SEC cracks down on crypto betting. Here’s what you should know
Regulators are going after crypto efforts, most recently with a $30 million fine in February against a crypto exchange called Kraken.
Regulators are going after crypto efforts, most recently with a $30 million fine in February against a crypto exchange called Kraken.
The move has major implications for the crypto industry. Here’s what you need to know.
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The move has major implications for the crypto industry. Here’s what you need to know.
Staking helps some crypto networks process and validate transactions. Staking is employed by several popular networks, including Cardano, Solana, and Ethereum, which hosts the #2 cryptocurrency, ether.
At a high level, staking works like this: Crypto investors can essentially pledge their computing power and crypto holdings to a network for a specified period of time.
The “deposited” crypto tokens act as collateral that can be destroyed or confiscated if the investor misbehaves. The idea is that investors won’t try to subvert a network—for example, by reversing transactions—if their own tokens are on the line.
Staking is not used by all cryptocurrencies. Bitcoin, the largest, relies on a different method to process transactions.
How are crypto exchanges involved?
The centers can basically act as intermediaries between their customers and the networks. Take Coinbase Global Inc. as an example. Coinbase helps its users set up crypto for stakes with the networks. Coinbase takes a commission ranging from 25% to 35% on any interest earned by users.
That revenue stream is especially important for exchanges when crypto prices and trading volumes fall.
What’s in it for the crypto investors?
They’re essentially going to earn interest on their crypto holdings – although the “interest” is usually in the form of more crypto.
Generally, if the investor deals directly with a network, the network pays him. If he goes through an exchange, the exchange pays him. Kraken used to offer investors annual interest rates of up to 21%. Coinbase still offers annual interest rates of up to 6%.
Who can stake their crypto?
With some networks, investors have to put up a lot of tokens to participate in the stake, so it’s really only available to wealthy individuals or institutional investors. With Ethereum, for example, investors must commit to a minimum deposit of 32 ether tokens (worth over $50,000 at current prices) and a computer connected to the internet 24/7.
It is much easier for small investors to get into staking if they go through an exchange like Coinbase or Kraken. In these cases, investors generally do not need to commit to computing power. There are no minimum requirements to bet with Coinbase or Kraken.
Why does the SEC get involved?
Regulators are scrambling to apply greater oversight and investor protection to the cryptocurrency industry following the collapse of FTX and other platforms.
In the alphabet soup of US regulatory agencies, the SEC believes it has the most straightforward claim to jurisdiction over crypto products that provide investors with a return. Congress and the Supreme Court have said that the SEC has the authority to regulate most financial investments whose profitability depends on the efforts of a third party.
For more than a year, SEC Chairman Gary Gensler has argued that interest-bearing products meet this standard when they allow investors to lend their tokens to a crypto platform in exchange for returns. Crypto lenders including Nexo Capital Inc. and BlockFi Lending LLC have settled SEC enforcement actions without admitting or denying wrongdoing.
The SEC also sued the crypto exchange Gemini over its Gemini Earn offering. Gemini has said it will defend itself.
What happened after the SEC’s settlement with Kraken?
Kraken agreed to stop offering its betting program to US customers. It will continue its efforts outside the United States
Other exchanges follow. At Coinbase, CEO Brian Armstrong has vowed to fight if the SEC goes after the Coinbase venture.
Binance.US, the US subsidiary of Binance, the largest crypto exchange in the world, has said it is monitoring the situation.
Write to Vicky Ge Huang at [email protected] and Paul Kiernan at [email protected]
