Coinbase falls the most since July as SEC cracks down on crypto stakes

by Arthur · February 9, 2023

(Bloomberg) — Coinbase Global Inc.’s shares fell the most in more than six months after rival Kraken was forced to stop offering an investment service also offered by the largest U.S. cryptocurrency exchange.

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Kraken will pay $30 million to settle claims by the Securities and Exchange Commission that it violated US rules with its crypto-staking products and will liquidate them in the US as part of the deal with the regulator. The SEC alleged that Kraken’s betting service was an illegal sale of securities.

In response to Kraken’s settlement, Coinbase’s head of legal affairs, Paul Grewal, said the company’s on-chain staking services are “fundamentally different.”

“Coinbase’s staking program is not affected by today’s news.” Grewal said in a statement to Bloomberg News. “What is clear from today’s announcement is that Kraken essentially offered a return product. Coinbase’s staking services are fundamentally different and are not securities.”

The stock fell 14%, the biggest drop since July 26. Bloomberg reported at the time that Coinbase was facing a US investigation into whether it improperly allowed Americans to trade digital assets that should have been registered as securities. Coinbase CEO Brian Armstrong previewed the showdown late Wednesday by blasting the SEC for allegedly wanting to get rid of crypto stakes from retail investors.

Crypto staking programs have grown to become a significant revenue stream for exchanges such as Kraken and Coinbase as their trading volume declines amid a plunge in digital asset prices.

At Coinbase, blockchain reward revenue, primarily from stakes, accounted for 11% of net revenue in the third quarter of 2022, up from 8.5% in the second quarter. Coinbase is the second largest depositor of Ether. Billions of dollars worth of Ether have been staked on exchanges as well as decentralized protocols like Lido and Rocket Pool to stake the cryptocurrency for returns.

In an interview, Grewal said Coinbase’s staking product differs from Kraken’s because staking rewards are fully disclosed and determined by blockchain protocols, and staking assets are always customer assets since there is “no transfer of titles.”

Staking involves earning rewards by unlocking coins to help order transactions on various blockchains such as Ethereum.

Major exchanges including Coinbase and Binance began offering Ether staking services for their customers when Ethereum transitioned its consensus mechanism to proof-of-stake last September. It has allowed investors to stake their Ether coins on the blockchain and earn returns.

“The Kraken settlement sets a precedent for the other exchanges that offer similar products for their staking clients,” said Marc Arjoon, research associate at crypto investment firm CoinShares.

Coinbase and Binance also offer derivative tokens for staking customers. Trading in a one-to-one relationship with Ether, these tokens allow people to trade Ether even though the coins are still locked on Ethereum. cbETH, the liquidity derivative token for Coinbase users, fell 5.6% in the last 24 hours, according to CoinGecko.

(Updates with commentary from Coinbase’s Grewal in the eighth paragraph.)