SEC staking decision provokes strong pushback from crypto firms and scathing criticism from within
(Kitco News) - The hours that followed the bombshell decision by the U.S. Securities and Exchange Commission (SEC) to charge the Kraken cryptocurrency exchange with the unregistered offer and sale of securities for its staking-as-a-service product saw a wave of pushback. And while resistance from crypto firms was predictable, there was also unexpected dissent from within the ranks of the regulator itself.
Coinbase was among the first to respond to the announcement, as the U.S. exchange was also targeted and investigated by the SEC for its staking offerings. Coinbase Chief Legal Officer Paul Grewal took to twitter with a defense of the exchange’s approach to staking, arguing that it was not at all the same as Kraken.
“These products are basically yield products,” Grewal said of Kraken’s now-discontinued staking services. “True on-chain staking services like ours are fundamentally different. For example: Our customers’ rewards are tethered to realities. They depend on the rewards paid by the protocol and commissions that we disclose. We don’t play games.”
Grewal said that Coinbase’s customers have a right to their rewards. “We can’t just decide not to pay any rewards at all.”
The CLO also addressed SEC Chair Gensler’s assertion that staking means investors sign away ownership of their crypto to the platforms. “Our customers' assets always remain theirs and are accounted for transparently in regular public audits,” he said. “We have been providing staking services to our customers for years, and these services were described at length in our public filings when we became a public company in 2021.”
Grewal concluded by repeating one of the main criticisms that U.S. crypto firms have leveled against Gensler’s SEC: the absence of clear regulatory guidelines.
“Rules making clear these distinctions would provide real clarity to the industry and our customers,” he said. “The public shouldn’t have to parse complaints in federal court to understand what a regulator expects.”
Crypto companies also received support in their battle against the Securities and Exchange Commission from within the regulator itself, as SEC Commissioner Hester Peirce offered a comprehensive and devastating dissent against her own agency’s decision.
Peirce argued that even if one accepts that these staking services constitute securities, “the more fundamental question is whether SEC registration would have been possible.”
She said that in the current anti-crypto climate, “crypto-related offerings are not making it through the SEC’s registration pipeline. An offering like the staking service at issue here raises a host of complicated questions, including whether the staking program as a whole would be registered or whether each token’s staking program would be separately registered, what the important disclosures would be, and what the accounting implications would be for Kraken.”
Peirce said the regulator has been aware of these crypto staking programs for a long time. “Instead of taking the path of thinking through staking programs and issuing guidance, we again chose to speak through an enforcement action,” she said. “Using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating.”
She also echoed Coinbase’s assertion that there are important differences between the various offerings. “Staking services are not uniform, so one-off enforcement actions and cookie-cutter analysis does not cut it,” she said.
Peirce said that the worst aspect of the SEC’s Kraken decision “is that our solution to a registration violation is to shut down entirely a program that has served people well,” noting that the program will no longer be available in the U.S., and the exchange was forced to agree to never offer any staking services in the country again, with or without registration.
“A paternalistic and lazy regulator settles on a solution like the one in this settlement: do not initiate a public process to develop a workable registration process that provides valuable information to investors, just shut it down.”
Peirce said that more transparency around these kinds of crypto-staking programs could be a good thing, but “whether we need a uniform regulatory solution and if that regulatory solution is best provided by a regulator that is hostile to crypto, in the form of an enforcement action, is less clear.”
Coinbase CEO Brian Armstrong was quick to retweet the SEC Commissioner’s dissent, and he reinforced her point about the regulator offering no legitimate options for the exchanges. “Well said,” he wrote. “There was no way to register (a disingenuous offer).”
Jason Allegrante, Chief Legal & Compliance Officer at Fireblocks, told Kitco News that he believes the SEC’s staking decision is part of a broader trend of regulators attempting to “limit the exposure of traditional financial and retail consumers” to the crypto sector.
“From an industry perspective, it is difficult to comply accurately when there is an absence of guidance and laws that clearly apply to the industry and specific offerings,” he said. “To have the regulator come in after already designing and launching the product and have a discussion on settling charges or discontinuing the product doesn’t provide the clarity we need.”
SEC Chair Gary Gensler also appeared on CNBC’s Squawk Box Friday morning, where host Andrew Sorkin pressed him on the possibility that staking services would continue to be offered by the platforms in other jurisdictions but would simply be denied to U.S. citizens. “330 million Americans are our clients,” Gensler said in response. “Kraken knew how to register, others know how to register, it's just a form on our website.”
On Thursday afternoon, the SEC announced that they had charged Kraken with the unregistered offer and sale of securities.
“The Securities and Exchange Commission today charged Payward Ventures, Inc. and Payward Trading Ltd., both commonly known as Kraken, with failing to register the offer and sale of their crypto asset staking-as-a-service program, whereby investors transfer crypto assets to Kraken for staking in exchange for advertised annual investment returns of as much as 21 percent,” they wrote. “To settle the SEC’s charges, the two Kraken entities agreed to immediately cease offering or selling securities through crypto asset staking services or staking programs and pay $30 million in disgorgement, prejudgment interest, and civil penalties.”
Kraken issued their own statement shortly after the SEC’s. “Today, two Kraken subsidiaries announced a settlement with the U.S. Securities and Exchange Commission (SEC) concerning Kraken’s on-chain staking program,” they wrote. “Because of this settlement, Kraken has agreed to end its on-chain staking services for U.S. clients.” They added that the exchange will continue to offer staking services for non-U.S. clients.
The Kraken exchange processes around $660 million in transactions each day, around 40% of the $1.6 billion in daily volume processed on number two exchange Coinbase, which is also based in the United States. Both are dwarfed by the over $23 billion in daily volume of Binance, which has moved into a near-monopolistic position among exchanges following the collapse of erstwhile number two FTX in November.