The crypto industry has been in a seemingly endless state of confrontation since its inception, battered by endless waves of fear, uncertainty and doubt, butting up repeatedly against not just cynicism, but sometimes outright hostility.
As a result, crypto developers, users and advocates have become battle-hardened (figuratively speaking) and don’t flinch when a new obstacle is planted in the road, or if prices suddenly plunge off a cliff.
The latest unfolding crypto conflict, though, should come as no surprise, as it has been heading down the line for a long time. It is, of course, the aggressive wrangling now taking place over regulation, primarily between crypto platforms and the Securities and Exchange Commission (SEC) in the US, which has fired shots and is now prompting bigger players in the crypto game to take a robust stand.
Kraken and Binance USD
Last week, it was announced that the popular crypto exchange Kraken had reached an agreement with the SEC to shut down its Ethereum staking service for US customers, along with paying a $30 million settlement, after failing to register its staking program.
However, the SEC received no shortage of intense criticism for its actions, not least from the dissenting SEC commissioner Hester Peirce who observed that the commission had again unfairly chosen “to speak through an enforcement action.”
Meanwhile, Adam Cochran, a partner at venture capital firm CEHV, pointed out that settlements such as that agreed to by Kraken do not establish legal precedents, and so the crypto industry must take the battle to the courts. Further, he identified presciently that the SEC chair Gary Gensler is “working his way up the food chain,” indicating that a meaningful confrontation will occur when the SEC clashes with a sizeable company not willing to fold.
In further regulatory news, the New York Department of Financial Services (NYDFS) has ordered finance and technology company Paxos Trust to cease issuing the Binance USD stablecoin (which is owned and issued by Paxos in partnership with Binance), which the SEC alleges is an unregistered security.
Coinbase Makes an Entrance
In response to the SEC mobilizing aggressively, the Chief Legal Officer at Coinbase, Paul Grewal, published an official post. It clearly explains what staking actually is, from a technical perspective, in order to illustrate how staking services do not fall within the definition of security, indicating in the process how existing frameworks simply may not be compatible with the workings of proof-of-stake blockchain technology.
Additionally, Grewal ran through a series of other rebuttals, asserting that Coinbase appropriately discloses critical information to its users, that users always retain ownership of their tokens, staking is not equivalent to investment, and staked assets are not utilized without consent by Coinbase.
What we’re left with is the impression that the SEC is not treating blockchain as a new and novel technology, and is not seeking to analyze or comprehend proof-of-stake mechanisms. What’s required from the authorities is unbiased research, open communication, and the drawing up of new, technology-appropriate guidelines. What we have instead, though, is the heavy-handed application of ill-fitting tools, and, it appears, attempts to force compliance without guidance, perhaps partly because no amount of guidance can pressure a square peg into a round hole.
Clarity Is in Demand
Crypto has always had a reputation as a wild west tech/financial frontier, a reading that has often been justified. There have been positives about this state of affairs, as developers can act quickly and without hindrance, and can build without waiting for permission. On the other hand, it enables an extremely risky setting in which unscrupulous actors operate without oversight, and it's the kind of environment that becomes unsustainable as the sector grows.
However, it would be inaccurate to suppose that most crypto participants are in favor of lawlessness, or are automatically opposed to regulation . In reality, what’s being requested, most often, is clarity and even-handedness. The crypto industry, collectively, wants to onboard as many newcomers as possible and celebrates every inch gained towards mainstream adoption. As such, there is recognition of the benefits that would come from operating within the kind of secure and stable environment that light regulation might help to enable.
However, what is not seen as acceptable is that regulators should simply punish platforms for not complying appropriately, while never actually issuing any firm explanations as to what that compliance should look like. It’s also far from tolerable if regulators appear to be circling with a view to critically incapacitating the crypto industry.
There is a higher-than-usual degree of paranoia in the crypto world, and an openly discussed fear that regulators acting for the US government might, on the whole, prefer for crypto to simply disappear altogether. It’s vital, then, that this atmosphere of distrust is dispelled through the authorities recognizing that blockchain development, cryptocurrencies and web3 are component parts of a perfectly valid tech sector. From there, a framework of reasonable consumer protections should not be difficult to fairly thrash out.
However, to reach that stage, in which all parties can discuss the issues transparently and with a view to enabling continued development, may first require a firmly assertive pushback at the regulators, and it appears to be Coinbase who will make that move.
