Last week, Kraken – a U.S. cryptocurrency exchange – was charged to shut down its U.S. cryptocurrency staking service and pay $30 million in penalties by U.S. Securities and Exchange Commission (SEC) after the commission said Kraken had failed to register the program. In the books of the SEC, Kraken was offering unregistered securities within its crypto staking-as-a-service program. Since then, the exchange has agreed to the SEC’s terms, but not without some ongoing tirades. CEO and Co-Founder of Kraken, Jesse Powell, has lamented the vague method the SEC employs in regulating crypto services. He said in a tweet last Thursday,
“...Some guidance would be appreciated. The “This is wrong, but I won’t tell you how to do it right. Want to find out if X works? Try it and see what happens.” approach does not help the industry nor consumers. We aren’t anti-regulation but we need a clear path to operate.”
As surprising as this may seem, the SEC’s war against crypto did not start last week. SEC vs. Ripple has dragged on for over 3 years while Coinbase, Gemini, Grayscale, Uniswap, and even the now-defunct Celsius have all had a fair share of the SEC’s iron fist clampdown on the industry. Therefore, all eyes have shifted to other U.S. exchanges that offer similar or similar offerings to Kraken. That includes Coinbase and Gemini, with both firms still recovering from recent incidents. Coinbase had to settle a $100 million lawsuit with New York’s Department of Financial Services (NYDFS) in early January, while Gemini played it out with the Digital Currency Group (DCG) over an “earn” service it offered its customers through DCG. The SEC Chair, Gary Gensler, threw a bone at both in his statement.
“Whether it’s through staking-as-a-service, lending, or other means, crypto intermediaries, when offering investment contracts in exchange for investors’ tokens, need to provide the proper disclosures and safeguards required by our securities laws,” he said, “Today’s action should make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection.”
What Do Recent Developments With The SEC Mean for the Crypto Industry?
Crypto Adoption in the United States
Coinbase has released a statement opposing whatever plan of action the SEC intends to take against the company. That shows that other companies asides from Kraken are equally worried, as well as their customers and several other independent stakers. With most popular blockchains based on the Proof-of-Stake consensus mechanism, people who wish to participate as validators in securing these blockchains are currently in limbo. These people and crypto firms who wish to continue staking will have to forge a path ahead with the SEC. Given Gensler’s history with the industry, there is a high chance it negatively affects crypto adoption in the U.S. Centralized crypto entities exist as trusted intermediaries between traditional finance and its decentralized archetype. Therefore, if the SEC’s final stance is not crypto-friendly, individuals and firms interested in staking but cannot use the blockchain themselves or do not want to expose themselves to the associated risks will no longer have the opportunity to do so. Participation level will drop and most likely drag interest levels with it.
Increased Scrutiny on More Cryptocurrencies and Crypto Services
The industry’s major concerns regarding the SEC regulation have always been, “If Gensler gets this win, what makes you think he will stop there?” It all got intense with Ripple, and now, it seems the SEC horizon has continued to widen with Grayscale, Coinbase, Kraken, Uniswap, and many more all within their claws. One might wake up tomorrow and see that Ethereum has been outlawed as a security or worse still, banned from being traded within American shores. Shortly after the Ethereum blockchain transitioned from a PoW to a PoS consensus mechanism, the SEC branded Ethereum security, and this caused an uproar within the industry. If Gary wins this one, one can bet he will have eyes on another in no time.
U.S. Firms Forced to Incorporate Offshore
Currently, several U.S. crypto firms will be imploring their legal teams to prepare rebuttals for any offense the SEC may have. Quite possibly, some of these firms, especially ones that primarily offer staking or lend-to-stake services, will be forced offshore as they long for more favorable regulatory climes to operate. In 2021, BlockFi agreed to pay $100 million to the SEC and 32 states to settle charges concerning a retail crypto lending product the company offered to nearly 600,000 investors. As part of the settlement, BlockFi had planned to offer an alternative product expected to be the first crypto interest-bearing security registered with the SEC. Still, the New Jersey company filed for bankruptcy in November without launching the product. That shows how increasingly difficult it is to navigate staking or any interest-bearing crypto service in the U.S.
Decentralized Staking Platforms To Thrive
The trouble with the SEC will most likely not go away in the interim for Kraken and co, given these words by Gurbir S. Grewal, Director of the SEC’s Division of Enforcement;
“In case after case, we’ve seen the consequences when individuals and businesses tout and offer crypto investments outside of the protections provided by the federal securities laws: investors lack the disclosures they deserve and are harmed when they don’t receive them,” he said. “Today, we take another step in protecting retail investors by shutting down this unregistered crypto staking program, through which Kraken not only offered investors outsized returns untethered to any economic realities, but also retained the right to pay them no returns at all. All the while, it provided them zero insight into, among other things, its financial condition and whether it even had the means of paying the marketed returns in the first place.”
There is an apparent disconnect between the returns paid out and the risk known to customers. If this disconnect is not addressed, centralized staking platforms might have to go. With the possible phase-out of competition from centralized counterparties, third-party decentralized staking platforms like Lido Finance and Rocket Pool will look to benefit as people look for alternatives with fewer risks. Smaller stake pools, staking individuals, and firms who previously used centralized platforms will now resort to these decentralized options to protect themselves.
As the crypto industry continues to grow, lots of learning and unlearning will have to be done. Companies and ideas will fail and more resilient ones will rise from their ashes. The ultimate goal of decentralized finance remains not just to remove the need for centralized intermediaries, but also to take away control from the hands of Big Brother SEC and the government. Until then, we keep building.
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