The four cracks in the crypto business model

The four horsemen of the crypto apocalypse are currently trampling over the sector’s 2023 ambitions.

This, as the post-FTX digital asset landscape finds itself facing brute-force regulatory pressure in the US, increasingly disinterested retail investors, a potentially unbanked future, and now, according to the Security and Exchange Commission’s (SEC) latest settlementa serious threat to staking, an innovative product that many crypto companies have “staked” their future retail hopes on.

Even nominal crypto asset Bitcoins recent setback has cooled, with the coin’s price falling to a three-week low under $22,000 which the broader cryptocurrency market itself throws 40 billion dollars in value.

Read more: In 2023, Crypto must focus on transparency and security

In the fourth quarter of 2022 earnings callretail platform Robinhood, which lost nearly a million monthly users near the end of the year, told investors that the crypto business has hit the buffers as retail investors’ appetite for speculative assets continues to be dampened by both panic over a looming crypto crash and higher interest rates.

It is also becoming more difficult for crypto businesses to access traditional banking services, as even the emerging financial institutions that previously centered their business models on catering for the industry is now cooling on it after suffering heavy losses.

Custodia Bank, a new institution founded to specialize in digital asset payment and custody solutions for US commercial clients and not yet operational, recently had its application for membership at the US Federal Reserve denied.

As reported by PYMNTS Binance, the world’s largest cryptocurrency exchange, temporarily suspended US dollar bank transfers earlier this week (Feb. 8), a move that observers speculated was related to the exchange’s difficulty accessing banking services.

Cici Lu, founder of blockchain advisor Venn Link Partners, was quoted in a Bloomberg report (February 9) who said there is “wild speculation that the crypto sector is going to find it harder to access US banking”

What’s at stake with Crypto Staking

But it’s the SEC’s $30 million settlement with US-based crypto exchange Kraken over its betting product that many observers consider to be the biggest recent development in the crypto sector, and one that could have a far-reaching impact on an industry already sweating. regulatory skepticism related to the collapse of FTX.

“Whether through stake-as-a-service, lending or other means, crypto intermediaries must provide the proper disclosures and safeguards required by our laws.” SEC Chairman Gary Gensler so.

Major crypto exchanges, including Coinbase and Binance, have themselves waded into offering crypto staking products to diversify their revenue. Coinbase is the second largest depositor of stake Ether, according to the tracker Etherscan.

SEC alleged that Kraken’s staking service was an illegal sale of securities and that their crypto staking products broke the rules. Kraken did not admit or deny the allegations, but agreed to pay a $30 million fine and discontinue its products in the United States as part of the settlement.

Coin base stock fell the most in over half a year on the news.

Staking works by allowing holders of tokens that allow stake – and not all cryptocurrencies do, for example, Bitcoin uses a proof-of-work mechanism, not proof-of-stake, making it ineligible – to generate returns by allowing their tokens to be used for to facilitate transactions on a blockchain.

According to the SEC complaint, Kraken offered its users returns as high as 21%.

“Staking is a really important innovation in crypto… We need to make sure that new technologies are encouraged to grow in the United States, and not stifled by a lack of clear rules. When it comes to financial services and web3, it’s a matter of national security that these qualities are developed in the United States.” tweeted Coinbase CEO Brian Armstrong.

“Regulation by enforcement does not work. It encourages companies to operate offshore, which happened with FTX, he added.

At least one SEC commissioner disagrees with the agency’s own claims.

Commissioner Hester Peirce dissented in one statement, “Today the SEC shut down Kraken’s betting program and counted it as a win for investors. I disagree and therefore disagree … Instead of going the route of thinking through intervention programs and providing guidance, we again chose to talk through an enforcement action.”

“Most troubling, however, is that our solution to a registration breach is to completely shut down a program that has served people well … A paternalistic and lazy regulator settles on a solution like the one in this settlement,” she added.

Coinbase’s Legal Director Paul Grewal separately alleged that the SEC is taking a brute-force approach to classifying cryptocurrencies as securities with its recent actions.

“The term ‘investment contract’ requires – as the law says – a contract. But here there are no contracts, either written or implied. The developers who created the tokens in question have no obligations whatsoever to buyers who later bought these tokens on the secondary market. And with zero contractual relationship can’t it be an ‘investment contract'”, says one recent legal filing from the company.

Legal certainty matters, and crypto companies are starting to wise up and make their case. What happens to the industry next remains to be seen.

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