Regulation is Coming to Digital Assets

Part 2 – Regulations in the USA

Regulation of cryptocurrencies and digital assets in the USA has historically been selective and localized. It seems that both the dual banking system and the sheer number of regulatory bodies have made it difficult to reach a comprehensive, all-encompassing framework.

In March 2022, the Biden administration issued its Executive Order to ensure the responsible development of digital assets, outlining what it termed as a ‘whole of government approach’ to address the risks stemming from the growth of digital assets while supporting responsible innovation. However, in Oct. 2022, the FSOC (Financial Stability Oversight Council), an inter-agency consultative body, released a capstone report which concluded that “there is no comprehensive regulatory framework in the US”.

Given the fact that:

• As early as 2013, FinCEN (Financial Crimes Enforcement Network) issued guidance on administering, exchanging, or using virtual currencies,
• States like New York issued the BitLicense as early as 2015, and
• The OCC (Office of the Comptroller of the Currency) issued legal opinions enabling banks to provide digital asset services back in 2020

This lack of comprehensive regulation may be surprising.

That said, this hasn’t stopped the SEC (Securities Exchange Commission), from what some term “bringing one-at-a-time enforcement actions as a way to set crypto regulatory policy”. In fact, the SEC has been very consistent in its stance, despite severe criticism.

SEC steps up litigation

The past years have been fraught with litigation brought forward by the SEC against a wide variety of crypto market players. For example, quite a few actions have been taken against, what the SEC has referred to as, ‘unregistered crypto asset offerings’ (such as in the cases of Dragonchain Inc., Chicago Crypto Capital LLC, and the Hydrogen Technology Corp.). Actions have also been taken against popular influencers such as Kim Kardashian and Ian Balina, for not revealing that they had been paid for promoting ‘security tokens’. Click here to see an extensive list of the SEC’s Enforcement Actions.

While the industry has heavily criticized the SEC, the SEC has been very consistent in its stand that a ‘token is a security’. However, Congress has not yet taken a formal stance on the matter.

Kraken’ down on staking

However, in early 2023, something changed. On Feb. 10th, it was reported that the SEC reached a settlement of $30 million with crypto platform Kraken, for the exchange’s failure to register its staking-as-a-service program. In addition to the fine, Kraken agreed not to offer its staking services to US citizens (these services will continue to be offered in other countries).

While the SEC’s ‘crackdown’ on Kraken was not a first, its focus on the ‘staking-as-a-service’ program was. SEC Chair Gary Gensler explained, “that without providing proper disclosures and verifying the program with a regulatory authority, investors could have been exposed to unfair ownership clauses and been susceptible to heavier losses”.

According to a report from Staked and Kraken, the value of staked assets was estimated at $42 billion at the end of 2022. A representative of the popular DeFi platform, Lido, which is also the largest DeFi application for staking cryptocurrency, says that this decision may have grave implications for the market. Especially if the SEC concludes that US citizens cannot interact with staking at all.

Not all it’s Krak’ed up to be

Some have argued that the SEC has been investigating the various ‘earn’ programs targeting retail customers for many months now. Indeed, these investigations may be in response to some of the events of 2022, where central exchanges (or actors) offered retail customers an opportunity for high yield in reciprocity for ‘locking up’ their digital assets in an ‘earn’ program.

In fact, according to Blockdaemon CEO – “Our team believes the current actions are intended to target those (‘earn’) programs, not institutional clients engaging in the staking mechanism offered by various digital protocols”. Should this be the case, GK8 customers delegating their assets to ‘staking’ (whether running their own node or by using 3rd party services) while retaining complete control of said assets should not be affected by the SEC’s latest decisions.

Whether the latest activities of the SEC were targeted specifically at Kraken, at ‘earn’ programs, or at ‘staking’ in general, institutions investing in blockchain-based digital assets should expect more regulation in due time. Both in the USA, and globally.

These regulations will likely impact a wide range of activities including, policies for managing and approving organizational transactions, reporting features, insurance requirements, and more. Stay tuned for more information on the expected impact of changing regulations on custody requirements.

In the meantime, you can learn more here.