The SEC will likely use its Kraken playbook to combat staking protocols
Some observers believe Kraken’s actions by the SEC will encourage Kraken users to switch to DeFi protocols. The truth is that the SEC will also be targeting those protocols. Opinion Collect this piece of history as an NFT. The United States Securities and Exchange Commission (SEC), settled with Kraken on February 9 regarding an action against the exchange’s staking reward program. Kraken was fined $30 million and agreed to stop the program. Kraken has been helping to settle Bitcoin (BTC), claimants stemming from the hacking of Mt. Gox over a decade ago. Merkle Root data was invented by Gox to provide verifiable proof that reserves are in place. Customers could crowdsource audits of their asset side of the balance sheets by verifying what was in their account against data on the chain. Sam Bankman-Fried urged customers not to keep their tokens on FTX, but Kraken founder Jesse Powell was always a “not you keys, and not your coins” guy. The SEC was still asleep on FTX and Terra, as well as Three Arrows Capital. The SEC behaved like a beat cop and pulled over a soccer mom who commutes to work and demanded that she act tough on crime. If you’re worried about it, don’t keep your funds with any centralized/regulated custodian. We can’t protect you. We cannot protect you.
Other political hypocrisy involved in this matter must be ignored. For example, politicians decrying proof of work (PoW), but now trying to ban staking on proof–of-stake blockchains. Or that Kraken tried applying for an Alternative Trading System licence from the SEC to be in compliance, but was met with crickets. The SEC stressed that Kraken’s staking programme was custodial and pooled investor assets together. This is great news for crypto, according to some on Twitter. “Hey, Gary Gensler, SEC Chairman, is reciting our motto that ‘not your keys and not your coins’. This will lead to more decentralization in staking in PoS Blockchains. “Related”: The Staking Ban is yet another nail in the coffin of crypto. But that’s not all. Rocket Pool and Lido are alternative centralized exchange staking platforms. However, they also pool together tokens. Due to the 32 Ether (ETH), minimum stake ($50,000), pooling is necessary for most retail investors to stake Ethereum. These protocols will eventually be subject to the SEC’s enforcement playbook. The SEC is skilled at changing the definition of security in statutes to cover all kinds of crazy things, including online gambling, orange groves, and sales of chinchillas. If the founders aren’t sufficiently anonymous, the SEC will eventually apply their playbook to decentralized staking protocols. Gensler does not believe in the cypherpunk philosophy that “not your keys, but your coin.” It is wrong to assume otherwise. Gensler’s proposal to regulate alternative trading systems — which would require developers who write smart contract codes to register as exchanges — is a mistake. The White House is against proof of work; the SEC is hitting proof of-stake delegation. Bank regulators are using subtle tools to encourage banks to deny access to customers with “crypto” in their names on FTXBy all means. If your proof-ofwork chain would operate more securely and effectively under a proof of stake system, then make the transition like Ethereum. However, don’t change to proof-of work in the hope that it will protect your from political or regulatory risk. As a securities law professor, it is possible to analyze Kraken’s staking reward program and identify some aspects that increase the risk that it will be deemed a security. This includes some advertising communications. However, this doesn’t mean that the program should be ended or that investors should be hurt. Instead, the SEC should create a working rule for custodial intermediaries that offer this unique financial product, similar to what it did in the past for asset backed securities, real-estate investment trusts, oil firm limited partnerships, and other related products. If given the chance, there are many securities lawyers who work in the crypto space and would be willing to help the SEC create the rulebook. They could do it through an open SEC call to comment on crypto regulation, which Gensler was advised to adopt. SEC Commissioner Hester Perce’s disapproval over the fine calls for a set reasonable rules. The only way forward for crypto is legal challenges to government overreach and protocol builders who remain true to the cypherpunk philosophy by Timothy May.J.W. Verret is an associate Professor at George Mason Law School. He is a crypto forensic accountant who also practices securities law at Lawrence Law LLC. He is a member the Financial Accounting Standards Board’s Advisory Council, and a former member the SEC Investor Advisory Committee. He is also the leader of the Crypto Freedom Lab, which is a think tank advocating for policy change to protect privacy and freedom for crypto developers and users. These views, thoughts, and opinions are solely those of the author and do not necessarily reflect the views or opinions of Cointelegraph.