Securities and Exchange Commission

SEC argues recent court case weakens Ripple Labs’ ‘fair notice’ defense

The SEC filed a letter supporting its motion for summary judgment against Ripple Labs, citing a separate court case it had recently won.

A recent court judgment further weakens a key defense made by technology firm Ripple Labs in its ongoing legal battle with the United States Securities and Exchange Commission (SEC), the regulator has claimed to a federal judge.

In an April 11 letter to U.S. District Judge Analisa Torres — who is overseeing the SEC vs. Ripple Labs case — the SEC highlighted the judge’s opinion in a separate enforcement action it won against investment advisory firm Commonwealth Equity Services.

In that case, it was deemed that a longstanding court precedent provides sufficient “fair notice.”

The SEC argued that the longstanding supreme court precedent, which gave rise to the Howey test — which is used to determine what constitutes a security — provides Ripple Labs with fair notice as to what a security is, just as the precedent referred to in the Commonwealth case had.

The SEC added its case with Commonwealth provides “additional authority” for rejecting Ripple’s fair notice defense.

Related: XRP price rally stalls as SEC vs. Ripple ruling drags on — 25% drop ahead?

Ripple’s argument that the SEC had failed to provide it with fair notice before suing it for committing securities fraud in December 2020 is regarded as one of its key defenses.

While many observers, such as crypto exchange Coinbase believe the defense to be a winner, legal experts such as John Deaton have a different opinion.

Deaton has previously noted that the fair notice defense only comes into play if the judge decides Ripple’s XRP (XRP) token was a security at any time between 2013 and the present. Deaton believes Ripple Lab’s best chance lies in convincing the judge that XRP is not a security based on the Howey test.

Hodler’s Digest, April 2–8: BTC white paper hidden on macOS, Binance loses AUS license and DOGE news

SEC’s Gensler seeks $2.4B in funding to chase down crypto ‘misconduct’

United States Securities and Exchange Commission Chair Gary Gensler says the regulator is spread thin and needs additional funding to keep up with the “increased complexity in the capital markets.”

United States Securities and Exchange Commission Chair Gary Gensler has thrown his support behind U.S. President Joe Biden’s request to allocate a record $2.4 billion in funding for the regulator, highlighting the ongoing need to crack down on “misconduct” in the cryptocurrency industry.

In prepared testimony for the March 29 budget hearing with the House Appropriations Committee, Gensler said the additional funding was needed to keep up the pace of innovation, adding:

“Rapid technological innovation in the financial markets has led to misconduct in emerging and new areas, not least in the crypto space. Addressing this requires new tools, expertise, and resources.”

The additional funding would allow the SEC to hire 170 additional staff, most of whom would work within its enforcement and examination divisions, said Gensler.

Related: Beaxy exchange shutters after SEC presses multiple charges against founder, execs

The SEC chair said that the prior year’s budget increase allowed it to bring staffing levels above what it was in 2016 for the first time, but said the regulatory agency was still stretched thin, adding:

“As the cop on the beat, we must be able to meet the match of bad actors. Thus, it makes sense for the SEC to grow along with the expansion and increased complexity in the capital markets.”

Gensler again described crypto as the wild west, suggesting the nascent industry is “rife with noncompliance,” and that crypto investors were putting their “hard-earned assets at risk in a highly speculative asset class.”

According to Gensler, the regulator “received more than 35,000 separate tips, complaints, and referrals from whistleblowers and others in FY 2022,” which helped it bring more than 750 enforcement actions and “resulted in orders for $6.4 billion in penalties and disgorgement.”

Thirty of these actions were related to the crypto industry, which resulted in $242 million in monetary penalties and represents a 36% increase over the 22 actions announced in 2021.

Web3 Gamer: Shrapnel wows at GDC, Undead Blocks hot take, Second Trip

Lawmakers should check the SEC’s wartime consigliere with legislation

Securities and Exchange Commission Chair Gary Gensler has a lot in common with The Godfather’s Michael Corleone, according to the Cato Institute’s Jack Solowey and Jennifer Schulp.

