Buy the rumor series: Expectations for improved regulatory environment rise, which cryptocurrency will benefit most directly?

Author: @Web3Mario

Abstract: We know there is a saying, "Buy the rumor, sell the news". Before the October election, the article "DOGE's New Value Cycle: Political Traffic Potential and Musk's "Department of Government Efficiency" (D.O.G.E) Political Career" published by the author has received good responses and expected results, and the author has also received a relatively rich return on investment. Thank you for your encouragement and support. I personally think that there will be a lot of similar trading opportunities in this window period before Trump officially takes over, so the author decided to start a series of articles, "Buy the rumor series", to explore and analyze the hot spots that are currently being hyped in the market and extract some trading opportunities.

Last week, there was a phenomenon that deserves attention. With Trump's strong return, the market has begun to hype the potential resignation of Gary Gensler, chairman of the US SEC. You can see analysis articles about the successor in most mainstream media. In this article, we will analyze which cryptocurrency will benefit most directly as the expectation of improving the regulatory environment rises. First of all, I think the ETH Staking sector will be the sector with the greatest direct benefits, and Lido, as a leading project, may also get rid of the current price dilemma.

Review the regulatory dilemma encountered by Lido: Samuels v. Lido DAO lawsuit

First of all, let's add some basic information. We know that Lido is the leading project in the ETH Staking track. By providing non-custodial technical services, it helps users participate in Ethereum PoS and earn income, and reduces the technical threshold of the entire process and the 32 ETH funding threshold of Ethereum Native Staking. After three rounds of fundraising, the project raised a total of 170 million US dollars. After going online in 2022, Lido's market share has remained at around 30% all year round thanks to its first-mover advantage. So far, according to Dune's data, Lido has also maintained a 27% market share and has not shown a significant decline, which shows that Lido is still relatively strong in terms of business demand.

The reason for Lido's current low price can be traced back to the end of 2023, when the price of its governance token LDO also reached its historical high, with a market value of 4 billion US dollars. At this time, a lawsuit changed the entire price trend. This is the Samuels v. Lido DAO case, case number 3:23-cv-06492. On December 17, 2023, an individual named Andrew Samuels filed a lawsuit against Lido DAO in the United States District Court for the Northern District of California. The core content of the lawsuit is to accuse the defendant Lido DAO and its partner venture capital company of selling LDO tokens to the public in an unregistered manner, in violation of the Securities Act of 1933. In addition, Lido DAO created a highly profitable business model by pooling users' Ethereum assets for staking, but did not register its LDO tokens with the U.S. Securities and Exchange Commission (SEC) as required. Plaintiff Andrew Samuels and other investors purchased LDO tokens because they believed in the potential of the business model and eventually suffered financial losses, so they sought legal compensation.

The case not only involves Lido DAO, but also includes allegations against its major investors, including AH Capital Management LLC, Dragonfly Digital Management LLC, Lido DAO, Paradigm Operations LP, Robot Ventures LP, etc. According to the information displayed on the progress of the entire case, these institutions received subpoenas from the court in January 2024, when the price of LDO was at its highest point. Since then, the legal process between the two parties has been limited to the lawyers of the investment institutions and Andrew Samuels' lawyer, so the relevant influence has not spread.

Until the first motion hearing on March 28, 2024, the verdict of which was determined on April 10, 2024, the case was admitted on fact after some relevant provisions were amended.

Afterwards, on May 28, 2024, Andrew Samuels's legal team unilaterally announced a motion to declare Lido Dao in default. The reason for this operation is that Lido DAO believes that it does not operate as a company, so it has ignored the lawsuit. If it is finally declared in default, Lido will face some unfavorable judgments, such as failure to defend itself, and based on the previous similar Ooki DAO case, the result is unfavorable to the absent party. The motion was approved by the court on June 27 and required Lido DAO to respond within 14 days. After that, Lido DAO had to initiate a community proposal on July 2, 2024 to hire Dolphin CL, LLC in Nevada as a defense lawyer and apply for 200,000 DAI in related funds. The case was widely known to the community. After several arguments from both sides, the case seemed to have entered a cooling-off period after September.

At the same time, another case also had a substantial impact on Lido, that is, the SEC on June 28, 2024 Consensys Software Inc., Case No. 24-civ-04578, note that this date actually occurred the day after the judgment of the Lido case was issued that Lido DAO, as an operating organization, had been fully informed of the lawsuit. In this lawsuit, the SEC believes that Consensys Software Inc. engaged in unregistered securities issuance and sales through its service called MetaMask Staking, and operated as an unregistered broker through MetaMask Staking and another service called MetaMask Swaps.

