A few short hours after Coinbase Global Inc (NASDAQ:COIN) head Brian Armstrong sounded the alarm bells over a pending crackdown on cryptocurrency staking, rival exchange Kraken proved the old adage that says where there’s smoke there’s fire.
Kraken, a premier US-based cryptocurrency exchange and also one of the oldest, will cease its staking programme immediately, and pay a US$30mln fine to the Securities and Exchange Commission (SEC) for securities law violations.
Crypto staking refers to an investment option whereby users can earn yield by lending out their crypto tokens to proof-of-stake (PoS) blockchain networks to provide security.
Kraken would take a cut of any yield rewards paid to stakers.
Up until the recent ban, Kraken was providing staking options for 16 proof-of-stake cryptocurrency networks, including Ethereum (ETH), Cosmos (ATOM), Cardano (ADA) and Algorand (ALGO), with some yearly rewards cited as high as 20%.
The SEC contends that this qualifies as an investment contract under the Howey Test, and therefore comes under the purview of stringent securities laws.
What is cryptocurrency staking?
"Today’s action should make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection,” SEC chair Gary Sensler said in a statement.
SEC commissioner dissents
The SEC’s ruling was not ubiquitous among the regulator’s constituents.
Commissioner Hester M. Peirce, who was appointed by former US president Donald Trump in 2018, disagreed with the ruling on the grounds that there is no clear guidance on how to register staking services with the SEC.
Peirce questioned whether SEC registration “would have been possible” while calling for more transparency around how to register crypto staking programmes.
She also took aim at the SEC’s penchant for regulation by enforcement, stating: “Using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating.”
Coinbase shares plummet
Investors have begun to fret over the likelihood of Nasdaq-listed crypto exchange Coinbase copping the next staking ban.
Coinbase earned US$63mln from staking revenues per the latest third-quarter 2022 report, constituting over 10% of total net revenues.
Staking has steadily become a more prominent line in the exchange’s balance sheet; in the third quarter of 2021, staking only accounted for 6.2% of revenues.
Due to the existential threat to this lucrative income stream, Coinbase shares dipped nearly 15% in Friday’s pre-market trading window.