The SEC vs. crypto: No to staking and stablecoin

If one was in doubt, the Securities and Exchange Commission (SEC) in the US is not pleased by crypto companies, further stressed by the past week. On Thursday last week, crypto exchange Kraken agreed to pay $30mn to settle an SEC allegation that Kraken’s staking service was an illegal sale of securities and end its staking service to US clients. Following the settlement, SEC chair Gary Gensler went on CNBC’s Squawk Box to state that Kraken failed to show full disclosures and register with the SEC. In a response to the interview, Kraken co-founder and CEO Jesse Powell went to Twitter to ironically write: “Oh man, all I had to do was fill out a form on a website and tell people that staking rewards come from staking? Wish I'd seen this video before paying a $30m fine and agreeing to permanently shut down the service in the US. How dumb do I look.” Powell is presumably referring to the fact that crypto companies cannot easily register with the SEC if being able to register at all.

Similar to Kraken, Coinbase is likewise a large custodial staker. For instance, the latter controls 11.38% of all staked Ether on the Ethereum network. Although Coinbase is US-regulated similar to Kraken, Coinbase has stated that its staking service is yet available to US clients, and it appears that Coinbase is willing to challenge the SEC in court in case the agency is to target their staking service next.

On Sunday, the Wall Street Journal reported that the SEC plans a lawsuit against crypto intermediary Paxos alleging that the firm issues an unregistered security due to the firm’s Binance-branded stablecoin known as Binance USD or BUSD for short. Although it is branded by the name of Binance, it is fully issued by Paxos, with the latter regulated in the US namely in New York. With a supply equal to $16.1bn, BUSD is the third-largest stablecoin. Not even a day after the report by WSJ, Paxos announced this morning that it ceases the minting of BUSD and ends its relationship with Binance. In other words, holders may only redeem BUSD but cannot issue new ones.

As Paxos is not ceasing its own branded stablecoin known as Pax Dollar, it appears that US regulators were particularly not pleased by a US-regulated entity issuing a stablecoin bearing the name of a non-US-regulated entity namely Binance. If this is the case, it is not as negative as it otherwise could have been for the industry in the event US regulators target every single stablecoin. Stablecoins are a key cornerstone for the crypto industry, so the targeting of stablecoins as a whole would be severely destructive for crypto.

More regulatory scrutiny

It is obvious that the SEC and perchance other US agencies are watching the crypto market much closer than they used to. This comes after they arguably failed to oversee the industry last year upon the collapses of Terra and FTX among many others. In our 2023 crypto outlook, we wrote about potential overreach and downright damaging regulatory crypto frameworks, as various governmental agencies may want to show the crypto market who is in charge following the collapses last year. Based on the events in the last week, it appears that this is true, as regulators seem to remedy their lack of oversight last year by now overextending their reach by largely targeting already highly regulated US-based entities such as Kraken and Paxos, instead of approaching companies and services not already regulated. This may have a greatly negative impact on the adoption and innovation of crypto.

To be realistic, it likely not ends with Kraken and Paxos and crypto services such as staking and stablecoins but will extend to other intermediaries and services, so market participants should be prepared for further potential imminent hostile regulation and oversight along with the imaginable consequences it may bring.