When Michael Corleone ordered hits on rival bosses in The Godfather, he had Don Cuneo locked inside a revolving door and shot. Getting whacked while trapped behind a barred door appears to be the treatment United States Securities and Exchange Commission Chair Gary Gensler has in mind for U.S. crypto projects based on recent SEC enforcement activity and comments by the chair.

The SEC should not be left to wage an unsupervised dirty war on crypto. Congress must both defend its oversight authority and give American crypto developers, entrepreneurs and users a clear path to lawfully carry on their business. Providing a common-sense disclosure framework for asset-backed stablecoins is the place to start.

Gensler’s SEC appears to be attempting to settle “all family business” with crypto. On Feb. 9, the SEC settled allegations that Kraken’s “staking-as-a-service” program (a way to earn rewards for helping to maintain crypto networks) constituted the illegal sale of unregistered securities. Later in the month, news emerged that the SEC sent a Wells notice to stablecoin issuer Paxos, indicating a potential future enforcement action over its Binance USD (BUSD) token (a Binance-branded asset designed to keep a 1:1 peg with the U.S. dollar), which the commission apparently also alleges is an unregistered security. And Gensler indicated in a recent interview that basically every crypto project — “everything other than Bitcoin” — could have an SEC target on its back.

The SEC maintains it is merely enforcing existing registration and disclosure requirements on crypto tokens and services it considers securities. But this is misleading for two reasons.

One, the applicability of securities laws to the projects at issue — Kraken’s staking service and Paxos’s BUSD stablecoin — is, at the very least, contestable. Even more so if the idea is that every crypto token other than Bitcoin (BTC) is to be considered a security. And two, a regulator interested in getting consumers the best disclosures about new products, including stablecoins, would provide clear guidance on how to do so. The SEC hasn’t.

Related: Expect the SEC to use its Kraken playbook against staking protocols

With Kraken, the SEC alleged its staking service involved a type of security known as an investment contract. In broad strokes, these securities cover an investment with an expectation of profit based on others’ managerial or entrepreneurial efforts. Whether Kraken’s service was is debatable. With Paxos, we don’t yet know what type of security the SEC thinks describes the BUSD stablecoin and why, but generally speaking, it’s harder, although not necessarily impossible, to see how an asset that a buyer does not expect to generate a profit is a security.

Troublingly, Gensler’s comments also could imply that he views even highly decentralized tokens, like Ether (ETH), as securities. This is inconsistent with previous comments by SEC officials, as well as the idea that securities laws are to address managerial risks — hallmarks of centralized bodies, not decentralized software protocols.

Moreover, even if one assumes that a particular token or service were a security, there’s still the matter of registration. And this is where the SEC looks like the hitman bolting the door.

It was entirely disingenuous when Gensler declared the process for registering a crypto security is “just a form on our website.” As Michael Corleone might have scowled, Gensler’s line “insults my intelligence and makes me very angry.” Because as SEC Commissioner Hester Peirce explained in her dissent against the Kraken action, “in the current climate, crypto-related offerings are not making it through the SEC’s registration pipeline.”

Lawmakers have a vital role in restoring administrative accountability. In a Feb. 14 Senate Banking Committee hearing, Republican Senator Tim Scott told the hearing, “If Chairman Gensler is going to take enforcement action, Congress needs to hear from him very soon.” Across the aisle, Democratic Senator Kirsten Gillibrand has voiced similar sentiment: “I have many concerns about Chairman Gensler and his approach to this space.”

Oversight would be most welcome. Congress should go a step further by legislating, first providing a practical registration path for stablecoins.

Related: Gary Gensler’s SEC is playing a game, but not the one you think

Ostensibly, the SEC wants issuers to disclose stablecoin risks to consumers. The main risk is a stablecoin will “break the buck,” losing 1:1 redeemability with the asset it’s pegged to, such as the U.S. dollar, because the issuer doesn’t have the reserves it claims to. Basic requirements around collateral and disclosures subject to antifraud authority would directly address this.

