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SEC announces activation of crypto regulation, and the first victim is the Kraken. Who’s next?

Igor Grigorchenko

News editor

Feb 10, 2023 at 06:14

Yesterday, February 9, crypto exchange Kraken came under legal attack from two U.S. government agencies. Immediately after the securities regulator SEC’s announcement against Kraken, the IRS sued the exchange to give access to user identification data. Let’s find out how these events are related and what the consequences will be.

Crypto under SEC watch

The U.S. Securities and Exchange Commission (SEC) issued a press release on Fe. 7 naming crypto assets and other new technologies as its top priorities for 2023. In doing so, it announced an increase in activities and regulation in this area in the near future.

And just a couple of days later, the first events followed. As announced by the SEC on Feb. 9, crypto exchange Kraken will “immediately” end its staking platform for U.S. customers and pay $30 million to settle SEC charges.

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“The complaint alleges that Kraken touts that its staking investment program offers an easy-to-use platform and benefits that derive from Kraken’s efforts on behalf of investors, including Kraken’s strategies to obtain regular investment returns and payouts,” the SEC release said.

Simply put, this means that the SEC has declared cryptocurrency stacking illegal securities transactions. Theoretically, based on the rule of precedent, this applies not only to Kraken but to all other institutions that offer a similar service to U.S. citizens. For example, Coinbase shares fell about 20% as the SEC took crypto staking action against Kraken.

In a blog post, Kraken said it would automatically unstake any assets staked by U.S. clients (except for staked ether, which won’t be unstaked until after the Ethereum Network’s Shanghai upgrade takes effect). All details will be available in the next few days. U.S. clients will also be unable to stake new assets, but non-U.S. clients are unaffected.

Kraken (also known as Payward Ventures, Inc.) is one of the top 5 crypto exchanges in the world. The exchange is also very active in Canada, Europe, and the UK. As of 2022, Kraken is the only crypto exchange in the world that has its own banking license (Kraken Bank).

Double Bottom of the Event

While the general public’s attention is focused on the loud SEC decision, the most interesting thing is happening elsewhere. Minutes after the SEC ruling, the U.S. Internal Revenue Service (IRS) filed a court order authorizing access to identification data of Kraken customers:

“The IRS is conducting an investigation to determine the identity and correct federal income tax liability of U.S. persons who conducted transactions in cryptocurrency.”

A Kraken spokesperson said the company had not yet been served with the petition but was aware of the summonses.

What does all this really mean?

Let’s try to put together these two pieces of news and understand what they mean. Some analysts paid attention to the fact that the fine for Kraken is insignificant, at only $30 million. Meanwhile, the market reacted to this decision quite strongly and negatively (for example, Bitcoin dropped from $23k to $21k):

Recall that SEC Chairman Gary Gensler warned that proof-of-stake (PoS) cryptocurrencies could be considered securities, which would include the Ethereum network. The crypto community ignored these verbal interventions by regulators.

And so the regulator went from warnings to actions, naming the first victim. So far, it is quite difficult to assess the specific consequences of this decision, because formally, by analogy with Kraken, many cryptocurrencies and crypto exchanges may be affected in the next iteration.

As for me, the main consequence is that if operations with PoS-cryptocurrencies are recognized as operations with securities, then their owners must pay taxes. This explains the coordinated attack by the IRS to identify all Kraken customers immediately after the SEC ruling. 

What do I think about this?

This means two things:

  • In order to work with securities, any company needs a license. This is exactly what the SEC’s decision about Kraken says. Hence, all similar PoS services (providing staking) need to either wait for their turn to get fined, shut down, or start the complicated licensing procedure with the regulator.
  • For individuals who invested in PoS-crypto (Ethereum, for example), this decision means that they will have to pay taxes on their cryptocurrency income. From now on it will be very strict, so being aware of the IRS’ reputation, I would advise all PoS cryptocurrency holders (at least Americans) to think seriously about owning them.

Personally, I think that the SEC will not attack projects like Ethereum in the coming years because they definitely belong to the so-called “Too Big To Fail” group. But projects of smaller scale and importance can now be attacked at any time based on the legal precedent with Kraken.

 

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