Buy the rumor series: Expectations for an improved regulatory environment heat up, which cryptocurrency benefits the most directly?

Author: @Web3Mario

Abstract: We know the saying, "Buy the rumor, sell the news." Before the October elections, the article I published, “The New Value Cycle of DOGE: Political Flow Potential and Musk's 'Department of Government Efficiency' (D.O.G.E) Political Career” , received a good response and met expectations, and I also gained substantial investment returns. I thank everyone for their encouragement and support. I personally feel that during this window period before Trump officially takes office, there will be many similar trading opportunities. Therefore, I have decided to start a series of articles, "Buy the Rumor Series," to explore and analyze the current market hot topics and extract some trading opportunities.

Last week, there was a noteworthy phenomenon: with Trump's strong return, the market has begun to speculate on the potential resignation of SEC Chairman Gary Gensler. You can find analysis articles on potential successors in most mainstream media. In this article, we will analyze which cryptocurrency will benefit the most directly as expectations for an improved regulatory environment rise. To conclude, I believe the ETH Staking sector will be the one to benefit the most directly, and Lido, as the leading project, may also escape its current price predicament.

Review of Lido's Regulatory Dilemma: Samuels v. Lido DAO Lawsuit

First, let’s provide some basic information. We know that Lido is the leading project in the ETH Staking sector, offering non-custodial technical services to help users participate in Ethereum PoS and earn returns, while lowering the technical threshold and the funding threshold of 32 ETH for Ethereum Native Staking. The project has raised a total of $170 million through three rounds of funding. After its launch in 2022, Lido maintained a market share of around 30% due to its first-mover advantage. As of now, according to Dune's data, Lido still holds a 27% market share, with no significant decline, indicating strong business demand for Lido.

The reason for Lido's current price slump can be traced back to the end of 2023, when its governance token LDO reached an all-time high, with a market cap of $4 billion. At that time, a lawsuit changed the entire price trend: 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 U.S. District Court for the Northern District of California, accusing the defendant Lido DAO and its partnered venture capital firms of selling LDO tokens to the public without registration, violating the Securities Act of 1933. Additionally, Lido DAO created a highly profitable business model by pooling users' Ethereum assets for staking but failed to register its LDO tokens with the SEC as required. The plaintiff Andrew Samuels and other investors, who purchased LDO tokens believing in the potential of this business model, ultimately suffered financial losses, and thus they sought legal compensation.

This case not only involves Lido DAO but also includes accusations against its major investors, such as AH Capital Management LLC, Dragonfly Digital Management LLC, Lido DAO, Paradigm Operations LP, and Robot Ventures LP. According to information on the case's progress, these institutions received subpoenas from the court in January 2024, when LDO's price was at its peak. After that, the legal process was limited to the lawyers of the investment institutions and Andrew Samuels, so the related influence did not spread.

It wasn't until the first motion hearing on March 28, 2024, that the ruling was confirmed on April 10, 2024, and after modifying some relevant terms, the case was factually accepted.

Subsequently, on May 28, 2024, Andrew Samuels' legal team unilaterally announced a motion for a default judgment against Lido DAO. The reason for this action was that Lido DAO believed it was not operating as a company and thus ignored the lawsuit. If ultimately declared in default, it would expose Lido to unfavorable judgments, such as not being able to defend itself, and based on previous similar cases like Ooki DAO, the results for the absent party are generally unfavorable. This motion was approved by the court on June 27, requiring Lido DAO to respond within 14 days. Consequently, Lido DAO had to propose a community proposal on July 2, 2024, to hire Dolphin CL, LLC, based in Nevada, as its defense attorney and requested a budget of 200,000 DAI. At this point, the case became widely known in the community. After several rebuttals from both sides, the case seemed to enter a cooling-off period after September.