Some, however, including the President’s Working Group, have argued more is needed and only insured depository institutions should issue stablecoins. But limiting stablecoin issuance to banks is just another way of barring the door to new market entrants. Straightforward rules enabling competition, not protectionist restrictions, are the path to continued financial leadership.

The SEC shouldn’t be left in the shadows to try to snuff out Americans’ work on and access to a new class of technology. As House Financial Services Committee Chairman Patrick McHenry has recognized, the future of digital assets “is a major political and economic question that must be decided by Congress.”

That decision should include initiating straightforward stablecoin legislation and democratic accountability. After all, a regulator is in no position to demand of Congress, “Don’t ask me about my business.”

Jack Solowey is a policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives (CMFA), focusing on financial technology, crypto and DeFi. He holds a law degree from the New York University School of Law and a bachelor of arts from the University of Pennsylvania.
Jennifer J. Schulp is the director of Financial Regulation Studies at the Cato Institute’s CMFA, where she focuses on the regulation of securities and capital markets. She holds a law degree from the University of Chicago Law School and an undergraduate degree from the University of Chicago.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

SEC files objection to Binance.US bid for Voyager assets

The SEC has moved to bar final approval of Binance.US’ $1 billion bid for assets belonging to bankrupt crypto lending firm Voyager Digital.

The United States Securities and Exchange Commission (SEC) has objected to Binance.US’ move to acquire over $1 billion of assets belonging to the defunct cryptocurrency lending firm Voyager Digital.

According to a Feb. 22 filing submitted to the U.S. Bankruptcy Court for the Southern District of New York, the SEC believes that some aspects of the asset restructuring plan of Binance.US’ acquisition could breach securities law.

The SEC is formally investigating whether Binance.US and related debtors violated anti-fraud, registration and other provisions of the federal securities laws. The SEC noted particular concern around the security of assets through the planned acquisition.

The SEC argues information provided in the planned purchase of Voyager assets fails to adequately outline whether Binance.US or affiliated third parties will have access to customer wallet keys or control over anyone with access to such wallets.

Related: CZ denies report Binance is considering major breakup with US business partners

Furthermore, the filing notes insufficient provision of safeguards to ensure that customer assets are not transferred off the Binance.US platform. The SEC also argues that Binance.US has not declared internal controls and practices ensuring the safety of customer assets.

The SEC is calling for Binance.US to address these issues by providing information regarding who has access to customer assets and the necessary controls after the deal is finalized.

The SEC is mainly focused on part of Binance.US’ initial plan and disclosure statement for its Voyager bid. The company will retain the right to sell cryptocurrencies belonging to Voyager to distribute to account holders, which is the main point of concern for the U.S. regulator.

“However, the Debtors (Binance.US) have yet to demonstrate that they would be able to conduct such sales in compliance with the federal securities laws.”

According to the filing, various cryptocurrency transactions will need to take place to rebalance funds for redistribution to account holders, which the SEC believes may violate sections of the Securities Act.

The regulator argues that the disclosure statement provided by Binance.US and other debtors does not address the possibility of these transactions being unlawful. It’s believed that this possibility could impact the estimated 51% recovery of funds paid out to Voyager account holders and claimants.

A footnote of the filing highlights the potential of Voyager buying and selling certain digital assets to rebalance asset holdings. The SEC flags the potential sale of Voyager Token (VGX), issued by Voyager, which “may constitute the unregistered offer or sale of securities under federal law.“

The SEC also notes that Binance.US could be acting as an exchange under existing Exchange Act laws, which it is prohibited to do without the necessary registration as a national securities exchange or exemption from doing so.

The filing highlights concerns over the lawfulness and overall ability to carry out planned asset restructuring through the acquisition and questions whether Voyager debtors will be able to recoup some of their assets following the bankruptcy of the firm:

“Creditors and stakeholders are entitled to know whether this transaction provides them a meaningful economic benefit, or whether this is just a $20 million sale of Voyager’s customer list to Binance.US.”

