The US Securities and Exchange Commission (SEC) is causing a stir in two ways: it treats staking programs and stablecoins as securities and accuses the providers of failing to register. This could be drastic for the crypto market. But not everyone in the SEC agrees with Chairman Gary Gensler’s tough line.
The US Securities and Exchange Commission has indicted crypto exchange Kraken for offering illicit securities with its staking programs. Kraken has reached an agreement with the SEC to have the exchange shut down staking programs immediately and pay a $30 million fine.
Kraken has thus given in on a crucial issue: staking services, such as for Ethereum, are therefore considered security, i.e. a security-like financial product. “When investors hand over tokens to staking service providers, they lose control of those tokens and incur risks associated with those platforms,” the SEC said. With staking, Kraken has promised regular payouts based on the exchange performing for investors – a classic definition of a security.
“So that’s how stupid I look.”
Whether it’s staking, lending or otherwise, SEC Chairman Gary Gensler explains, “when offering investment contracts against investors’ tokens, one must provide the appropriate disclosure requirements and safeguards as required by securities laws.” Kraken’s approach is a clear signal that staking providers must register and meet all requirements.
In a CNBC interview , Gensler explains that Kraken “has not disclosed to the investing public the risks they are taking.” You can offer almost any investment product in the US if you disclose the risks fairly and truthfully. That is “our fundamental compromise.” When asked how Kraken’s staking service differs from Coinbase’s yield program, for example, Gensler reacts somewhat evasively. Whatever you call it, you have to register by filling out a form with the SEC and disclosing the risks.
Kraken CEO Jesse Powell sarcastically responded: “Oh man, all I had to do was fill out a form on a website and tell people that staking rewards come from staking? I wish I saw the video before paying a $30 million fine and shutting down service forever in the US. So that’s how stupid I look. Damn.”
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. Gosh. ⛽️?https://t.co/UPdQdnI6xN
— Jesse Powell (@jespow) February 10, 2023
At the same time, however, something astonishing happened that is perhaps typical for the USA but seems completely unthinkable here: On the same day, the SEC publishes a comment by SEC Commissioner Heister Peirce on its website, in which she very clearly positions herself against the decision . A supervisory authority makes its internal conflicts public! Just the idea of doing it that way should cause ventricular fibrillation in BaFin!
A “paternalistic and lazy” regulatory practice
The SEC, Peirce explains, has shut down Kraken’s staking program, calling it a victory for investors. “I disagree and disagree.” Whether Kraken should have registered staking is the one question that you can agree or disagree with. But another question is more fundamental: whether registration would have been possible at all? Peirce doubts this.
Staking programs have existed for a long time. It would have been correct if the SEC had offered guidance here. “But instead we choose again to speak by enforcement.” This is neither fair nor efficient and does not do justice to the reality of staking. Peirce is particularly concerned that “our solution to a registration violation is to shut down a program that has served people well.” Regardless of registration, Kraken will no longer offer staking in the US. This is the ugly consequence of a “paternalistic and lazy” regulatory practice: “Don’t initiate a public process to develop a workable registry that gives investors valuable information, just shut it down.”
However, this internal controversy does not prevent the SEC from taking the next step, which could not be less groundbreaking for the industry: According to the Wall Street Journal , the Securities and Exchange Commission has informed the company Paxos Trust that it intends to launch a bring an action for breach of investor protection.
Security is what the SEC calls a security
Paxos is the issuer of the stablecoin Binance USD (BUSD), which is the third largest stablecoin after Tether and Circle dollars with 16 billion units. In the eyes of the SEC, it is an unregistered security — a security. Gensler explained in a panel discussion in November 2021 that he sees stablecoins as something similar to bank deposits or money market funds.
The specific background to the letter from the SEC is still unclear. Neither Paxos nor the authorities want to comment on it so far. The letter is a “Wells Notice,” a brief notice from the agency that gives the company in question an opportunity to comment and explain to the SEC why it should not file a lawsuit. Paxos could possibly also react with an out-of-court settlement, which from a slightly shifted perspective could also be called a bribe: There are many billions of dollars lying around in the crypto industry and the SEC only has to construct a crime to bag them.
Binance’s Chengpeng Zhao clarifies that despite the name, the BUSD is not issued by Binance, but by Paxos. It has been informed that the stablecoin issuer has been ordered by the New York Financial Regulator not to mint new dollar tokens. Therefore, the sum of all BUSD will only decrease over time.
#BUSD. A thread. 1/8
In summary, BUSD is issued and redeemed by Paxos. And funds are #SAFU!
— CZ ? Binance (@cz_binance) February 13, 2023
He’s no legal expert, my Zhao, but as a layman he agrees with Miles Deutscher who asks, “How the hell can a STABLECOIN be considered security if it clearly doesn’t meet the criteria of the Howey test?” The Howey test is considered the definitive instrument for assessing whether something is a security, i.e. a security. One of his criteria is the expectation of making a profit on the investment, which, as Deutscher rightly points out, no one who’s bought BUSD ever had.
The SEC has labelled BUSD as an “unregistered security”, and is suing its issuer, Paxos.
But how on earth is a STABLECOIN considered a security, when it clearly doesn’t meet the Howey Test criteria.
No one has ever had “the expectation of profit” when buying $BUSD. pic.twitter.com/QXOlDUyvc3
— Miles Deutscher (@milesdeutscher) February 13, 2023
Crypto investor Adam Cochran responds with a disturbing explanation: The Howey test only applies to investment contracts, while the notion of security is defined much more broadly. “To be honest, the term is so vague that the SEC can mean anything by it if they want to.”
This is what people don’t realize.
Howey test = precedent for investment contracts.
“Securities” is a much broader category defined by the 1933 Securities Act.
Honestly, if the SEC wants to, with how vague the act is, its fairly easy to put anything under it. https://t.co/TbHKqO3zLD
— Adam Cochran (adamscochran.eth) (@adamscochran) February 13, 2023
If the SEC under Gary Gensler continues to follow this rather arbitrary but legally viable course, the US crypto market could be in for a wild time.