SEC gives crypto a new scare

The U.S. securities regulator has made clear with two recent enforcement actions that it views most crypto products and services as securities — the agency’s simplest and broadest warning to date about what companies in the industry can’t do.

Why it’s important: By causing exchange Kraken to shut down its staking program – a common service offered by many in the industry – the regulator has made it clear that some of crypto’s biggest names could now be drawn into the crosshairs.

What they say: “This should really make everyone aware of this marketplace,” Securities and Exchange Commission (SEC) Chairman Gary Gensler said on CNBC after the settlement with Kraken.

The big picture: For a long time, crypto firms debated what the SEC could regulate, focusing on which specific tokens were “securities.”

• What the agency has made clear now — through two recent actions — is that any agreement made by a company to pay an investor a return to keep its assets is itself subject to the regulation.
• The SEC’s position effectively places many programs offered by crypto exchanges and lenders under its rule, and there is no guarantee that the agency will allow them to exist, even if a company sought to register them.

Between the lines: In the same way that a traditional bank customer can earn interest or returns on their dollar deposits, crypto investors can do so in a number of ways.

• Gemini’s Earn program promised to pay interest to depositors by lending their assets to other borrowers, transferring a portion of the profits. The SEC accused Gemini and its partner, Genesis Global, of offering unregistered securities.
• Staking service providers, such as Kraken, also offer depositors a return, usually by pooling their assets and redistributing rewards earned from verifying transactions that require “staked” tokens.

Zoom out: The SEC’s complaint against Kraken was significant in that Gensler now says these are distinctions without a difference.

• “The labels don’t matter,” Gensler told CNBC on Friday.
• “Whether you call it lending, whether you call it earning, whether you call it return … it doesn’t matter,” he said, ticking off terms commonly used in crypto products.

Status: Coinbase Global CEO Brian Armstrong said Monday that his firm, the largest crypto exchange in the United States, intends to compete for its own betting service is targeted by the SEC.

• OCC-sanctioned Anchorage Digital has no plans to close its institutional staking service, saying it allows customers to stake their own assets from federally regulated escrow accounts.

Flashback: Almost a year ago, the SEC settled with BlockFi over the lender’s failure to register its interest account program.

• It was not followed by a wider industry crackdown.

Quick take: However, the SEC now appears less cautious in its enforcement targeting now that the industry’s war chest is sufficiently depleted.

Bottom line: The stakes are higher for the SEC this time around, too, as several profit-making programs since the BlockFi crackdown have led to losses for US investors, whom the SEC is charged with protecting.

• For proof of that, just look at Gensler’s own comments.
• “If someone takes their tokens and transfers them to that platform, the platform controls it, and guess what happens if they go bankrupt? You’re in line at the bankruptcy court,” he told CNBC.

What we’re looking at: The SEC isn’t the only one getting into crypto. The ripple effects of an icier stance by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC) and even the White House are beginning to show.