Can the SEC really hurt crypto?

Can the SEC really hurt crypto?

Weekly stories are first featured in our Newsletter. Subscribe here to receive it directly in your mailbox every Monday.

American regulators 🦅 continue trying to intimidate the crypto industry, and this week they may have even succeeded in doing so.

⚔️ The SEC (Securities and Exchange Commission) has forced Kraken exchange to pay a $30 million fine and close its US staking services, arguing that they amounted to a sale of securities and raising questions about the fate of CeFi lending products in the US.

The move comes after January’s settlement with Coinbase ($50 million fine for opening client accounts without sufficient background checks), which was also forced to kill its Lend project last year.

It looks like the SEC is determined to crack down on the crypto industry – at least on its centralized (hence more vulnerable) part. Can they succeed? And if so, what will happen to the global crypto markets?

Let’s try to figure this out.

SEC v Crypto

The SEC is a long-time enemy of the crypto space. It is accused of not playing fair and enforcing instead of guiding: the agency still has not defined what cryptoassets it considers securities (even if its Chair Gary Gensler claims all of them except Bitcoin are 🤦‍♀️) and is known for arbitrarily choosing its victims.

Forcing Kraken to close its Staking program has created resonance throughout the entire industry and spooked the crypto markets: it is seen as one of the reasons for its recent -5% slump 📉

Gary Gensler has even made an appearance on TV explaining the clampdown, the hypocrisy of which didn’t stay unnoticed by the exchange’s CEO Jesse Powell:

In reality, it is indeed more than uncertain if any crypto-related offering could make it through the SEC’s registration pipeline even in theory, and many lawyers suggest it would be hopeless in practice.

Coinbase CEO Brian Armstrong suggested that the SEC was planning to get rid of all “crypto staking in the US for retail customers”, which would strike a major blow to the country’s CeFi (centralized finance dealing with crypto) .

How bad is this be for crypto? 🤔

Good news: crypto staking does not depend on CeFi. Users stake or delegate their crypto to the staking nodes/services to earn rewards for maintaining a PoS blockchain. This process does not involve centralized actors at all 🤷‍♂️

Of course, CeFi makes it so much easier to stake, but the growing number of DeFi alternatives offer a user-friendly interface and allow to stake your crypto without the need to run a node.

How bad is this be for the crypto markets? 🤔

This is a more complicated question. The most influential investors in the world are still big institutional US firms, which rarely engage directly with the cryptocurrencies or the DeFi, preferring the bureaucratic safety of the CeFi sector. Now that the American CeFi is in regulatory danger, this might result either in retracting their investments, or choosing a foreign counterpart.

In any case, this might trigger a troubled period for the markets.

⚖️As the heat rises, the results of the soon-to-be released judgement on SEC v Ripple case become increasingly important, as it could set the precedent for the entire industry, finally defining the what cryptoassets are and which aren’t securities.

Who can challenge the SEC?

Not everyone in the US government is happy with the SEC, and the agency knows it. It has been multiplying its media presence to try and convince regular Americans it was protecting their interests.

Like this video on crypto staking, released last week (⚠️warning, bad jokes abound):

However, some politicians decide to call the Gary Gensler’s bluff.

Senators like Patrick Toomey (R.-Pa) have written letters accusing Gary Gensler’s “regulation-by-enforcement” method of being arbitrary and ineffective. The agency indeed was totally inept at protecting users from Celsius mismanagement and the FTX fraud – although these fall under its main responsibility 🗿

Patrick McHenry (R.-NC.), who is now chairman of the House Financial Services Committee, is reportedly building a case against Gensler as an instigator of the industry’s failures 🌠

Others, like Debbie Stabenow (D-Mich.) and John Boozman (R-Ark.), are pushing a new bill, which would give more authority to oversee crypto trading to the CFTC (Commodity Futures Trading Commission), an agency that has been disputing the crypto industry with the SEC for a long time.

Gary Gensler, on the other hand, has among his advocates the main American crypto-sceptic Sen. Elizabeth Warren (D.-Ma), who reportedly also prepares a bill that would give more authority over crypto to the SEC.

American politics is famous for having a working counterpower, and so far the battle SEC v Crypto is not won neither lost. However, US investors have all reasons to be considering regulatory risk as a major one.

What if the SEC wins?

For the sake of argument, however, let’s imagine what happens if the SEC wins.

➡️ Pushing CeFi out of the US

✈️ Crypto is global, so even if the SEC manages to drive the American CeFi industry offshore, these services will continue working abroad.

Remember the Chinese miners ⛏️? A big industry involving physical premises and representing 65% of the Bitcoin hashrate was banned from China almost overnight… only to reappear in other countries short time after. Miners’ exodus has heavily shaken the markets, with Bitcoin losing 50% in a week (!), but rather briefly, and today the absence of miners in China is unfortunate only for China 🤭

CeFi companies, capable to work from any part of the world, can do the same even faster – of course, if they manage to find clients outside the US.

If this happens, crypto markets can see their growth slowed down, but globally it won’t change much. For the US, on the other hand, this would mean driving business out of the country, and that goes against its core principles, which would probably dynamize the counterpower to fight back 🥊

➡️ Driving more clients to DeFi

🪄 CeFi’s main alternative is DeFi, or decentralized finance, and it could thank Mr Gensler for bringing it more business (not to mention him reiterating “not your keys, not your crypto” in his video 😅).

As the staking on centralized platforms like Kraken is being banned, users can turn to protocols like Lido, which are out of the SEC’s reach thanks to their decentralization.

Ethereum’s upcoming Shanghai upgrade scheduled for March 2023 may drive even more uses to DeFi, for it will enable $ETH withdrawals from the blockchain’s staking contract.

In the end, decentralization keeps proving to be a very powerful concept that is extremely difficult to fight. China could not prove otherwise, it is now up to the American government to try 💁‍♂️

In the meantime, we can enjoy the outburst of people’s meme art on Twitter 😂