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gulatory Actions Against Crypto Exchanges Escalate With Little Guidance


Recent weeks have seen an unprecedented level of enforcement activity involving cryptocurrency exchange platforms. The United States Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have brought significant actions against exchange platforms for, among other things, failing to register with regulators. The “wild west” era of cryptocurrency appears to have ended, and a new era of stricter enforcement appears to be on the horizon. Yet, some crypto exchanges have asserted that while they have sought common ground with regulators, there does not appear to be a path to registration under current law.To get more news about crypto exchange news, you can visit wikifx.com official website.

The aggressive enforcement by both the SEC and CFTC may soon bring the two regulators into conflict, as both have sought to aggressively expand their jurisdiction in the cryptocurrency space. Whether a given token is properly considered an investment contract, a currency, and/or a commodity will determine whether the SEC, the CFTC, or both can legally regulate. The current wave of enforcement may provide additional clarity on this jurisdictional issue.
While lax enforcement is a thing of the past, government agencies have been slow to provide clarity or guidance with respect to how these exchanges can operate legally. To many observers, the regulators’ enforcement approach appears arbitrary and threatens the very existence of the young industry.
SEC Continues to Focus on Staking with Wells Notice to Coinbase
The Wells notice sent to Coinbase is the latest example of the SEC’s focus on “staking,” which is a way for holders of cryptocurrency to earn passive income from their investments. Users who “stake” their assets assist in the maintenance of the digital blockchain by “locking up” their coins to earn rewards. Certain blockchains use a proof-of-stake consensus mechanism to identify participants to validate new blocks of data being added to the blockchain. These “validators” must lock away a certain amount in tokens in order to ensure that they act honestly. In exchange for this, the validators receive rewards in cryptocurrency. Holders of cryptocurrency can delegate their stake to operators who do the actual labor of validating the blockchain transactions.

The SEC first set its sights on staking earlier this year when it settled charges with Payward Ventures, Inc. and Payward Trading Ltd., both commonly known as Kraken. The SEC alleged that Kraken failed to register the offer and sale of its crypto asset staking-as-a-service program. This was a program whereby investors transferred crypto assets to Kraken for staking in exchange for advertised annual investment returns of as much as 21 percent. As part of that settlement, Kraken paid $30 million to the SEC in disgorgement, prejudgment interest, and civil penalties and agreed to immediately end its SaaS program.
Commissioner Peirce called for the SEC to issue guidance on staking rather than regulating the activity by enforcement. “That our solution to a registration violation is to shut down entirely a program that has served people well,” Commissioner Peirce stated, is the mark of a “paternalistic and lazy regulator.”

Notwithstanding Commissioner Peirce’s comments, the SEC appears highly skeptical of staking-as-a-service. When the settlement with Kraken was announced, Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, stated that Kraken, through its staking program, “offered investors outsized returns untethered to any economic realities” and “provided them zero insight into, among other things, its financial condition and whether it even had the means of paying the marketed returns in the first place.”

A potential enforcement action against Coinbase, another cryptocurrency exchange platform, seems to indicate that Commissioner Peirce has not swayed her fellow commissioners.

On March 22, 2023, Coinbase disclosed that it had received a Wells notice from the SEC, and that the Wells notice relates to the Coinbase staking service, its crypto investment platform, and its wallet. A Wells notice is a formal notice that SEC staff intend to recommend an enforcement action. According to a statement from Coinbase, the SEC declined to specifically identify which assets on its platforms the SEC believes are securities. Coinbase claims it does not list securities or offer products to customers that are securities, and it contends that its staking services, which the SEC was first alerted to in 2019, are not securities either.

Coinbase also asserts that it attempted to register these services with the SEC, but that there is no existing way for a crypto exchange to actually register with the SEC. In fact, Coinbase claimed that it met with the SEC more than 30 times over the course of nine months and proposed two different “registration models,” but received no feedback.

After receiving the Wells notice, Coinbase called publicly for more regulatory guidance, not more enforcement. The likely enforcement action against Coinbase leaves little doubt that the SEC will continue to attempt to expand the scope of its jurisdiction over cryptocurrency platforms, including by classifying staking-as-a-service programs as securities offerings. While Kraken’s settlement foreclosed the possibility of a judge considering whether the SEC’s position is sound, Coinbase appears poised to put the SEC’s approach to the test.

Clients must be mindful that there is no existing way for crypto exchanges to register with the SEC. The SEC’s posture in this investigation further suggests that it will not provide feedback or work in lockstep with crypto exchanges in developing registration procedures. The SEC is content with regulating by what appears to be arbitrary enforcement. Absent federal government regulation, or guidance, companies will need to craft registration paths on their own with outside counsel.