Yahoo Finance Ethereum price drops 9% following Kraken's SEC settlement
Ethereum (ETH-USD) dropped 9% in value on Monday, after crypto-exchange Kraken agreed to end its crypto staking for US customers and pay $30m (£24.9m) to settle a Security Exchange Commission (SEC) charge.
The crypto market did not respond well to the SEC's attack on Kraken, as the announcement brought an end to the climb of bitcoin (BTC-USD) and ethereum since the beginning of 2023.
Paxos, which partners with Binance to issue the BUSD stablecoin (BUSD-USD), has also been told by a New York regulator to halt the minting of new coins, according to a Bloomberg report.
The global cryptocurrency market cap has digested the latest regulatory attacks on the industry by falling 1.6% in 24 hours to $1.05tn, according to Coingecko.
Ethereum dropped 9% in the past seven days to $1,483, while bitcoin fell 6.2% to $21,537.
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The decent into the red began in earnest last Thursday when SEC chair Gary Gensler announced he would be charging Kraken with failing to register the offer and sale of its "staking as a service" program.
Kraken, which is the third largest crypto-exchange in the world after Binance and Coinbase (COIN), had been offering staking services for at least half a dozen crypto tokens, including ethereum. The exchange advertised annual returns of as high as 21% on some staked instruments.
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Gensler said: "Today the SEC charged Kraken for the unregistered offer and sale of securities through its staking-as-a-service program. Whether it’s through staking-as-a-service, lending, or other means, crypto intermediaries must provide the proper disclosures & safeguards required by our laws."
Gensler released a video to explain to the US public why the SEC is taking such a strict stance against platforms that offer staking services.
Today @SECGov charged Kraken for the unregistered offer & sale of securities thru its staking-as-a-service program.
Whether it’s through staking-as-a-service, lending, or other means, crypto intermediaries must provide the proper disclosures & safeguards required by our laws.— Gary Gensler (@GaryGensler) February 9, 2023
What is 'staking' and how does it relate to Ethereum?
In the case of ethereum, the second largest cryptocurrency in the world, you need 32 ether to create your own staking node and receive "staking rewards" in the same currency. This is called Solo Staking.
However, most people do not have 32 ethereum to create a node on their own. But, they can instead use a centralised cryptocurrency exchange that offer "staking as a service" options.
In this process they hand over their crypto tokens to the centralised crypto exchange where the tokens are then pooled together and used to help validate transactions on the blockchain. The exchange gets a percentage of the blockchain's staking reward, and so does the customer.
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The SEC wants crypto exchanges to register these financial instruments as securities before offering them to customers. This is because staking has risks that are not being articulated to the customer, the SEC said.
On Saturday Gensler told Andrew Sorkin of the New York Times: "Investors need to know what Kraken, or any other exhange, is doing with these staked tokens, are they trading against the tokens, or borrowing against those tokens, are they using them for theur own purposes?"
Referring to November's implosion of the FTX cryptocurrency exchange, Gensler said: "We have seen this in the crypto field before".
Gensler has said on numerous occasions that the only digital asset that he believes is not a security is bitcoin, which he has conceded should be under the observation of the US Commodity Futures Trading Commission (CFTC).
In his interview with Sorkin, Gensler added: "What kraken was doing was asking the American public for their coins, and saying that they will give them a return of between 4% and 21%."
Gensler cited the Howey Test which is used in the US to discern the difference between investing in a security or a commodity, like copper or wheat.
He said: "The problem with Kraken was that they were not disclosing to the investing public the risks that they were entering into.
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"We have a basic bargain in the United States since the 1930s, you can take whatever risk you want, companies like Kraken can offer investment contracts and investment schemes, but they have to have full, fair and truthful disclosure.
"This puts the investors in a better position, that's are basic bargain. Kraken where not compliing with that basic law."
He said that the charge against Kraken "should put everyone on notice who operates in the crypto marketplace".
He added: "When these exchanges take you tokens to put them in staking pools and if that exchange goes bankrupt, the customer stands in line at the bankruptcy court.
"There is a saying in crypto, not your keys not your coins. Those other platforms who offer staking should take note of this and seek to come into compliance and do the proper disclosures, and registration and the like."
What is a security?
In the US, a security is a tradable financial asset, including debt and equity securities (common stocks), and derivatives like forwards, futures, options, and swaps.
The Howey Test in the US is a method of differentiating between a security and a commodity.
It is is used to determine if a transaction qualifies as an "investment contract" and is subject to disclosure and registration requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934.
It applies to any contract, scheme, or transaction and determines if there is an "investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others."
This is important for assessing blockchain and digital currency projects, as some cryptocurrencies and initial coin offerings (ICOs) may meet the test's definition of an "investment contract."
The Financial Conduct Authority (FCA) is the national authority regulating financial markets in the UK, and its definition of "security" in the Handbook includes equities, debentures, alternative debentures, government and public securities, warrants, certificates, units, pension schemes, investments, and anything on the Official List.
Watch: Kraken ending its crypto staking services for US customers, former SEC attorney weighs in
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