Denver The American crypto exchange Kraken bows to pressure from the SEC. The trading platform will pay a $30 million penalty, settling a regulatory lawsuit, the SEC said on Thursday. The focus of the lawsuit was the so-called “staking”, which will be banned for US customers with immediate effect.
With staking, users can lend certain cryptocurrencies to so-called validators and receive a kind of interest in return. The validators check the transactions of certain blockchains such as Ethereum and deposit cryptocurrencies as collateral. This is how they show that they have an incentive to properly confirm transactions. If they waved fictitious transactions through, the collateral would be gone.
Kraken had offered its users to benefit from staking more easily and from within their accounts. The industry speaks of “staking as a service”. It saves users from registering directly with staking providers.
In the eyes of the SEC, Kraken violated existing securities laws with its “staking as a service” program. The exchange should have filed its program with the SEC. Then it would be ensured that “the necessary disclosure obligations and security precautions are maintained,” emphasized SEC boss Gary Gensler.
The fine was met with fierce criticism in the industry. Crypto executives sense a large-scale offensive against exchanges and other providers, involving a whole range of financial regulators. Rebecca Rettig, a lawyer at the blockchain platform Polygon Labs, believes it is a repeat of “Operation Stranglehold” under the administration of then US President Barack Obama. At that time, the Justice Department had taken on the banks and their connections to arms suppliers. US President Joe Biden was Obama’s Vice President at the time.
Coinbase CEO criticizes procedures
Coinbase, the largest American crypto exchange, is also preparing for trouble over its own staking program. CEO Brian Armstrong wrote on Wednesday evening on the short message service Twitter. He’s heard rumors that the SEC is planning to abolish staking for all retail investors. “I hope that’s not the case because I think it would be a terrible path for the US to take,” Armstrong said in an unusually direct critique of the influential regulator. Coinbase shares plummeted 14 percent on Thursday.
However, after court documents from Kraken and the SEC were released, Coinbase’s chief counsel, Paul Grewal, emphasized that the in-house staking program is “very different” from Kraken’s. In addition, in the case of Coinbase, it is “not a security”.
The deal is important for exchanges to diversify their business model and reduce their reliance on trading fees. SEC boss Gensler had already emphasized last year that he considers many cryptocurrencies to be securities. He has had his sights set on staking and also simply lending cryptocurrencies in particular for some time.
However, the bankruptcy of FTX, once the third largest crypto exchange in the world, has raised awareness among a number of authorities. The New York financial regulator NYDFS, for example, is said to have launched an investigation into the stablecoin provider Paxos, reports the industry service Coindesk. It should be about both the stable value Pax Dollar and the stablecoin of the world’s largest crypto exchange Binance, which is published by Paxos.
Fed warns financial institutions
At the beginning of January, the US Federal Reserve, which is also an important bank regulator, together with two other authorities issued a warning to financial institutions. Banks that work with crypto firms should be aware that they are taking high risks, “as demonstrated by the high volatility and vulnerabilities in the industry over the past year,” a statement said at the time. Authorities are still evaluating whether and how banks could do business with crypto firms under existing regulations.
In their criticism, Rettig and Armstrong emphasized that companies were not given the opportunity to cooperate with regulators and that the Kraken program had to be stopped directly. Rettig speaks of “a systemic dismantling of the crypto industry in the USA”.
Criticism of the crackdown is also stirring within the SEC. Commissioner Hester Peirce, who is pro-industry, is calling for clearer rules of the game from her own agency. Filing lawsuits “to show people in a new industry what’s against the law isn’t an efficient and fair way to regulate,” Peirce said. A regulatory package for the crypto world has been discussed for a long time, but in deeply divided Washington it is considered unlikely that new laws will be introduced in the foreseeable future.
Crypto prices, which had initially recovered significantly since the beginning of the year, also fell. Bitcoin, the largest and oldest cryptocurrency, lost almost five percent on Thursday and cost a good $21,840. Ether, number two, fell a good six percent and cost $1,547.
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