SEC accuses Kraken of staking, worries crypto executives

by Arthur · February 10, 2023

Table of Contents

A Kraken strike

The SEC’s decision to charge crypto exchange Kraken with securities violations over a popular way for the industry to make money sent several chills down the spines of executives across the sector. At 7:40 a.m. Eastern, the price of Bitcoin was trading at $21,757, down nearly 3.9 percent over the past 24 hours.

Crypto companies — and skeptics of the agency’s approach to regulation — now worry about what new limits the agency will try to impose on the industry.

The SEC focused on staking, where users pledge certain crypto holdings, such as Ethereum, to companies in exchange for large returns. (These borrowed holdings are in turn used to validate crypto transactions.) Companies like Kraken pool customers’ assets, making it easier for regular users to stake their holdings and make money.

But the SEC accused Kraken of selling unregistered investment contracts, since stake customers are promised regular returns and payouts. That deprives investors of necessary disclosures, the agency said. “Do they lend, borrow or trade with them?” the agency’s chairman, Gary Gensler, said of the strike by service providers in a video presentation on the SEC’s website. “Where do the rewards come from? Are you getting your fair share?”

Kraken agreed to shut down its U.S. betting program and pay $30 million to settle the allegations — though it neither admitted nor denied the allegations, and will retain its international betting services.

The move could lead to a wider clampdown. Speculation about a possible SEC ruling against Kraken had run through the crypto industry for days, leading Brian Armstrong, CEO of the Coinbase exchange, to defend the practice on Wednesday: “I think it would be a terrible path for the United States” if SEC banned betting for retail investors, he tweeted.

Shares in Coinbase, which also offers a betting service, fell 14 percent on Thursday. But the company told DealBook that its offering is different from Kraken’s — while noting that it generated just 3 percent of revenue last year — and hinted that it would fight any legal action. “We are willing to stand up for the rule of law,” said Paul Grewal, its general counsel.

Not everyone at the SEC agreed with the move. “We’ve known about crypto-behaviour programs for a long time,” Hester Peirce, a Republican commissioner, wrote in a dissent. She argued that the agency should have provided guidance for such programs rather than cracking down on them.

In other crypto news, a federal judge ordered lawyers for Sam Bankman-Fried to cooperate with prosecutors on a plan to stop the FTX founder from deleting text messages he sends while he awaits trial for fraud.

HERE’S WHAT HAPPENS

Japan will reportedly appoint a new central bank governor. The yen rose against the dollar on Friday after reports that Kazuo Ueda, an academic and monetary policy expert, would succeed Haruhiko Kuroda as governor of the Bank of Japan. But analysts warned it was unclear what Ueda’s appointment would mean for Japan’s ultra-loose monetary policy.

Britain narrowly avoids a recession. The economy was flat last quarter, technically avoiding two quarters of negative growth. But while other countries such as the US are proving unexpectedly resilient, the IMF still predicts that Britain – whose economy is the worst performing among the Group of 20 nations – will fall into recession this year.

SpaceX limits Ukraine’s access to Starlink network for military use. The president of Elon Musk’s aerospace company, Gwynne Shotwell, said this week that it had limited Kiev’s ability to use the satellite internet service to plan attacks on Russian forces. It is widely speculated that Ukraine has used Starlink to plan drone attacks.

Adani Group is reportedly turning to an elite Wall Street law firm for help. The Indian conglomerate has hired Wachtell, Lipton, Rosen & Katz, one of America’s top defenders against activist investors, to advise, according to The Financial Times. Adani companies’ shares have plunged following criticism from US-based short-seller Hindenburg Research.

‘Toodle-oo’ at Disney

News Thursday that activist investor Nelson Peltz had dropped his Disney board fight after Bob Iger, the entertainment giant’s chief executive, unveiled a sweeping overhaul sparked celebrations at the company. (A Disney executive texted a Times reporter “Toodle-oo” with a screenshot of a CNBC headline announcing the news.)

But Mr. Peltz’s departure represents a victory for both sides — and still leaves Mr. Iger with enormous challenges in his second tour of duty at Disney.

Peltz achieved one main goal: making money. In closing the fight, he noted that Mr. Iger’s plan — including cutting billions in costs, promising to restore Disney’s dividend and more — addressed most of his demands.

Perhaps more importantly, Mr. Peltz made a substantial profit. Trian Partners, his investment firm, bought about $1 billion in Disney shares at an average of about $90 each; the company’s stock closed Thursday at $110.36.

