As if we needed another reminder of why blockchain technology is such a critical innovation in the face of authoritarian government overreach, the SEC's recent $30 million settlement with cryptocurrency exchange Kraken is a perfect example, capturing the attention of crypto enthusiasts around the world.
In summary, Kraken, along with at least a dozen other US-facing exchanges, offer "staking" services to their customers. In layman’s terms, this can be compared to interest earned on a savings account in a traditional bank. Crypto holders receive a few-percent bonus for temporarily locking up their crypto in order to secure the underlying blockchain.
Last week, however, the SEC not only fined Kraken for the egregious "crime" of not offering complete disclosures as to where this bonus comes from, but also permanently banned them from offering staking products to American customers again—even after they provide the newly required disclosures.
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The most obvious problems with this: 1) there was no harm to anyone, as Kraken has never had any issues making these yield payments to customers; 2) most US exchanges (such as Coinbase, Gemini, and Okcoin) offer the same staking services, with the same lack of detailed disclosures; and 3) all of these other exchanges will simply be able to update their terms of service (you know, the ones no one reads) with the new disclosures and continue business as usual, while Kraken pays a $30 million fine and is forever barred from providing this service again.
To add insult to injury, SEC Chair Gary Gensler tweeted a tongue-in-cheek promotional video explaining these actions against Kraken; what he never bothered to address was why Kraken was singled out while their competition absorbs that market share. Gensler then joined CNBC to further gaslight the public, making it seem as if all Kraken had to do was "fill out a form"—despite his agency’s refusal for years to provide basic clarity on how crypto exchanges could become fully compliant.
Kraken CEO Jesse Powell fired back in his trademark fashion. Call me jaded, but as a former Kraken employee from 2018-2020, I had a front-row seat to Jesse's unflinching candor and publicly critical takes on regulatory hypocrisy—something which I believe made him (and Kraken) a target for this grossly disproportionate SEC ruling. If Gensler was serious about wanting to "protect investors" from making uninformed investment decisions, he could have simply issued that guidance requiring US-facing crypto exchanges to provide a certain level of enhanced detail in their product disclosures.
But that's not what he did at all, choosing instead to regulate via enforcement, kneecapping an American business and continuing to ramp up fear of prosecutorial actions against an industry desperate for regulatory clarity. Perhaps most telling of Gensler's authoritarian impulses here can be found in the dissenting opinion from SEC Commissioner Hester Pierce: "Using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating... A paternalistic and lazy regulator settles on a solution like the one in this settlement: do not initiate a public process to develop a workable registration process that provides valuable information to investors, just shut it down."
At the end of the day, all we can do is use this ordeal to remember the US government's hostility towards cryptocurrency, and the continued use of "protecting" people as the excuse-du-jour for carrying out selective prosecutions. We can speculate further as to where the real source of this hostility comes from (Big banking donors who view crypto as an existential threat? Global financial institutions who want to keep all of us captured in their private surveillance dragnets?), but that is a story for another day…
Dave Stann is the Chief Technology Officer at Sovren.Media. From 2018 to 2020, he served as Director of Mobile Product Management at Kraken, where he oversaw the creation of the Kraken Pro and Kraken Futures mobile apps.