As Cointelegraph reported, Binance is looking to remedy previous regulatory and law-enforcement investigations in the U.S. The firm is facing the possibility of fines relating to previous compliance issues.

Binance is also dealing with regulatory action toward Paxos, which is responsible for issuing Binance’s U.S. dollar backed Binance USD (BUSD) stablecoin. The New York Department of Financial Services ordered the firm to stop minting BUSD tokens from Feb. 21. Paxos has countered claims from the SEC that BUSD is a security after receiving a Wells notice from the regulator for failing to register the token as a security in the U.S.

US crypto regulation happening ‘behind closed doors’ — Blockchain Association CEO

The “work has been done” for stablecoin regulation in the U.S., but many in Washington D.C. are feeling “burned” and “betrayed” over the FTX collapse last year.

The United States Congress needs to take control of crypto legislation and make it a more “open process” where the entire marketplace is looked at “comprehensively,” suggests Kristin Smith, CEO of the Blockchain Association — a prominent U.S. crypto industry nonprofit.

In a Feb. 22 Bloomberg interview, Smith said the industry needs U.S. lawmakers to lead crypto legislation despite it making the process “very slow,” with regulators “stepping in” in the interim.

Smith noted that despite regulators “moving very quickly,” progress on legislation is happening “behind closed doors,” suggesting it’s vital for more industry involvement in an “open process,” which would involve Congress.

Smith believes the issue with regulators leading legislation with enforcement actions and settlements relates to “very specific facts and circumstances.”

She explained it’s a difficult position for Congress at the moment, as many in Washington D.C. who “were close” to former FTX CEO Sam Bankman-Fried and FTX feel “burned” and “betrayed” over the collapse of the cryptocurrency exchange in November 2022.

Smith is hopeful that stablecoin regulation will soon happen in the U.S., saying Congress has been looking at it “since 2019” and the “work has been done.” She said it “came close” to happening last year before the collapse of FTX.

Related: FTX poked the bear and the bear is pissed — O’Leary on the crypto crackdown

She added that crypto risks are different from traditional financial services, so regulators must spend more time looking at market regulation and “tailor to those risks.”

Smith suggested that stablecoin and “market side” regulation should be a higher priority than focusing on legislating crypto-related criminal activity, saying that public ledgers make it “much more transparent” than we see in the traditional financial system.

This comes after the Blockchain Association’s chief policy officer, Jake Chervinsky, took to Twitter on Feb. 15, stating that no matter how many enforcement actions the Securities and Exchange Commission and Commodity Futures Trading Commission bring, they are “bound by legal reality,” adding that “neither” has the authority to “comprehensively regulate crypto.”

Breaking: SEC sues Do Kwon and Terraform Labs for fraud

“We allege that Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required for a host of crypto asset securities,” said SEC chair Gary Gensler.

The United States Securities and Exchange Commission has filed a lawsuit against Terraform Labs and its founder, Do Kwon, for allegedly “orchestrating a multi-billion dollar crypto asset securities fraud.”

In a Feb. 16 statement, the SEC said that Kwon and Terraform offered and sold an “inter-connected suite of crypto asset securities, many in unregistered transactions.” The agency pointed to Terraform Labs’ now-collapsed algorithmic stablecoin, TerraClassicUSD (USTC), and its connected cryptocurrency, Terra Luna Classic (LUNC).

The SEC also took issue with mAssets, crypto derivatives that mirror the stock price of publicly listed companies, and Terraform’s issuance of Mirror (MIR), a governance token for the Mirror protocol that lists mAssets.

SEC chair Gary Gensler said in a statement that Kwon and Terraform “failed to provide the public with full, fair, and truthful disclosure,” particularly for USTC and LUNC, which were formerly named Terra (LUNA) and TerraUSD (UST). Gensler added:

“We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”

The SEC filed a 55-page complaint in the U.S. District Court for the Southern District of New York with charges relating to violations of the registration and anti-fraud provisions of the Securities Act and the Exchange Act.

