The American SEC yesterday fined crypto exchange Kraken and forced it to halt its staking products to US customers. The news comes amidst other measures that indicate the US government is trying to discourage the banking sector from servicing crypto companies. 

It is becoming clear that the American Securities and Exchange Commission (SEC) especially is hostile to crypto. The financial watchdog argues that staking as a service is an unregulated security. 

“Whether it’s through staking-as-a-service, lending, or other means, crypto intermediaries, when offering investment contracts in exchange for investors’ tokens, need to provide the proper disclosures and safeguards required by our securities laws.”

What is staking as a service?

The large majority of users have exchanges stake for them (LiteBit offers this service too). One of the largest Ethereum staking pools is on Coinbase. It seems that in the US, these staking services will have to sold in compliance with securities laws soon. Why? The SEC sees staking as a service as an investment contract, in which the customer expects to benefit from the investment efforts from the provider. 

This is up for debate, as what exchanges do is mostly helping users overcome a technological hurdle and charging a fee in return. Is that really an investment contract? Kraken chose to settle instead of taking the interesting question to court.

Responses and dissent

The crypto community is unsurprisingly no fan of the recent SEC crackdown on a well respected exchange. Sarcastically, Bankless tweets:  

'Thankful to Gary Gensler for saving us from *checks notes* earning interest on our investment!'

The gist of the crypto crowd’s critique is that the measure doesn’t help US customers who want to be involved in crypto. If US companies don’t offer staking, they will have to move to offshore exchanges. 

Interestingly, there is also dissent within the ranks of the SEC. SEC commissioner Hester Peirce condemns the ‘paternalistic and lazy’ financial watchdog.  She thinks the SEC should have put out guidance on staking instead of regulation by enforcement.

Post FTX crackdown: operation chokepoint 2.0?

‘And then they fight you…’ It was to be expected that after the FTX collapse the US government would turn on the screws. But how? The United States don’t have a comprehensive set of laws to regulate crypto yet, like the EU has (MICA is coming soon). In a political climate where it is hard to pass new laws, ‘regulation’ will either take the form of enforcement and court cases or even behind-the-scenes pressure.  

Could the latter be the case? There is no clear evidence (yet), but there are signs that we are amid a coordinated behind-the-scenes enforcement by US government agencies, which is at least venture capitalist Nic Carter’s opinion. He calls it “Operation Choke Point 2.0,” in reference to the Obama-era operation, which used the banking system to exert pressure on politically disfavored sectors of the economy such as the adult industry. 

One recent example of this crypto version of the chokepoint operation would have been Binance’s trouble to give its users access to US dollar on and off ramps. Binance’s US bank refused to process SWIFT payments of less than 100 thousand dollars. This indeed looks a bit like being choked. Since January, US banks were strongly discouraged from doing business with crypto companies, for concerns around ‘safety and soundness’.

Price drops

After the news, crypto prices dropped around 5% yesterday evening. Ethereum took a harder hit than Bitcoin. Interestingly, liquid staking providing coins such as Lido and Rocket Pool, rose on the news. These competitors to centralized staking services are apparently viewed as beneficiaries from the recent developments. With Lido, the coins you stake don’t leave your custody. It remains unclear though, how and if the SEC will crack down on these services.

Conclusion

The Tornado Cash crackdown of last summer already showed that the US government wouldn’t allow a parallel financial system to operate unnoticed and unchecked: it’s competition! ‘First they ignore you, then they laugh at you, then they fight you…’ 

Sure, there are also valid concerns, for example the fear of systemic risk of an event in crypto spilling over and destabilizing the traditional financial system. Regardless, it is concerning that the current choking of crypto companies happens without consultation and discussion. Instead of a democratic process, it is enforced by political pressure and threats with lawsuits.