SEC Crypto Crackdown Explained: Unregistered Securities, Gemini, Kraken

SEC Crypto Crackdown Explained: Unregistered Securities, Gemini, Kraken

  • The SEC has stepped up its campaign to rule what its chairman has called the “Wild West” of crypto.
  • Gary Gensler took on the Winklevoss twins and Kraken, the third largest crypto exchange in the world.
  • But its targeting of unregistered assets has left some in the crypto industry with an answer: It’s war.

After many calls to clean up the wild west of crypto, it looks like the SEC is finally stuck.

He’s gone after big names like Gemini and Kraken – and he’s using unregistered title rules as his key hammer.

We explain what it is and what the industry does with regulatory repression.

What was targeted?

The SEC has been quick in recent weeks in its efforts to reprimand crypto offerings that it sees as breaking the rules, relying on the argument that they are unregistered securities.

The most high-profile lawsuit was against crypto giant Genesis and the Winklevoss twins Gemini in January, after the The SEC blamed its disastrous “Gemini Earn” program consisting of an offer of unregistered securities.

Then Kraken, the third largest crypto exchange in the world, last week paid a $30 million settlement to the SEC and agreed to stop its “staking” program, where investors lock up their holdings of digital assets for an interest-based reward.

And this week, crypto firm Paxos was forced by the New York Department of Financial Services (NYDFS) to stop minting its Binance-branded stablecoin after a planned lawsuit by the SEC over the sale of unregistered securities. This differs from previous staking combinations.

A spokesperson told Insider that he strongly disagrees with SEC staff, saying his BUSD coin is not a security.

Why now?

The collapse of FTX in November, locking up billions of dollars in customer deposits, no doubt increased the urgency to rein in potentially risky offerings, just as this event did. contagion effects on Genesis and Gemini.

But regulators’ discomfort with crypto goes back years – since the asset has been popular. In October 2021, SEC Chairman Gary Gensler refers to the crypto sector as “a bit of the Wild West”.

Emerging evidence suggests that programs such as staking have become a way for crypto firms to inflate the value of their assets using consumer funds.

An investigation into the now-bankrupt crypto giant Celsius find the company had used client funds to back the value of its native coin in an effort to generate high returns for investors.

What is an unrecorded title?

A security, more simply, is a financial instrument traded for profit. They form the basis of investment contracts for things like stocks, debt, and derivatives.

The SEC highlights the Howey test to determine whether an asset can be classified as a security. This test has four parts, all of which must be passed to determine a security: [1] A money investment [2] in a joint venture [3] with profit expectations [4] come from the efforts of others.

In the United States, if an asset qualifies as a security, it must be registered with the SEC. For example, an initial public offering (IPO) of a newly listed stock represents the first offering of its newly registered securities.

Securities must be registered because they give the issuing company the relevant shareholder information to pay dividends and provide relevant share information. It also helps reduce fraud by recording the rightful owner of the title.

According to the SECan unregistered title is simply a title that has not been approved by the regulatory body.

Unregistered securities have been the subject of several scams, with the SEC saying their characteristics include the promise of high returns without risk, aggressive sales tactics and are backed by unqualified investment professionals. As such, their use is limited.

Only accredited investors, defined as those with a net worth greater than $1 million or annual income exceeding $200,000, can trade in non-registered securities, essentially excluding most retail investors. The threshold is considered a measure of financial sophistication and suggests a buffer for eligible investors against potential losses.

The debate in the crypto world, however, is not about whether or not assets should be registered, but more fundamentally about whether they should be classified as securities.

So what’s the confusion?

There has long been a debate over whether a digital asset – essentially software – is a commodity like gold or a security like an ETF. To that end, crypto is generally regulated by the Commodities and Futures Trade Commission (CFTC), indicating its status as a commodity.

Gensler however, argued most cryptocurrencies meet the legal definition of a securityand must be registered with the SEC.

But the evolution of the crypto industry, especially through programs like staking and initial coin offerings (ICO), blur the lines and give the SEC ammunition to pursue a crackdown.

The crackdown is focused on companies that have promised customers returns, whether for staking their crypto for a blockchain or lending their crypto with a guaranteed percentage return, such as with Kraken and Gemini’s Earn program respectively. These could be considered investment contracts.

Crypto enthusiasts tend to claim that the asset does not pass the four prongs of the Howey test to determine a security or investment contract because it does not generate value through the efforts of others.

Meanwhile, last week Coinbase Chief Legal Officer Paul Grewal also dismissed the idea of ​​staking as a security. In a notehe argued that staking failed all four prongs of the Howey test, not just the fourth prong of value creation.

“Trying to superimpose securities law on a process like staking doesn’t help consumers at all,” Grewal wrote. “Instead, unnecessarily aggressive mandates will prevent US consumers from accessing basic crypto services in the US and drive users to unregulated offshore platforms.”

More fundamentally, crypto industry bigwigs from Brian Armstrong to Anthony Scaramucci have piled up on the SEC’s ruling on Kraken’s “staking” program, describing it as an attack on economic freedoms.

And after?

Crypto firms and the SEC will have to wait for the outcome of various lawsuits to set a precedent. The result could mean crypto firms have to register deals and assets as securities, but some say that has left them in no-man’s land.

“Regulation by app is confusing for crypto enthusiasts,” Globalblock Crypto, a digital asset brokerage, said in a note.

“The SEC says ‘all crypto projects must come forward and register’, but when they do, they’re just told ‘no.’ People are desperately trying to figure out how to offer a product legally without getting advice. “

“The Wolf of All Streets” crypto trader Scott Melker had more language choices.

“It is clear that the United States is going to go to war with the crypto industry,” he said. tweeted.

“If this is the war they want, this is the war they will have.”

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