In the complaint, the SEC said that Terraform and Kwon “touted and marketed” its Anchor Protocol, which at one point was advertised to pay out 20% interest on USTC deposits. It also alleged Terraform and Kwon misled investors about the stability of Terra’s stablecoin.

Related: Korean e-commerce exec accused of accepting LUNA for shilling Terra Labs

Last May, USTC lost its peg to the U.S. dollar, causing its price — and the price of LUNC — to effectively collapse to zero. This resulted in a wider collapse in the digital asset market that wiped out an estimated value of $40 billion.

A one-year chart of USTC’s price showing the rapid depeg event in May. Source: Coingecko

Gensler commended the SEC’s staff on their investigation, adding: “The defendants attempted to prevent us from obtaining important information about their business.”

“This case demonstrates the lengths to which some crypto firms will go to avoid complying with the securities laws,” he added.

Kwon, a South-Korean national, is currently at large and believed to be in Serbia after leaving his residence in Singapore sometime in September following a Seoul court issuing an arrest warrant for him. Interpol reportedly issued a Red Notice for Kwon to law enforcement worldwide later in September.

Kwon has denied he’s hiding from authorities and Terraform have claimed South Korea’s case against Kwon is “highly politicized.”

Cointelegraph contacted Terraform Labs for comment but did not receive an immediate response. Do Kwon could not be reached for comment.

Expect the SEC to use its Kraken playbook against staking protocols

Some observers have suggested the SEC’s action against Kraken will push users toward DeFi protocols. The reality is that the SEC is coming for those as well.

The United States Securities and Exchange Commission (SEC) settled with Kraken on Feb. 9 for an action taken against the exchange’s staking rewards program. Kraken paid a $30 million fine and agreed to halt the program.

Set aside for a moment the irony that the SEC is going after a solvent firm in the crypto space with a decade-long reputation as a good actor. Kraken has been helping settle verified Bitcoin (BTC) claimants from the hacking of rival exchange Mt. Gox over a decade ago. It invented the use of Merkle Root data to create verifiable proof of reserves. It allowed customers to effectively crowdsource audits of the asset side of the balance sheet by verifying what’s in their account against data on-chain.

And while Sam Bankman-Fried urged customers to keep their tokens on FTX for obvious reasons, Kraken founder Jesse Powell has always been a “not your keys, not your coins” guy. Meanwhile, the SEC was asleep on FTX, Terra and Three Arrows Capital. This week the SEC acted like a beat cop who pulls over a commuting soccer mom and throws the book at her to act tough on crime after a streak of robberies.

We have to set aside other political hypocrisy in this affair, like politicians decrying proof-of-work (PoW) blockchains yet now seeking to outlaw staking on proof-of-stake (PoS) blockchains. Or that Kraken tried to come into compliance with the SEC by applying for an Alternative Trading System license but got crickets in response.

The SEC emphasized that Kraken’s staking program was custodial, pooling investor assets together. Some on Twitter were quick to comment that this is actually great news for crypto. “Hey, look, SEC Chairman Gary Gensler is parroting our motto of ‘not your keys, not your coins.’ This just means more decentralization of staking in PoS blockchains.”

Related: Staking ban is another nail in crypto’s coffin — and that’s a good thing

Not so fast. Lido and Rocket Pool are innovative alternatives to centralized exchange staking programs, but they also pool together tokens. Pooling is essential for most retail investors to stake in Ethereum due to the minimum stake of 32 Ether (ETH) (~$50,000). The SEC’s enforcement playbook against Kraken will eventually be used against those protocols. The SEC is adept at warping the definition of security in the statute to cover all sorts of crazy things, from sales of chinchillas to online gambling to orange groves. The SEC will eventually apply its playbook to more decentralized staking protocols if the founders aren’t sufficiently anonymous.

It is a mistake to assume that Gensler believes in the cypherpunk philosophy behind the motto “not your keys, not your coin.” The SEC’s proposed reforms to regulating alternative trading systems last year — which would force developers who write smart contract code to register as exchanges — demonstrates how he views decentralized finance (DeFi) better than anything, as this is impossible.

