impacted by the Kraken crackdown because it has a large share of the staking market and it also owns half of the consortium that runs stablecoin USDC. But founder and CEO Brian Armstrong published a blog post making the case that Coinbase's staking is not a security and said the company will "happily defend this in court if needed."
While Coinbase is in the news today, Silvergate and Lido DAO could be similarly impacted. Silvergate is already facing a run on the bank but it may face scrutiny from a more aggressive SEC. And LidoDAO, while technically a decentralized organization, may face scrutiny if the SEC is going after stablecoins.
Now what
The reality is that these investments are riskier today than they were even a few days ago. U.S. regulators are working together to crack down on crypto products and companies and it's unclear where their crackdown will end. The fact that they're looking to sue over a stablecoin that by definition wouldn't generate a profit seems to say they're pushing the limits.
While Coinbase and Lido DAO are facing regulatory pressure, there are potential answers to what they're doing. Coinbase seems prepared to defend itself in court and Lido DAO is a decentralized product so it may not face the same scrutiny. Silvergate, on the other hand, has underlying risks from leveraged positions and has been losing deposits for six months, so it's in a very weak position.
It's not surprising to see investors taking risks off the table today, but that could present a long-term opportunity. I think Coinbase, in particular, is emerging as one of the only centralized companies investors can trust and if it wins a court battle to keep staking services it could be a leader there as well.
That thesis depends on crypto becoming a big business long-term, but I think the future is looking up there as well. More value is being generated in decentralized products and non-fungible token (NFT) trading volume is rising, so there's fundamental interest. It may take years for crypto and blockchain products to go mainstream, but I do think they'll get there and when they do Coinbase will be one of the winners.