Mr. Iger will now move on to the rest of his long to-do list. He demonstrated a clear and decisive vision of the new Disney – but it is one that requires difficult steps to implement. The company will shed 7,000 jobs, about 4 percent of its workforce, to save about $5.5 billion in expenses.

He also has to rethink streaming. The flagship Disney+ service will focus on profitability rather than subscriber growth, and spend less on content. Mr. Iger suggested that Disney may end up sell its majority stake in Hulu instead of buying out Comcast’s stake in the platform.

And Mr. Iger still has a thorn in his side: Ike Perlmutter, the chairman of Marvel and a top Disney shareholder who urged the board to make Mr. Peltz a director. (On Thursday, Mr. Iger said he had prevented Mr. Perlmutter from firing Kevin Feige, the man behind the Marvel Cinematic Universe, in 2015.)

There is a lot for Mr. Iger to fix, in what he has promised will be only a two-year term as CEO (He said on CNBC that the board is already working to find his successor — obviously hoping to avoid a repeat of Bob Chapek’s disastrous tenure.) “It’s my contract says. ,” he told CNBC of his intention not to stay. – That was the agreement with the board.

Adidas’s Kanye West hangover

Bjørn Gulden has been CEO of Adidas for just six weeks, and he is already warning that the year will be a mess.

Adidas shares fell more than 10 percent this morningwiped more than 2.5 billion euros, or about $2.67 billion, in market value from the stock after the German sportswear giant issued its fourth profit warning in the past six months and said it expected big losses in 2023.

The biggest culprit: The company’s messy split last year with musician Kanye West could knock around 1.2 billion euros off full-year sales, and 500 million euros off operating profit – an even bigger loss than it had estimated just four months ago. Adidas cut ties with West, now known as Ye, in October after he went on an anti-Semitic rant. An immediate priority for Gulden (who was poached from rival Puma) is figuring out how to sell the mountain of unsold inventory from West’s Yeezy line.

The news rocked Wall Street. “There is a lot of work to be done across corporate culture, product, lower sell-through rate, excess inventory and digesting the Yeezy exit, all of which can be done but will take time,” wrote Piral Dadhania, an equity analyst at RBC Capital Markets, in an investor note. He cut Adidas’ share price target to 110 euros, which implies a further drop of 21 percent from this morning.

Adidas faces many headwinds. The company had lost market share to Nike and other rivals; its costly withdrawal from Russia and prolonged weakness in China have weighed on sales. The clothing collaboration with Beyoncé is also reportedly worse: Sales of the singer’s Ivy Park line are well outside the company’s internal forecasts, according to The Wall Street Journal.

Mr. Gulden announced a strategic review that will cost 200 million euros. “I am convinced that over time we will make Adidas shine again. But we need some time, he says.

ESG investment ban faces red government pushback

Some officials in red states are beginning to push back on ESG investment bans, as the debate grows more tense in capitals where much of the big-money decisions are made.

The latest: Frankfort, Ky. Public pension officials said they will oppose the state treasurer’s demand to pull funds from asset manager BlackRock, one of 11 financial giants that Kentucky has blacklisted for what it calls a boycott of energy companies through its environmental, social and governance investment guidelines.

David Eager, CEO of the Kentucky Public Retirement Authority, which manages a $21.6 billion pension fund on behalf of state and local government employees, told DealBook that members’ pension portfolios come before politics. “Taking into account non-investment-based factors and acting on political wishes is not in their best interest,” Mr. Eager said.

This position flips the usual Republican script that so-called “woke” investment constitutes a political position that fails to prioritize investors’ returns. But those in charge of managing the state’s pension funds turn the anti-ESG argument upside down, saying that if an investment is financially sound, they have a fiduciary duty to stick with it.

Meanwhile, in Indiana… A bill to ban ESG investment considerations in the management of public pensions faces a rewrite after a new analyst forecast $6.7 billion in diminished returns over a decade. Similarly, in North Dakota, a Republican supermajority in the House voted overwhelmingly against a boycott of financial institutions similar to Kentucky’s because it was considered too vague.

Even Florida, an epicenter of the anti-ESG movement under Governor Ron DeSantis, has softened its stance somewhat. The state will continue to do business with BlackRock as long as investment decisions steer clear of political, social or ideological considerations.