It’s becoming clear from a pattern across financial regulators and the White House that the subtext in the administration’s policy toward crypto is that it should be choked off. The White House is against proof-of-work; the SEC is hitting proof-of-stake delegation, and the banking regulators are using subtle tools of examination to encourage banks to deny bank account access to anyone with “crypto” in their name even if the customer in question doesn’t actually hold crypto.

Related: My story of telling the SEC ‘I told you so’ on FTX

By all means, if your proof-of-work chain would operate more securely, effectively, or fairly under a proof-of-stake system, make the transition like Ethereum did. But don’t switch to proof-of-stake out of some hope it will protect you from regulatory or political risk because it won’t.

As a securities law professor, I can put on my analysis hat and find some aspects of Kraken’s staking rewards program that increased the risk of it being deemed a security, particularly some of the advertising communications. But that doesn’t mean the program should end or that a fine of this nature is warranted when there has been no fraud or investor harm.

Instead, a working rule set for custodial intermediaries offering this unique financial product should be drafted, as the SEC has done in the past for asset-backed securities, real estate investment trusts, oil firm master limited partnerships, etc. There are legions of securities lawyers working in the crypto space who would help the SEC write the rulebook today if given the opportunity. They could do so through an open SEC call for comment on crypto regulation, as I urged Gensler to adopt when I advised him. SEC Commissioner Hester Peirce’s dissent over this fine also calls for a set of reasonable rules.

Until that is possible, the only hope forward for crypto is ongoing legal challenges to administration overreach and protocol builders that stay true to the cypherpunk philosophy of Timothy May.

J.W. Verret is an associate professor at the George Mason Law School. He is a practicing crypto forensic accountant and also practices securities law at Lawrence Law LLC. He is a member of the Financial Accounting Standards Board’s Advisory Council and a former member of the SEC Investor Advisory Committee. He also leads the Crypto Freedom Lab, a think tank fighting for policy change to preserve freedom and privacy for crypto developers and users.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Breaking: Paxos facing SEC lawsuit over Binance USD — Report

According to The Wall Street Journal, the notice relates to Binance USD, which the United States Securities and Exchange Commission is alleging is an unregistered security.

The United States Securities and Exchange Commission has reportedly told Paxos Trust Co. that it plans to sue the stablecoin issuer for violation of investor protection laws in relation to its Binance USD (BUSD) token.

According to a Feb. 12 report in The Wall Street Journal citing people familiar with the matter, the SEC has issued a Wells Notice to Paxos — a letter the regulator uses to tell companies of planned enforcement action.

The notice alleges that Binance USD is an unregistered security, according to the people.

According to Investopedia, after a Wells Notice is received, the accused is allowed 30 days to respond to it via a legal brief known as a Wells Submission, a chance to argue why the charges should not be brought against t prospective defendants.

An SEC spokesperson told Cointelegraph that it “does not comment on the existence or nonexistence of a possible investigation.”

A spokesperson for Binance said that BUSD is a “Paxos issued and owned product,“ with Binance licensing its brand to the firm for use with BUSD.

The spokesperson added that Paxos is regulated by the New York Department of Financial Services and that BUSD is a “1 to 1 backed stablecoin.”

“Stablecoins are a critical safety net for investors seeking refuge from volatile markets and limiting their access would directly harm millions of people across the globe,” the Binance representative said. “We will continue to monitor the situation. Our global users have a wide array of stablecoins available to them.”

Cointelegraph contacted Paxos for comment but did not receive an immediate response.

Paxos is the owner and issuer of BUSD,  a U.S. Dollar-collateralized stablecoin that has been around since the firm struck a partnership with Binance in September 2019. It is the third-largest stablecoin, with a market cap currently exceeding $16 billion.

Paxos is also the creator of the Paxos Dollar (USDP) stablecoin, which was launched in 2018, and is also behind digital asset exchange itBit, which it launched in 2012 alongside the founding of Paxos.

