On-Chain Commentary
- The SEC has brought forth enforcement actions against Kraken and BUSD
- BUSD may have held a fractional reserve at some point in 2022
- US regulators need to provide clarity and paths to full compliance
Regulatory enforcement actions for retail staking platforms and stablecoin issuers in the digital asset environment have ramped up over the past week. The SEC targeted Kraken with an enforcement action over an unregistered offer and sale of their crypto asset staking-as-a-service program. The US-based crypto exchange Kraken, which launched in 2013, settled with the SEC, paying $30 million in penalties and closed its staking program to US customers. Coinbase, who also provides a staking program for retail customers, may be the next SEC target. In a blog post, Coinbase Chief Legal Officer Paul Grewal argued Coinbase’s staking services are not securities.
Stablecoin issuer Paxos was also served with a Wells Notice, indicating a pending SEC lawsuit against the company’s handling of the Binance USD (BUSD) stablecoin. Paxos says it categorically disagrees with the SEC charges and is prepared to vigorously litigate if necessary. The New York State Department of Financial Services (NYDFS) also informed Paxos to halt any future issuance of BUSD, alleging the token wasn’t being administered in a “safe and sound” manner. In 2022, competitor stablecoin issuer Circle reported a potential dislocation in BUSD’s issuance versus reported reserves to the NYDFS. Paxos issues monthly BUSD transparency reports, with the most recent showing reserves consisting of 76% US treasury reverse repo, 19% short-dated US treasuries, and 5% cash.
This week, the SEC may also be adjusting rules surrounding crypto firms acting as qualified custodians. In light of the events that occurred throughout 2022 with FTX, Three Arrows Capital and the algo-stablecoin UST, all of the recent SEC actions are expected to some degree. However, the SEC needs to tow a fine line between punishing the remaining good actors in the space and bringing forth common sense regulations to protect investors. If the fear of regulatory obedience or enforcement is too high, companies, products, and capital will move offshore, and become more difficult for Americans to access in a safe and compliant manner. At the end of the day, the digital assets themselves remain unharmed fundamentally from any government’s regulatory action and continue to function without issue.
