The Crypto Crackdown Begins — And It’s Not Only About Staking
The SEC’s attack on Kraken is likely just the tip of this year’s crypto-regulatory iceberg.
On Tuesday, Nic Carter warned that a well-coordinated crackdown on crypto within the United States was on the horizon.
Just three days later, it seems that some sort of attack has already begun.
On Thursday, the SEC forced Kraken to shut down its staking services — and to pay a $30 million fine in the process. The shutdown took place less than 24 hours after Coinbase’s CEO warned that the commission may be planning to ban retail staking, believing that related agreements constitute unregistered securities transactions.
Staking providers pool together their users’ cryptocurrencies to form massive staking nodes that generate yield across a variety proof of stake crypto networks. Exchanges pay that yield back to their customers while skimming a fee of the top to earn a profit.
The commission’s move has not only spurred Bitcoin and Ethereum to drop 4% and 6% on the day, but its also drawn scrutiny from crypto-friendly politicians.
House Republican Tom Emmer said the SEC’s enforcement strategy “hurts everyday Americans the most.” Meanwhile, SEC commissioner Hester Peirce (aka Crypto Mom) said her agency didn’t even try to provide a workable path for firms to register with the Commission — a claim backed up by Brian Armstrong.
As a standalone issue, the SEC may well be justified in classifying staking products as securities — especially when offered by a centralized staking provider. However, the context of the enforcement — in which politicians and normies are already extra paranoid about crypto after FTX’s collapse — cannot go unnoticed.
Since early November, every crypto firm and executive is being investigated — not only Sam Bankman-Fried. The NYDFS is looking into Gemini Earn, the Department of Justice is investigating Silvergate, and Binance’s banking partners are quickly cutting ties with the exchange under regulatory pressure.
Even today, the IRS began seeking court approval to identify Kraken’s customers — and the NYDFS expanded its investigations into the stablecoin provider Paxos.
Perhaps there is something to Nic Carter’s claim that the US is deliberately choking the crypto out of its borders.
The industry’s supporters frequently warn that poor rules/enforcement will make crypto companies move offshore — but what if that doesn’t matter to certain politicians? What if that is, in fact, their goal?
According to Nic, the plan is basically to ringfence crypto — including exchanges and stablecoin providers — outside of the banking system. As Marc Andrew puts it, this will leave the sector “with no voice of strength to represent itself.”
The Federal Reserve, FDIC, OCC, and NEC statements within recent weeks all have a common theme: touching crypto is really, really, risky. While none explicitly ban anyone from interacting with crypto, the threat of investigation or enforcement is enough to deter tradfi players from participating anyhow.
Matthew Green — a John Hopkins crypto researcher involved with ZCash — expressed the same concerns after the Treasury Department sanctioned Tornado Cash in August, regarding a “chilling effect” on the freedom to publish code.
“Bans do not need to be accomplished through explicit orders,” he wrote at the time. “They can be obtained simply by exposing US companies and citizens to the perception of sanctions risk.”
While August’s “chilling effect” was on the use and publication of open-source code, Nic believes this month’s actions signal to banks that issuing stablecoins or transacting on public blockchains is either highly discouraged or effectively prohibited. Not a good sign for the highly coveted goal of “institutional adoption.”
As Nic explained, coordinated efforts of this kind aren’t exactly new. The Obama administration used similar tactics beginning in 2013 to choke off specific industries. The government exploited the deeply intertwined public-private partnership and concentrated power within the banking sector to effectively marginalize groups of their choice — without needing to enact legislation through congress.
Crypto’s plight today appears the same. In March, the Biden Administration published an executive order on crypto that appeared to strike a balance between the most crypto-allergic Democrats and wild west Republicans, calling for “regulation” rather than an outright ban on the sector.
In reality, Biden may be carrying the will of his party’s most extreme and hostile voices, while inheriting his former boss’s tactics to execute it.
