Crypto Biz: Coinbase has a lot at stake

Crypto assets made their way onto the United States Securities and Exchange Commission’s list of priorities for 2023. So far, though, we haven’t tasted the “regulatory certainty” many have been calling for. Instead, the regulator threw the book at Kraken for allegedly failing to register its staking program. Coinbase appears next on the chopping block, but its lawyers are ready to fight.

This week’s Crypto Biz newsletter delves into Coinbase’s defense of its staking program and its not-too-pleasant quarterly financials. We also look at the latest company to fall victim to Sam Bankman-Fried’s FTX.

Coinbase beats Q4 earnings estimates amid falling transaction volume

Q4 was a rough quarter for the cryptocurrency market, and nowhere was this more evident than in Coinbase’s latest earnings report. On Feb. 21, the crypto exchange reported a 12% drop in transaction volumes during the quarter as revenues plummeted 57% year-on-year. Although the revenue figures were higher than expected, I wouldn’t put much stock in Wall Street’s projections. (If you set the bar low enough, anyone can “beat expectations.”) Nevertheless, there was a silver lining: Coinbase’s subscription and service revenues increased 34% during the quarter. However, investors should be aware that Coinbase is being probed by the United States Securities and Exchange Commission (SEC) for its staking products. The exchange is attempting to put out the fire before it even starts (more on that below).

Coinbase staking ‘fundamentally different’ to Kraken’s — chief lawyer

With the SEC cracking down on Kraken over its staking products, other exchanges are trying to get ahead of the curve to avoid similar repercussions. This week, Coinbase’s chief legal officer Paul Grewal told shareholders that the exchange’s staking products “are fundamentally different from the yield products described in the reinforcement action against Kraken.” According to Grewal, Coinbase users always retain ownership of their digital assets. Secondly, users have a “right to the return,” which means Coinbase can’t unilaterally decide not to pay any rewards for staking. The SEC filed a complaint against Kraken alleging that the exchange’s users lose control of their tokens when participating in the staking program. Kraken settled with the SEC for $30 million.

If I grow oranges myself and harvest them myself, the oranges are not securities. If I grow oranges myself and harvest them using a contractor that charges me a fee, the oranges are still not securities.

— paulgrewal.eth (@iampaulgrewal) February 13, 2023

Hedge fund closes operations after losing funds in FTX exchange: Report

The crypto market felt FTX’s enduring legacy again this week after hedge fund Galois Capital reportedly shut its doors. Galois had sizable exposure to FTX when the exchange went bust in November 2022. According to the Financial Times, Galois’ co-founder Kevin Zhou has already penned a letter to investors apologizing for his firm’s involvement with FTX. Zhou also told investors they would receive 90% of Galois’ remaining assets, with the remaining 10% held at the firm temporarily. Like other FTX creditors, Galois is waiting for the bankruptcy process to begin — that process could take up to a decade to fully pan out.

For the record, yes we did have significant funds stuck on FTX. No, we did not use any Bahamian method to move funds out.

— Galois Capital (@Galois_Capital) November 11, 2022

Mastercard to allow crypto payments in Web3 via USDC settlements

Mastercard’s foray into the digital asset market continued this week after the payments giant disclosed a partnership with Web3 payment protocol Immersive. This means Mastercard users wishing to make a direct crypto payment will no longer rely on third parties — as long as they have a Web3 wallet. Real-time payments for digital and physical goods will be settled in USD Coin (USDC), a U.S. dollar-backed stablecoin issued by Circle. Will this partnership be an important milestone in advancing the mainstream adoption of Web3 wallets, or will it be lost in the noise? Only time will tell. In the meantime, much more work is needed to educate people about Web3’s actual meaning.

Before you go: Beware of Bing AI chat and ChatGPT pump-and-dump tokens

ChatGPT has taken the world by storm in recent months. Now, scammers want to capitalize on this growing trend by launching a series of fake pump-and-dump tokens. Investors, beware! In this week’s Market Report, Marcel Pechman and I dissect the recent explosion in pump-and-dump tokens and share a few words of wisdom on how to stay safe. We also give you the latest pulse of the cryptocurrency market and whether Bitcoin is bullish or bearish. You can watch the full replay below.