Meanwhile, another case had a substantial impact on Lido: the SEC's lawsuit against Consensys Software Inc. on June 28, 2024, case number 24-civ-04578. Note that this date is just one day after the ruling in the Lido case, where Lido DAO was fully informed of the lawsuit's judgment. In this lawsuit, the SEC alleged 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 provided and sold tens of thousands of unregistered securities on behalf of liquidity staking providers Lido and Rocket Pool, which create and issue liquidity staking tokens (known as 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 suggests, can be freely bought and sold. Investors in these staking programs provide funds to Lido and Rocket Pool in exchange for liquidity tokens. The SEC's complaint alleges that Consensys engaged in unregistered securities issuance and sales by participating in the distribution of staking programs and acted as an unregistered broker in these transactions.

In this lawsuit, the stETH certificates issued by Lido to participating users were explicitly described by the SEC as a security. Thus, Lido officially entered a low period under regulatory pressure. The reason for outlining the timeline of the case's progress is to correlate it with the price trend. In other words, the core factor suppressing LDO's price is the litigation impact brought about by increased regulatory pressure, triggering risk-averse sentiment among institutional or retail investors. If the judgment is unfavorable, it would mean that Lido DAO would face significant fines, which would inevitably have a huge impact on LDO's price.

Is stETH a Security, and Why Lido's Future Development is Worth Watching

From the analysis above, we can identify that the current reason for LDO's price slump is not due to business underperformance but rather the uncertainty caused by regulatory pressure. We know that the core of the two cases mentioned above is to determine whether stETH is a security. Generally, whether an asset can be recognized as a security requires passing the so-called "Howey Test." Briefly, the Howey Test is a standard used in U.S. law to determine whether a transaction or instrument constitutes a security. It originates from the 1946 U.S. Supreme Court ruling in the SEC v. W.J. Howey Co. case. This test is crucial for defining securities, especially in the cryptocurrency and blockchain space, and is often used to assess whether tokens or other digital assets are regulated by U.S. securities law.

The Howey Test is primarily based on the following four criteria:

• Investment of money: Does it involve an investment of money or other value?
• Common enterprise: Is the investment part of a common enterprise or project?
• Expectation of profits: Do investors have a reasonable expectation of profits from the efforts of others?
• Efforts of others: Is the profit primarily derived from the management and operation of the project developers or third parties?

If a transaction or instrument meets all of the above conditions, it may be classified as a security and subject to regulation by the SEC. In the current regulatory environment, stETH is recognized as a security. However, the cryptocurrency community holds an opposing view. For example, Coinbase believes that ETH Staking does not meet the four elements of the Howey Test and therefore should not be considered a securities transaction.

• No monetary investment: During the staking process, users retain full ownership of their assets and do not hand over control to a third party, so there is no investment behavior.
• No common 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 expectation of profits: Staking rewards are earned from the labor of blockchain validators, similar to wages, rather than the expected returns from an investment.
• Not reliant on the efforts of others: The institutions providing staking services only operate public software and computing resources for validation, which is technical support rather than management, and rewards are not based on their management efforts.

From this, we can see that there is indeed room for discussion regarding whether ETH Staking-related certificate assets will be recognized as securities, heavily influenced by the SEC's subjective judgment. Finally, let me summarize why I believe Lido's future development is the most noteworthy:

1. The core factor suppressing the price is regulatory pressure, which has a high subjective component, and the current price is technically at a low point.
2. ETH has been defined as a commodity, so there is more room for discussion compared to other areas, such as SOL.
3. The ETH ETF has been approved, and the top resources mobilized to promote ETF sales will undoubtedly provide assistance. To elaborate, there is already information circulating about this, and it is generally believed that the current inflow of funds into the ETH ETF is not as good as BTC. The reason lies in the differentiation; for most traditional funds, BTC is the standard in the entire cryptocurrency space and relatively easy to understand, while the appeal of the ETH ETF is not as strong. If ETH ETFs could provide indirect staking returns to buyers, it would significantly enhance their attractiveness.
4. The legal costs associated with resolving the relevant lawsuits are relatively low. We know that in the Samuels v. Lido DAO case, the plaintiff is not the SEC but an individual, so the legal costs of a dismissal judgment are smaller compared to cases directly litigated by the SEC, resulting in relatively minor impacts.

In summary, I believe that during this window period, as the possibility of changes in the regulatory environment increases, Lido's future development is worth watching.