Category: Cryptocurrency Regulation

Sec official declares ether is not a security

SEC Official Declares Ether is Not a Security

Bill Hinman, Director of Corporate Finance at the United States Securities but also Exchange Commission, stated that ether does not qualify as a security.

Hinman spoke at the Yahoo Finance All Market Summit – Crypto. “Based on my understanding of the present state of ether, the ethereum network, its decentralized structure, we believe current offers and sales of ether are not securities transactions,” he said.

Hinman listed the criteria the Commission applies when it classifies a financial instrument as a security. A third party must exert managerial or promotional effort on behalf of an enterprise. Investors must depend on that party for profit. Information asymmetry between promoters and purchasers must persist. “If the network is sufficiently decentralized and purchasers no longer have a reasonable expectation that a third party will carry out entrepreneurial or managerial functions… when the efforts of the third party are no longer seen as key… material information asymmetry recedes,” he said. He added that the bitcoin and ethereum networks have reached that level of decentralization – no single promoter now drives either token.

Hinman offered no comment on XRP, the token issued by Ripple Labs. Critics argue that XRP meets the definition of a security because Ripple Labs promotes the token to banks for cross border transfers. Ripple Labs holds roughly sixty percent of the total XRP supply – its principals profit directly from price appreciation.

Hinman’s statement does not extend to tokens sold through initial coin offerings. SEC officials have repeatedly warned that most ICO tokens fall under federal securities law. Hinman explicitly excluded ether’s 2014 crowd sale from his analysis. SEC Chairman Jay Clayton has declined to draw a similar line for ICO tokens. The Commission therefore retains authority to pursue enforcement actions against tokens that constitute unregistered securities.

Trading or holding digital tokens involves substantial risk. The author does not recommend any specific cryptocurrency or ICO. Readers should consult a licensed financial professional before committing capital. The author held 0.21 bitcoin and 1 litecoin at the time of publication.

Kraken pays $30 million, closes u.s. staking service after sec settlement

Kraken Pays $30 Million, Closes U.S. Staking Service After SEC Settlement

Kraken consented to remit $30 million in penalties and to terminate its on chain staking program for United States customers under an agreement reached with the Securities but also Exchange Commission on Thursday.

According to the SEC complaint filed in federal court, the exchange held $2.7 billion in client crypto assets in the program during April 2022. Marketing material promised annual yields that reached 21 percent.

Participants transferred tokens to a pooled address controlled by Kraken. The exchange operated validator nodes on proof-of-stake networks. Block rewards, transaction fees along with protocol inflation flowed to the pool. Kraken deducted an undisclosed commission – distributed the remainder to participants on a bi weekly schedule denominated in the same asset that each user had supplied.

The SEC stated that investors surrendered custody of tokens to the platform; they faced counter party risk, smart contract risk in addition to slashing risk with minimal disclosure.

The agency alleged that the staking program constituted an unregistered securities offering. The complaint listed omissions – fee schedules, financial statements, risk factors next to the method used to calculate advertised yields.

Gurbir Grewal, director of the SEC Division of Enforcement, said in a press release: “Kraken promised returns that bore no relation to underlying cash flow. The exchange reserved the right to withhold all rewards.”

Kraken accepted the settlement without admitting or denying the allegations.

Effective immediately, the exchange disabled new staking deposits from U.S. residents. A separate subsidiary located in the Republic of Ireland continues to serve non-U.S. clients.

Kraken posted a blog update: “All staked assets except ether will be unstaked automatically. Rewards accrued through 09 February 2023 will be credited to spot wallets. U.S. clients lose the ability to stake additional ether.”

Tokens will appear in user spot wallets within seventy two hours. Rewards will be prorated to the cutoff date.

Bitcoin slid beneath $21,000 within minutes of the announcement. BNB, cardano each lost between 4.8 and 6.2 percent on spot exchanges.

Brian Armstrong, chief executive of Coinbase, tweeted on Wednesday that the SEC contemplated a nationwide prohibition on retail staking. The Kraken accord supplies a template for future enforcement against Coinbase, Binance.US along with smaller providers.

Gabriella Kusz, chief executive of the Global Digital Asset besides Cryptocurrency Association, wrote in an email: “The settlement will deter protocol teams from offering staking services to U.S. residents. Retail investors will migrate to offshore platforms or self custodial solutions.”

SEC Commissioner Hester Pierce published a dissenting statement.

Pierce wrote: “The Commission elected to extinguish a service that thousands of investors used. Kraken faces a permanent bar against any future staking offer in the United States, registered or exempt. Rather than craft a disclosure regime, the regulator chose prohibition.”

Correction – Feb. 10, 2023: An earlier headline failed to specify that Kraken terminated staking only for U.S. customers.