The Securities and Exchange Commission cracked down on cryptocurrency services that offer users returns with their latest regulatory move Thursday night. The SEC is calling for crypto exchanges to end their staking-as-a-service programs. The agency charged Kraken, the third largest exchange by volume, with selling unregistered securities. Bitcoin price tumbled to three-week lows as cryptocurrencies fell on the news.
United States-based Kraken paid a $30 million fine to settle the charges. It also announced an end to its yield-generating staking services. Kraken launched its staking programs in 2019. It advertised annual investment returns of as much as 21%, according to the SEC.
In staking services, users lock up their funds in exchange for rewards when their "staked" tokens are used to validate blockchain data.
In the announcement, SEC Chair Gary Gensler said that crypto intermediaries need to provide proper disclosures and safeguards when offering investment contracts, regardless if it's through staking-as-a-service, lending or other means. "Today's action should make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection" Gensler said.
Gensler appeared on CNBC's "Squawk Box" Friday morning. He said other exchanges should "take note" and come into compliance.
Crypto Exchange Impacts
Following the enforcement action, Coinbase, the top U.S. exchange, said that its staking program was not affected by the news. "What's clear from today's announcement is that Kraken was essentially offering a yield product," Coinbase Chief Legal Officer Paul Grewal wrote in a statement shared with The Block.
Coinbase's staking services differ because its returns are based on rewards paid by protocols and commissions the company discloses, rather than set yields. "Rules making clear these distinctions would provide real clarity to consumers, investors, and the industry," Grewal wrote. Many industry experts have called for greater regulatory clarity over the space, saying uncertainty is causing the U.S. to fall behind.
CEO Brian Armstrong also responded on Twitter by tweeting, "we will keep fighting for economic freedom (our mission at Coinbase)."
Bitcoin, Cryptos Fall
The cryptocurrency markets tumbled early Friday following the late Thursday announcement. Bitcoin price dropped to three-week lows, plummeting to $21,650 overnight from its Thursday high above $22,700. Ethereum fell 5.8% to $1,526 early Friday after trading above $1,630 Thursday. COIN stock fell 4% following the news and Coinbase shares are down 23% so far this week.
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