The SEC cracks at Kraken, Coinbase’s shares pay the price

• The SEC alleged Kraken for their crypto-staking products; the crypto exchange to pay $30 M in the settlement. 
• Coinbase argues theirs is “fundamentally different,” shares dropped nonetheless. 

Any abrupt incident in a sector, especially by authorities or legalities, also affects other parties. Recently the SEC alleged the crypto exchange and bank Kraken regarding their crypto staking product, and as a result, the largest US crypto exchange Coinbase Global Inc. saw its share dropping most in six months. 

The Securities and Exchange Commission (SEC) alleged that Kraken broke the US rules with its crypto-staking products. They will now be paying $30 million to settle the case; part of the agreement says they are ordered to discontinue them in the US. At the same time, the commission added that the Kraken’s staking services were an illegal sale of securities. 

Coinbase’s Chief Legal Officer (CLO), Paul Grewal, said in response to the Kraken settlement that their on-chain staking services are “fundamentally different.” Speaking to Bloomberg, Grewal said the company’s staking program would not be affected by the recent revelations. 

“What’s clear from today’s announcement is that Kraken was essentially offering a yield product. Coinbase’s staking services are fundamentally different and are not securities.”

Despite their statements explaining the difference, COIN stock dropped by almost 14%, which was the biggest drop since July 26. At the time of writing, it was trading at $59.63 with a drop of 14.13%, with the previous close at $69.44, while the opening was at $68.49. The fifty-two-week range is from $31.55 to $214.02. It is clear that the stock is trailing at the lower end of the spectrum. 

The market cap is strong at $15.617 billion. Moreover, the short interest is bearish, with 28.58% float sold short. The next earnings date is February 21, 2023. 

According to a media report, Coinbase is facing a US probe in the context that they were ineptly letting Americans trade the digital assets which would have been registered as securities. Brian Armstrong, the Chief Executive at Coinbase, trumpeted the settlement case on Wednesday, arguing that the SEC is trying to eliminate crypto staking by retail investors. At the same time, crypto staking programs managed to grow a significant revenue stream for crypto exchanges like Kraken and Coinbase. Due to crypto winter and other factors, the trading volumes in digital assets have decreased considerably. 

Blockchain-rewards revenue at Coinbase is primarily focused on staking, with almost 11% net revenue in Q3 of 2022, a jump of 8.5% from Q2, while it is also Ether’s second largest depositor. Billions of dollars worth of ETH has been betted in DeFi protocols like Lido and Rocket Pool and exchanges, staking the coin for yield. 

Grewal highlighted in an interview that Coinbase’s staking product is fundamentally different from Kraken as their staking rewards are completely disclosed and are determined by blockchain protocols; also, the staked assets are consumer assets forever as there is “no transfer of titles.”

Staking involves earning rewards by locking up some coins to help order transactions on numerous blockchains like Ethereum. Major exchanges like the world’s biggest exchange and Coinbase have already offered Ether staking services to customers. Because of the merge where Ethereum shifted from proof-of-work (PoW) to proof-of-stake (PoS) on September 6, 2022. Now investors can put their Ether coins on the blockchain to earn returns. 

Marc Arjoon, research associate at CoinShares, said that:

“The Kraken settlement sets a precedent for the other exchanges that offer similar products for their staking customers.”

Nancy J. Allen is a crypto enthusiast and believes that cryptocurrencies inspire people to be their own banks and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning.

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