The SEC has something to say about staking, stablecoins, and custody
The SEC has come in strong in the last weeks against three areas of crypto: staking, stablecoins, and custody.
The main question is whether these were isolated actions with nuanced approaches or a gloomy precedent.
Staking: Kraken was forced by the SEC to pay a $30M fine and close their staking business because of alleged “unregistered securities offering”. Kraken could have brought this upon themselves because of how they marketed their product. From the SEC’s press release.
… since 2019, Kraken has offered and sold its crypto asset “staking services” to the general public, whereby Kraken pools certain crypto assets transferred by investors and stakes them on behalf of those investors… Kraken touts that its staking investment program offers an easy-to-use platform and benefits that derive from Kraken’s efforts on behalf of investors, including Kraken’s strategies to obtain regular investment returns and payouts.
Coinbase reacted quickly, stating that their staking services were significantly different from Kraken’s: Coinbase is a mere intermediary between stakers and validators and performs little to no management of funds, and yields are based on market forces surrounding Proof of Stake activity.
They also asserted that they would defend staking in court if needed.
Stablecoins. In a matter of days, Paxos received a “cease and desist” letter from the New York State Department of Financial Services (NYDFS) and a Wells notice from the SEC (a letter announcing enforcement actions), both related to the company’s partnership with Binance in the issuance of Binance’s stablecoin, BUSD.
The NYDFS alleges problems in the reserves system and claims that Paxos was only allowed to operate an Ethereum-based stablecoin, but BUSD has been bridged to many other chains by Binance.
On the other hand, the SEC makes its habitual claim of operating an unregistered securities offering.
Even though Paxos opted to halt the creation of new BUSD (while still guaranteeing 1:1 redemptions for the existing coins), they have also affirmed that they’re ready to dispute the SEC’s claims in court. Binance, in declarations to the Wall Street Journal, admits that they will probably have to “figure out what are the remediations we have to go through now to make amends for [past violations].”
For some time, rumors spread that Circle, the conglomerate in charge of USDC, had also received a Wells notice — a claim they refuted via Twitter.
The overarching question is what leads the SEC to consider BUSD a security, and whether this applies to the other main actors, such as USDC and USDT.
Custodians. Following a 13-year-old request from Congress, the SEC has recently issued a proposal to update its regulation over financial asset custodians. SEC-registered financial advisors (fund managers who advise hedge funds, pension and retirement funds, endowments, or the public via robo-adviser apps) will now be required to operate only with “qualified custodians”. Some conditions for qualification include the segregation of customer funds and documentation, accountability, and auditing responsibilities, but it applies only to certain institutions, including banks and trusts but excluding, among others, exchanges. Advisors that trade crypto-assets in a trading platform would be breaking the law.
Regarding crypto, the SEC’s plan “would cover all crypto assets — including those that currently are covered as funds and securities and those that are not funds or securities.” In short, the SEC claims jurisdiction over all crypto
The SEC also sends crypto into a Catch-22 situation. In the words of dissenting SEC Commissioner Mark T. Uyeda, “an adviser may custody crypto assets at a bank, but banks are cautioned by their regulators, not to custody crypto asset.”
The silver lining in the case of the SEC’s position over custody is that, finally, the Commission is following a more meditated and nuanced procedure in producing this new regulation. The SEC is issuing this proposal for public comment instead of enforcing it without prior explanations, as was the case with staking and stablecoins.