FOX Business journalist Eleanor Terrett tweeted on Feb. 12 that the move was a “unilateral effort” from the SEC and other regulators to “blitz crypto.” She claimed that more Wells notices are expected to be sent over the coming weeks.

The reported action is the latest move by the SEC in its seeming crackdown on crypto-related firms.

Related: Coinbase will ‘happily defend’ staking in US courts, says CEO

On Feb. 9, the regulator announced a $30 million settlement with crypto exchange Kraken for its failure to register its crypto staking program which the SEC claimed was a security. Following the action SEC Chair Gary Gensler warned crypto firms to “come in and follow the law.”

The SEC faced criticism from its own people for its action against Kraken. On Feb. 10 SEC Commissioner Hester Peirce said the SEC’s conduct “is not an efficient or fair way of regulating,” slamming her own agency for shutting down a “program that has served people well.”

Reports also emerged last week that Paxos was being investigated by the NYDFS. However, the exact motive behind the probe is currently unclear.

This article was updated on Feb. 13 at 2:00am UTC to add a response from a Binance spokesperson and at 11:45 am UTC to add a response from a SEC spokesperson. 

Kraken staking ban is another nail in crypto’s coffin — and that’s a good thing

The SEC’s move to ban staking on Kraken is going to encourage more people to move toward decentralized options beyond the agency’s reach.

Rumors of an impending crypto ban came to fruition on Feb. 9 with the Securities and Exchange Commission’s enforcement action against Kraken, which resulted in a settlement where the exchange agreed to end its staking services for American users. The action will likely extend to all companies based in the United States.

Reactions were predictable depending on where you stand on crypto in general. Crypto advocates railed against regulators who are slowly asphyxiating this burgeoning industry, while skeptics celebrated crypto’s impending demise. The advocates have it right. Antagonistic regulators will force crypto into friendlier jurisdictions, which will reap the economic benefits. The skeptics have it right, too. This event, and much of those from last year, is killing crypto. Their apparent glee is misplaced, though. This is a good thing.

Emboldened by the slew of blow-ups of crypto businesses in 2022, the SEC and the Commodities Futures Trading Commission have begun to take an increasingly harder line with the crypto industry. They’ve been targeting fiat on-ramps via U.S. banks. They are now targeting staking. Brian Armstrong, CEO of centralized exchange Coinbase, intimated on Feb. 9 that “the SEC would like to get rid of crypto staking in the U.S. for retail customers.” A day later, Kraken announced it would be shuttering its staking-as-a-service program as well as paying a $30-million fine. It now seems likely something akin to a ban on staking will extend to all U.S.-based companies.

Armstrong rightly stated in his tweets that a ban on staking “would be a terrible path for the U.S. if that was allowed to happen.” If U.S. regulators press too hard, they might be responsible for the U.S. ceding ground in the crypto industry to other countries. Better stop now because crypto businesses are already leaving the United States.

The latest action by the SEC is even drawing criticism from within the SEC. Commissioner Hester Peirce objected to the rashness of this enforcement action, stating that “using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating.” It creates uncertainty and forestalls investment. What is needed are fair and clear rules. Barring that, American leadership in crypto will fade.

However, the ban on staking is a good thing for crypto.

Good riddance.

Related: My story of telling the SEC ‘I told you so’ on FTX

Staking with an incorporated business is antithetical to what makes crypto special. Staking is used to secure global networks like Ethereum’s, which is designed to be controlled by no one. Since companies operate under the purview of governments, there is an obvious dissonance between them and staking. This might not be a problem if businesses represented a trivial amount of total staking activity, but just Coinbase and Kraken, both domiciled in the U.S., represent roughly 20% of total staked ETH.

It would be great if all government-regulated companies accounted for considerably less than 10% of Ethereum’s staking, or any public blockchain’s for that matter. It might be the case that the fastest way to achieve this change is to ban staking! After Mr. Armstrong’s tweets, decentralized staking projects’ token prices got a boost. Hopefully, this will translate into an increase in their staking percentages. There was another bump upon the Kraken announcement. If the SEC continues, expect to see a significant shift away from centralized to decentralized staking.