According to the SEC’s complaint, since January 2023, Consensys has offered and sold tens of thousands of unregistered securities on behalf of liquidity staking program providers Lido and Rocket Pool, which created and issued liquidity staking tokens (called stETH and rETH) in exchange for staked assets. While staking tokens are typically locked and cannot be traded or used during the staking period, liquidity staking tokens, as the name implies, can be freely bought and sold. Investors in these staking programs provided funds to Lido and Rocket Pool in exchange for liquidity tokens. The SEC’s complaint alleges that Consensys engaged in unregistered securities offerings and sales by participating in the distribution of staking programs and acting as an unregistered broker in these transactions.

In this lawsuit, the stETH certificates issued by Lido to participating users are explicitly described by the SEC as a security. At this point, Lido has officially entered a low period under strong regulatory pressure. In the previous description, the reason why the time rhythm of the case progress was sorted out was to echo its price trend. In other words, in fact, the core factor that suppresses the price of LDO is the impact of litigation caused by increased regulatory pressure, which triggers the risk aversion of institutional investors or retail investors, because if the judgment is unfavorable, it means that Lido DAO will face a large fine, which is bound to have a great impact on the price of LDO.

Is stETH a security, and why is the subsequent development of Lido the most worthy of attention

After the above analysis, we can already identify that the current reason for the low price of LDO is not because the business is not as expected, but because of the uncertainty caused by regulatory pressure. We know that the core of the above two cases is to determine whether stETH is a security. Generally speaking, whether an asset can be identified as a security needs to go through the so-called "Howey test". Briefly, the so-called Howey test is a standard used in U.S. law to determine whether a transaction or instrument constitutes a security. It originated from the 1946 U.S. Supreme Court ruling on the case of SEC v. W.J. Howey Co. This test is crucial to the definition of securities, especially in the field of cryptocurrency and blockchain, and is often used to assess whether tokens or other digital assets are regulated by U.S. securities laws.

The Howey test is mainly based on the following four criteria:

• Investment funds: whether it involves investment of money or other value.

• Common enterprise: whether the investment has entered a common enterprise or project.

• Expected profit: whether the investor has a reasonable expectation of making a profit from the efforts of others.

• Others' Efforts: Does the source of profit mainly rely on the management and operation of the project developer or a third party?

If a transaction or tool meets all of the above conditions, it may be identified as a security and regulated by the U.S. Securities and Exchange Commission (SEC). In the current regulatory environment that is not favorable to cryptocurrencies, stETH is identified as a security. However, the cryptocurrency circle holds the opposite view. For example, Coinbase believes that the ETH Staking business does not meet the four elements of the Howey test and should not be regarded as a securities transaction.

• No money investment: During the staking process, users always retain full ownership of their assets, rather than handing over funds to a third party for control, so there is no investment behavior.

• No joint enterprise: The staking process is completed through a decentralized network and smart contracts, and the service provider is not a business jointly operated with users.

• No reasonable profit expectation: Staking rewards are the labor income of blockchain validators, similar to salary compensation, rather than the expected profit return of investment.

• Not dependent on the efforts of others: Institutions providing staking services only run public software and computing resources to perform verification, which is technical support rather than management behavior, and rewards are not based on their management efforts.

From this we can see that in fact, there is still room for discussion on whether the certificate assets related to ETH Staking will be identified as securities, which is greatly affected by the overall subjective judgment of the SEC. Finally, let me summarize why I say that Lido's subsequent development is the most noteworthy:

1. The core factor of price suppression is extremely regulatory pressure, and the subjective factors of regulatory pressure are high, and the current price is at a low point from a technical perspective.

2. ETH has been defined as a commodity, so the relevant views have more room for discussion than other fields, such as SOL.

3. ETH ETF has been approved, and the relevant top resources mobilized to promote the sales of ETF will certainly provide help. I will expand on this a little bit here, because there is already relevant information spreading. This part of the follow-up information generally believes that the current ETH ETF capital inflow is always poor compared to BTC ETH. The reason lies in differentiation. For most traditional funds, BTC is the standard of the entire cryptocurrency track and is relatively easy to understand, while for ETH ETF, it is not so attractive. If ETH ETF can be allowed to provide indirect staking income to buyers, it will significantly increase its attractiveness.

4. The legal cost of resolving the relevant lawsuit is relatively small. We know that in the Samuels v. Lido DAO case, the plaintiff was not the SEC, but an individual. Therefore, the legal cost of the dismissal is small compared to the case of direct litigation by the SEC, and the impact is relatively small.

In summary, I think that during this window period, as the possibility of changes in the regulatory environment increases, the subsequent development of Lido is worth paying attention to.