The U.S. securities regulator has made clear with two recent enforcement actions that it views most crypto products and services as securities — the agency’s simplest and broadest warning to date about what companies in the industry can't do.
Why it matters: In causing the exchange Kraken to shut down its staking program — a common service offered by many in the industry — the regulator has made it clear that some of crypto's biggest names may now be drawn into its crosshairs.
What they're saying: "This really should put everyone on notice in this marketplace," Securities and Exchange Commission (SEC) chair Gary Gensler said on CNBC following its settlement with Kraken.
The big picture: For a long time, crypto firms debated what the SEC could regulate, centering on which specific tokens were "securities."
- What the agency has made clear now — through two recent actions — is that any agreement made by a company to pay an investor a return to hold their assets, is itself subject to its regulation.
- The SEC's position effectively places many programs offered by crypto exchanges and lenders under its rule, and there is no guarantee that the agency will let them exist, even if a company sought to register them.
Between the lines: Much like a traditional banking customer can earn interest or yield for their dollar deposits, crypto investors can do it in a variety of ways.
- Gemini's Earn program promised to pay interest to depositors by lending out their assets to other borrowers, and passing on a portion of the profits. The SEC charged Gemini and its partner, Genesis Global, for offering unregistered securities.
- Providers of staking services, like Kraken, also offer depositors a return, generally by pooling their assets together and redestributing rewards earned from verifying transactions that require "staked" tokens.
Zoom out: The SEC's complaint against Kraken was significant in that Gensler is now saying these are distinctions without a difference.
- "The labels don't matter," Gensler told CNBC Friday.
- "Whether you call it lend, whether you call it earn, whether you call it yield... that doesn't matter," he said, ticking off terms commonly used in crypto products.
State of play: Coinbase Global CEO Brian Armstrong said Monday that his firm, the largest crypto exchange in the U.S., intends to put up a fight if its own staking service is targeted by the SEC.
- OCC-sanctioned Anchorage Digital has no plans to shutter its staking service for institutions, saying it enables its clients to stake their own assets from federally regulated custody accounts.
Flashback: Nearly a year ago the SEC settled with BlockFi over the lender's failure to register its interest accounts program.
- That was not followed by a wider industry crackdown.
Quick take: The SEC now, however, appears less circumspect in its enforcement targeting now that the industry's war chest has been sufficiently depleted.
The bottom line: The stakes are higher for the SEC this time around too, as several yield-bearing programs since the BlockFi action have led to headline grabbing losses for U.S. investors, who the SEC is charged with protecting.
- For proof of that, just look at Gensler's own comments.
- "If somebody's taking their tokens, and transferring it to that platform, the platform controls it, and guess what happens if they go bankrupt? You stand in line at the bankruptcy court," he told CNBC.
What we're watching: The SEC isn't the only one homing in on crypto. The ripple effects from an icier stance from the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC) and even the White House, are starting to show.
