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Home » Resources » The crackdown on crypto continues 

February 17, 2023

Estimated reading time: 4 minutes

The crackdown on crypto continues 


This month, Kraken (Payward Ventures) was charged by the Securities and Exchange Commission (SEC) and settled for $30 million. The latest is an investigation into Binance, the world’s largest cryptocurrency exchange. The charges and investigations by the SEC are stacking up.  

Kraken did not register its crypto-staking product, leaving investors exposed and unprotected in the eyes of the regulators.  

While it is a big hit to the crypto industry, this penalty is not the first of its kind and certainly not surprising. Especially when you consider the recent focus on cryptocurrency from regulatory boards. But with the SEC continuing to ramp up the spotlight, more robust cryptocurrency regulations are on the way.  

What happened to Kraken?

Kraken is a cryptocurrency exchange that is offered a staking-as-a-service product to its customers since 2019.  

Staking is an alternative to the traditional proof-of-work concept in crypto. Traditionally, crypto mining would use computers to process transactions on the blockchain in a mechanism that was highly energy intensive.  

But staking could achieve the same result without such a negative effect on energy usage. It relied upon investors to post some of their virtual currency holdings to process transactions. With Kraken, investors were promised returns of up to 21% for doing so.   

However, the SEC deemed this digital asset staking service an investment contract, which means that it should have been registered as such. Regulations around digital assets and investments in the United States state that firms must file a notice under the Investment Company Act of 1940.  

Kraken’s staking-as-a-service for crypto assets was unregistered. Once deemed as an investment contract, the product sat outside of the law (even without specific crypto regulation). This left investors unprotected, having lost control of their digital currency once it was staked. It also meant that investors were ill-informed about the new risks that their assets would take on after they were staked.  

  It was determined by the SEC that Kraken could not guarantee any returns. In fact, it was hard to follow exactly what their 21% returns calculation was based on, with the SEC stating the “returns untethered to economic realities”.  

After this ruling, the program has been shut down in the US.  

Why is the SEC focused on cryptocurrency? 

The SEC’s crackdown on cryptocurrency firms is coming thick and fast.  

In January 2023, the SEC charged two more crypto firms, Genesis Global LLC and Gemini Trust Company LLC with the unregistered offer and sale of securities. Similar to Kraken, the firms offered a crypto asset lending program known as Gemini Earn. But in November 2022, investors were prevented from withdrawing their assets due to financial stability issues in the cryptocurrency markets.  

The SEC’s charges come from the fact that this program deals with securities, and again should have been registered under the Securities Law. With many more cryptocurrency firms offering similar programs, the SEC has provided some guidance on its actions.   

The SEC Chair Gary Gensler released a statement which confirmed that the SEC views most cryptocurrencies as securities and would require the cryptocurrency exchanges behind the coins to act in accordance with securities regulations. 

“Many crypto intermediaries provide lending functions for a return. Make no mistake: If a lending platform is offering and selling securities, it too comes under SEC jurisdiction”, Gensler stated.  “I’ve asked the SEC staff to work directly with entrepreneurs to get their tokens registered and regulated, where appropriate, as securities”.  

The instability associated with cryptocurrency has so far added to the distrust in financial services. Without virtual currency regulation, investors are left exposed to fraud and misconduct of their personal information. Moreover, due to the DeFi nature of the blockchain, it is feared that a higher percentage of criminals could get away with money laundering.  

It, therefore, makes sense then, that the SEC states, “our fundamental goal is to provide investors with the protections and disclosures they deserve – and that are required by law”.  

By implementing cryptocurrency regulations and cracking down on wrongdoings, the SEC aims to protect investors, and restore trust in financial services and the crypto market. This should continue to grow economic activity in the States.   

How to stay ahead of cryptocurrency regulation changes  

The crackdown on cryptocurrency offerings is unlikely to stop any time soon. In fact, firms should expect more robust crypto regulations and specific disclosure criteria to meet, in order to offer cryptocurrency investment opportunities to consumers.  

But the SEC’s updates are irregular and varied. It is almost impossible to stay up to date with what is happening, and how to respond as a cryptocurrency firm.  

Use CUBE’s Automated Regulatory Intelligence to stay ahead of the cryptocurrency regulatory changes yet to come.  

Keep ahead of emerging crypto regulatory obligations by speaking to CUBE.


Speak to CUBE

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