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SEC Action on Kraken the First in a New SEC Crackdown
If one were to lab-engineer a policy to engender the greatest amount of uncertainty and confusion in the crypto industry and among investors, the best, final product wouldn’t look much different than the one currently driving the US Securities and Exchange Commission.
The SEC’s latest move against Kraken, one of the most compliant exchanges in existence, is making major waves in crypto, and the first direct regulatory attack on the major remaining crypto exchanges, industry advocates are saying, and we agree.
Kraken on Thursday agreed to shutter its US staking services and pay some $30 million in fines, after the SEC declared that its staking operations were no different than the sale of securities. Attorneys, consultants and even former regulators fear it’s the opening salvo in a new campaign against the industry.
The chairman of the SEC has made plain his intent to come for the cryptocurrency titans, doing everything short of announcing a schedule of enforcement actions, and his counterpart at the Commodity Futures Trading Commission (CFTC) is promising a big year. On the criminal side, the Department of Justice (DOJ) is unlikely to let other companies skate away from behaviors that warranted criminal charges in previous cases.
“We're in the early days of some major upheaval,” said Mick Mulvaney, a former acting White House chief of staff under former President Donald Trump, who is now advising a company in the digital-assets sector. “The industry is giving people that hate it a lot of ammunition."
As Jaret Seiberg – an analyst with Cowen – put it: “We expect the SEC to rely on enforcement over the upcoming year to shape the crypto sector. We see the greatest threat to trading platforms, which we suspect the agency will contend are illegal exchanges.”
Binance and its executives have reportedly been in the Justice Department’s sights for potential criminal money-laundering charges. But it may draw SEC attention, too, because when the U.S. regulator went after its rival, FTX, the SEC named that exchange’s native token FTT a security, potentially meaning Binance’s BNB is similarly vulnerable.
Most recently, Binance admitted that it accidentally kept some of its own funds in the same wallet as user assets – the kind of commingling that often draws severe sanctions for regulated companies, even if the company discloses the breach itself.
The industry’s high-profile lapses over use of customer money – conjuring the specter of the collapse of MF Global for Washington’s regulatory community – has spurred a push to segregate crypto customers’ money as one of the main drives for lawmakers seeking to set up regulatory fences around crypto.
A lack of walls around investors’ crypto assets also sparked one of several run-ins another prominent exchange, Coinbase, has been having with the SEC.
A Coinbase statement created an uproar last year over how customer assets are maintained at the exchanges when the company disclosed investor money could be tied up in a hypothetical bankruptcy, and it accused SEC guidance for forcing it to make the statement. The company has also reportedly been dealing with an SEC investigation into a number of its business practices, including staking. As with Kraken, staking has been a significant service offered to Coinbase customers, though the company argued Thursday that Kraken was essentially offering a yield product while Coinbase isn’t.
“Coinbase’s staking services are fundamentally different and are not securities,” said Paul Grewal, chief legal officer, trying to head off the perception that the SEC is signaling that these common crypto services could be targeted at other companies.