The US financial regulatory authorities have recently been taking a more active stance against crypto exchanges and their offerings to the public. The Securities and Exchange Commission (SEC) has accused the Kraken exchange of selling unregistered investment contracts to investors, and as a result, the operating companies, Payward Ventures and Payward Trading, have agreed to pay a $30 million fine and shut down a staking service that was providing a yearly return of 21% to investors.
The SEC's complaint stated that since 2019, Kraken has been offering staking services to the general public, which involves aggregating certain crypto assets from investors and staking them on their behalf. SEC Chair Gary Gensler commented that crypto intermediaries need to provide the necessary disclosures and safeguards required by securities laws when offering investment contracts in exchange for investors' tokens, regardless of whether it's through staking-as-a-service, lending, or other means.
In a separate but related move, the New York Department of Financial Services (NYDFS) is investigating a Binance-branded stablecoin, BUSD, which is issued by Paxos. On February 13, the SEC issued a wells notice to Paxos alleging that BUSD is an unregistered security, and on the same day, the NYDFS ordered Paxos to halt the issuance of BUSD. In response, Paxos announced that it would end its relationship with Binance for the BUSD stablecoin, and cease the issuance of new tokens starting February 21. However, Paxos Trust, a regulated institution overseen by the NYDFS, will continue to manage the dollar reserves that back BUSD. Binance CEO Changpeng Zhao emphasized that BUSD is a stablecoin wholly owned and managed by Paxos and does not meet the criteria of an unregistered security, as defined by the Howey Test.
Binance was quick to distance itself from the troubled stablecoin, emphasizing that it is issued and managed entirely by Paxos.
Binance CEO Changpeng Zhao posted a tweet where he explained the position of the crypto exchange regarding the situation with BUSD. According to him, BUSD is a stablecoin wholly owned and managed by Paxos and its market cap will decrease over time following the mining halt. Zhao added that he generally agrees that BUSD doesn't meet the Howey Test criteria as an "unregistered security" with no one among investors having expectations of profit when buying BUSD. These expectations are one of four criteria mentioned by the Supreme Court to detect unregistered securities.
Coinbase CEO Brian Armstrong also commented on the SEC's recent actions, warning that similar enforcement actions against other exchanges could be on the horizon. Armstrong argues that staking services are not securities and provide benefits such as increased security and a reduced carbon footprint. He believes that new technologies should be encouraged in the US and not held back by unclear rules.
The recent SEC announcement had a significant impact on the price of Bitcoin, which fell sharply by 6% or $1,200, from $22,950 to $21,790.
This demonstrates the sensitivity of the crypto market to regulatory developments and highlights the importance of clear and concise regulations in the industry.