The SEC Makes It Clear – Registration is Necessary for Decentralized Financial Activities

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SEC chief Gary Gensler has just sent a clear message to the crypto industry. Anyone who wants to operate in the crypto market must be registered, or they will have trouble with the Securities and Exchange Commission. This time, the SEC took aim at staking services which have become popular as of late. Most notably, the SEC pointed the finger at Kraken in an early February case, after which the exchange agreed to a settlement.

The time for non-registered crypto businesses is coming to an end. And, while registration is always a good thing, experts argue that the SEC’s hostile view of cryptocurrencies might end up dealing more problems than offer any solutions.

What’s Crypto Staking?

Crypto staking is not anything new, but it seems to be a thorn in the SEC’s side. It’s a way where crypto transactions are verified with a proof of stake consensus mechanism. It verifies transactions on blockchains with validators who hold a cryptocurrencies and receive rewards in exchange for their validation.

In short, staking is a way to receive rewards on cryptocurrencies by taking part in transaction validations. This mechanism is only possible on proof-of-stake blockchains such as Bitcoin and Ethereum.

Kraken was one of the first to offer crypto staking. For each Ethereum penny, its users received a 4%-7% staking yield annually. Many have questions how Kraken can guarantee those returns on such tiny stakes, leading the SEC to investigate the issue.

According to SEC Enforcement Director Gurbir Grewal, the SEC didn’t just offer outsized returns, but retained the right to not pay returns at all. Furthermore, the Securities and Exchange Commission stated that Kraken failed to provider customers with any proper disclosure on how their crypto will be used. Gensler said that there’s no way an investor can know the risks, which resulted in a full-blown investigation case.

Kraken neither admitted or denied anything. The company said that it should have been registered, settling an agreement behind closed doors.

Other Exchanges on Notice

Gary Gensler just sent a warning to other crypto exchanges – everyone who wants to deal with crypto or use staking should register and comply to securities laws. Kraken says it will continue using the services outside of the USA. Coinbase’s staking program was not affected by Kraken’s settlement as its mechanism was fundamentally different.

Some people, like SEC Commissioner Hester Pierce, has advocated for more lenient rules against crypto firms. He criticized the enforcement against Kraken, instead recommending tighter restrictions on the crypto marketplace.

While many thought otherwise, Kraken’s settlement essentially doesn’t create any new laws regarding the state of the crypto market. But, it could be a breaking point for Congress. It can now think about passing legalization and other restrictions that will essentially regulated the cryptocurrency marketplace.

It remains to be seen if SEC will stand on its firm approach or introduce legalization with a bit more lenient law. If you ask us, the second option will serve the crypto market better.

February 22, 2023: • No Comments

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