U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler is warning other platforms to “take note” of crypto exchange Kraken’s move to halt its staking service in the country and cough up a $30 million fine.
“Companies like Kraken can offer investment contracts and investment schemes, but they have to have full, fair and truthful disclosure. And this puts the investors who watch your program in a better position. That’s our basic bargain. They were not complying with that basic law,” Gensler said during a Friday appearance on CNBC’s Squawk Box.
When asked by show host Andrew Ross Sorkin how the enforcement action might apply to other yield-earning programs such as crypto exchange Coinbase’s Earn program, Gensler said labels – whether a program is called “lend,” “yield” or “earn” – didn’t matter as much as the underlying economics.
“If somebody’s taking their tokens and transferring it to that platform, the platform controls it and guess what happens if they go bankrupt? You stand in line at the bankruptcy court,” Gensler said, taking aim at the string of bankruptcy cases in progress including that of crypto lender Celsius. A U.S. bankruptcy court judge ruled in January that any crypto deposited on the platform as part of its Earn program belonged to Celsius and not customers.
“There’s a saying in crypto that says not your keys, not your coins. So those other platforms should take note of this and seek to come into compliance, do the proper disclosures and registration and the like,” Gensler added.
Although the regulator has blocked crypto staking, which lets users lock their assets on platforms in exchange for a “reward” percentage over time, in the U.S., the firms offering those services may simply continue to do so from other jurisdictions, Sorkin noted to Gensler.
“330 million Americans are our clients,” Gensler replied. “Kraken knew how to register, others know how to register, it’s just a form on our website… And if they want to offer staking, we’re neutral, come in register because investors need that disclosure.”
An SEC official briefing reporters on Thursday said that a crypto company hoping to offer staking-as-a-service – as a registered securities offering under the regulator’s purview – would have to first register as a securities platform before getting the agency’s Division of Corporation Finance’s approval on the product itself.
The SEC’s enforcement action against Kraken has already invited criticism, even from within, with SEC Commissioner Hester Peirce calling it a “paternalistic” and “lazy” move.
“Most concerning, though, is that our solution to a registration violation is to shut down entirely a program that has served people well,” Pierce said.
Gensler said the regulator is using all available tools and is talking directly to market participants about compliance, and insisted that the regulator is “technology neutral” when asked if the SEC’s goal is to try and keep crypto out of the mainstream financial system.
“If this field has any chance of survival and success, it’s time-tested rules and laws to protect the investing public disclosure for fair and truthful disclosure,” Gensler said. “Address conflicts and disaggregate these bundled businesses and don’t have your hand in the customer’s pocket using their funds or your own.”
Bankruptcy proceedings for collapsed crypto exchange FTX and U.S. fraud charges against its founder Sam Bankman-Fried allege the company had misappropriated customer funds.
When asked if a bitcoin exchange-traded fund (ETF) would allow investors to access the crypto via traditional exchange platform at market prices, Gensler said he won’t say “why” but “the path forward is well trodden.”
Large tech companies like Apple “know how to register their offerings.”
“It’s time for this group to do so. The runway is getting awfully short. And we’re here to try to protect the investing public,” Gensler said.
The crypto market shed billions after news of the SEC’s impending settlement with Kraken broke on Thursday.
Update (Feb. 10, 2023 14:30 UTC): Adds more detail from Squawk Box interview from the sixth paragraph onwards.
Nikhilesh De contributed reporting.
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