Table of Contents
Introduction
In a wave of enforcement actions, the Securities and Exchange Commission (SEC) has recently brought charges against several major cryptocurrency exchanges, accusing them of offering unregistered securities to their customers. This step marks a significant escalation in the SEC’s efforts to regulate the burgeoning cryptocurrency sector, particularly platforms offering crypto asset lending and staking programs.
Gemini
In January 2023, the SEC charged Genesis Global Capital, LLC and Gemini Trust Company, LLC for the unregistered offer and sale of securities to retail investors through the Gemini Earn crypto asset lending program. This unregistered offering raised billions of dollars’ worth of crypto assets from hundreds of thousands of investors. It’s alleged that Genesis and Gemini began offering the Gemini Earn program to retail investors in February 2021, allowing investors to loan their crypto assets to Genesis in exchange for interest payments. However, in November 2022, Genesis announced that it would not allow its Gemini Earn investors to withdraw their crypto assets due to a lack of liquid assets to meet withdrawal requests, following volatility in the crypto asset market. This has led to an ongoing situation where Gemini Earn retail investors have still not been able to withdraw their crypto assets1.
Coinbase
In June 2023, the SEC charged Coinbase, Inc. with operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency. The SEC also charged Coinbase for failing to register the offer and sale of its crypto asset staking-as-a-service program. Coinbase has allegedly made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities, intertwining the traditional services of an exchange, broker, and clearing agency without having registered any of those functions with the Commission as required by law. In addition to this, Coinbase is also alleged to have been engaging in an unregistered securities offering through its staking-as-a-service program since 2019, which allows customers to earn profits from the “proof of stake” mechanisms of certain blockchains and Coinbase’s efforts2.
Kraken
The SEC charged Payward Ventures, Inc. and Payward Trading Ltd., commonly known as Kraken, with failing to register the offer and sale of their crypto asset staking-as-a-service program in February 2023. To settle the SEC’s charges, Kraken agreed to immediately cease offering or selling securities through crypto asset staking services or staking programs and pay $30 million in disgorgement, prejudgment interest, and civil penalties. The SEC complaint alleged that since 2019, Kraken offered and sold its crypto asset “staking services” to the general public, whereby Kraken pools certain crypto assets transferred by investors and stakes them on behalf of those investors. The complaint also highlighted the risks associated with these platforms, with very little protection for investors3.
Conclusion
The SEC’s actions against Gemini, Coinbase, and Kraken represent an increasing effort to regulate the cryptocurrency industry and ensure the protection of investors. As the SEC has demonstrated with these actions, it is committed to ensuring that all entities offering securities, including those offering crypto assets, are fully compliant with the law. It remains to be seen how these charges will impact the future of these exchanges and the broader crypto asset industry.