This is part of a larger trend the crypto industry began last year. When opaque crypto business after business went insolvent like falling dominoes, people began looking for viable on-chain alternatives. Suddenly, the quaint values that defined early crypto adopters weren’t so quaint anymore — e.g., “not your keys, not your coins” or “don’t trust, verify.”

Related: Digital Currency Group’s Genesis implosion: What comes next?

People began looking for trustless platforms for things like derivatives and yield. We can probably add staking to the list, too. Luckily, on-chain technology is now mature enough to offer a comparable experience to centralized services. This experience will only become better as the tech continues to develop rapidly, and as more people move their assets on-chain.

Fiat on-ramp exchanges like Coinbase will always play an important role in crypto, but it’s clear that eventually, every crypto-to-crypto service these intermediaries currently offer will be retired in favor of superior fully decentralized alternatives.

To the skeptics that say “crypto is dead.”

Simply reply, “Yes, crypto is dead. Long live crypto.”

Dennis Jarvis is the CEO of Bitcoin.com. He previously held various management and product management roles at Apple, Rakuten and distributed ledger startup Orb. He earned a bachelor’s degree in economics from Temple University and is an avid outdoorsman and ski instructor.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

SEC’s ‘one-dimensional’ approach is slowing Bitcoin progress: Grayscale CEO

Grayscale’s chief was the latest to take a swing at the authority for its so-called “regulation by enforcement” actions.

The approach to crypto regulatory enforcement by the United States Securities and Exchange Commission (SEC) has stalled the advancement of Bitcoin (BTC) in the country, according to the CEO of Grayscale Investments.

In a letter published in The Wall Street Journal on Jan. 23, the chief of the cryptocurrency asset management firm, Michael Sonnenshein, said he agreed with an assertion that the SEC was “late to the game” regarding crypto regulation and preventing the bankruptcy of FTX, adding:

“‘Late’ doesn’t capture what transpired here. The problem is the Securities and Exchange Commission’s one-dimensional approach of regulation by enforcement.”

Grayscale is currently suiting the SEC for denying the conversion of its Bitcoin trust to a spot-based exchange-traded fund (ETF).

He clarified the SEC “should certainly try to eliminate bad actors” but it shouldn’t hinder “efforts to develop appropriate regulation.”

The inaction by the regulator to stop such bad actors from entering the crypto industry “prevented Bitcoin’s advancement into the U.S. regulatory perimeter,” Sonnenshein wrote.

This has forced American investors to use offshore crypto businesses “with less protection and oversight,” he said.

“We are seeing the consequences of the SEC’s priorities play out in real-time — at the expense of U.S. investors.”

Cointelegraph has reached out to the Securities and Exchange Commission for comment.  

Sonnenshein’s opinion piece comes as Grayscale is suing the SEC for having “arbitrarily denied” Grayscale’s plans to convert its Grayscale Bitcoin Trust (GBTC) to a spot ETF.

The SEC argued that Grayscale’s proposal did not sufficiently protect against fraud and manipulation. Grayscale countered by saying that the SEC was arbitrarily treating spot-traded products differently from futures-traded products.

Grayscale is owned by the crypto conglomerate Digital Currency Group (DCG), which is currently undergoing financial difficulties.

DCG also owns the bankrupt Genesis Trading, which was charged by the SEC on Jan. 12 for allegedly selling unregistered securities.

Related: SEC leaked crypto miners’ personal information during investigation: Report

Over the weekend, John Reed Stark, a crypto skeptic and former SEC chief, lambasted the term “regulation by enforcement,” labeling it a “Bogus Big Crypto Catch Phrase.”

In a Jan. 22 post on Linkedin, he said the term was a “misguided, deflective effort designed to tap into sympathetic libertarian and anti-regulatory mores,” and called it “utter nonsense.”

He argued that “litigation and SEC enforcement are actually how securities regulation works.”