US Regulators are Coming Down Hard on Crypto

February 16, 2023

Cryptocurrencies: Weekly Update


There has been a swift regulatory sweep on the US crypto industry with the SEC and NYDFS bringing enforcement on several major crypto entities.

-Stablecoin Issuer Paxos Is Being Investigated by New York Regulator

-Kraken to end on-chain staking services for U.S. clients

Although we’ve been anticipating new rules and regulations to be created for the crypto space, nobody was expecting the SEC to classify staking services as unlicensed securities. Staking is a service offered by most crypto exchanges that allow traders to offer their tokens as liquidity to the exchange in order to earn interest, which is a common practice for traders that don’t want to sit on idle cash when they’re not actively in a trade.

The key concern with services like this is that in the event of financial turbulence, exchanges can seize users’ staked tokens as the company’s own assets. This happened with the Gemini Earn program in the final months of 2022 when the exchange's parent company Genesis got wiped out due to its relations with FTX. Genesis quickly shut down their Gemini Earn staking program as a result of not being able to pay back their borrowed balance from the fund, leaving stakers/liquidity providers high and dry, unable to reclaim their deposited tokens.

What is strange is that rather than pursuing action against one of the many large exchanges that have already had their staking programs blowup and take customer funds with them like Gemini or Celsius, the SEC looks to be attempting to make an example out of Kraken which is one of the most reputable US exchanges aside from Coinbase. 

If you are based in the US then it would be wise to withdraw any coins you may have staked on Kraken sooner rather than later just to air on the side of caution in the event of a liquidity crunch on the exchange from mass outflows. If you haven’t already set up a hot/cold wallet for yourself then you should also consider doing so, because although it is unlikely, there have been several instances of other exchanges locking up even non-staked user tokens in order to prevent a bank run. If you don’t have a wallet set up then you can check out our resources page for a few options to check out.

If you’re unfamiliar with staking, you can check out this video by the Chair of the SEC himself, Gary Gensler in which he gives a detailed explanation of these types of services and the risks involved.

Coinbase has already commented on the settlement between Kraken and the SEC by proclaiming that the staking programs offered by Coinbase are above board and do not qualify as securities and that the exchange has no plans to shut down its own staking services. This could get painful for exchanges, with Coinbase seeing 11% of its net revenue in Q3 2022 from staking activities.

The NYDFS and SEC have also directed Paxos to cease the circulation of any new Binance USD stablecoins. Paxos is the issuer of BUSD, a US Dollar stablecoin that is the native stablecoin to the Binance exchange.

This means that Paxos is forced to allow all circulating BUSD tokens to be redeemed 1-to-1 for USD, so if you currently hold any BUSD it would be wise to convert it back to cash as soon as you’re able to. NYDFS is monitoring Paxos closely to verify that the company can facilitate redemptions in an orderly fashion subject to enhanced, risk-based, compliance protocols. Following Sunday's news, some $52 million of BUSD were sent to exchanges in a 24-hour period.

Both staking and non-government stablecoins are key aspects of the broader crypto and web3 industries, so the sudden action by regulators has been received with quite a bit of negative feedback. The best explanation for all of this is that authorities are finally gearing up to claim a larger degree of control over the decentralized crypto space in order to prevent scams and other illicit activity in the wake of FTX and all of the other crypto entities that destroyed a lot of the trust in the industry in recent months.