12th February 2023 > > The Kraken fallout.

tl;dr

Kraken’s staking problems might have larger ramifications than what one might assume at first sight.

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Quiet weekend across the board with little in the way of economic news flow this week.

Curious Cryptos’ Commentary – Kraken staking problems

On the 10th February 2023 the CCC reported on the SEC’s (Securities and Exchange Commission) legal action against centralised cryptocurrency exchange Kraken.

In brief, Kraken agreed to pay a nominal fine of $30mm without admitting any fault, and to shut down its staking service.

This news took us from around $23k to $21.5k for BTC, as once again we see that lack of regulatory clarity, allied with regulatory hostility, is damaging for any business or investment. This is a point that seems to be lost on much of our current political elite – witness the decision last week by AstraZeneca - to the detriment of all of us who live in the UK.

One nuance that is relevant is that Kraken’s “staking” service was not actually about staking, as understood in the crypto world regarding PoS (Proof-of-Stake) coins. The offer of receiving rewards for depositing assets on Kraken was simply a marketing tool to attract deposits. Given the well-publicised problems of leaving assets on exchanges ever since the collapse of Mt. Gox in 2014 all the way through to the fraud at FTX late last year, I find it extraordinary that anyone would decide to leave a material proportion of their crypto bags on an exchange. Hopefully, without the option of receiving these marketing dollars, Kraken’s US customers will think again.

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Crypto-mom Hester Peirce is the Commissioner for the SEC, and is in effect boss to Gary Gensler, Chair of the SEC, though she is unable to fire him, presumably much to her chagrin.

Hester is not happy.

In a statement released following the Kraken news, she had this to say:

“Today, the SEC shut down Kraken’s staking program and counted it as a win for investors. I disagree and therefore dissent.”

“Using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating.”

“A paternalistic and lazy regulator settles on a solution like the one in this settlement.”

“However, whether we need a uniform regulatory solution and if that regulatory solution is best provided by a regulator that is hostile to crypto, in the form of an enforcement action, is less clear.”

The full statement can be found here:

https://www.sec.gov/news/statement/peirce-statement-kraken-020923

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There is little love lost when the Commissioner describes the Chair of the Commission as “paternalistic” and “lazy”.

I know whose side I am on.

Coinbase also has a staking service in the US, but this involves actual staking. For ETH, there is also the option of liquid staking, a topic we covered on 6th December 2022 in the context of Lido Finance and stETH. Investors can stake via Coinbase and receive cbETH in return which can be used in other DeFi (decentralised finance) protocols or traded.

Coinbase has disclosed that it is also under investigation by the SEC with regards to its own staking service.

The outcome of this investigation might have a material impact on Gensler’s objective of classifying all cryptos except for BTC as securities.