SEC Slaps Kraken $30M Fine Spooking Markets, Bitcoin Slides Below $22K

The first two weeks of February have delivered nothing short of the volatility that the sector is synonymous with. The broader market set off on a dull mood early this week, influenced by developments around the now-resolved dispute involving crypto lending firm Genesis and its parent company Digital Currency Group. Most asset prices across the board, except AI-related tokens, established a downtick. The latter, including tokens for SingularityNET (AGIX), Alethea (ALI), and fetch.ai (FET), thrived on the hype around OpenAI's large language model chatbot, ChatGPT, returning decent gains during this period.

Bitcoin drops 4%, leading the market in losing momentum

Bitcoin price successfully printed its first green daily candle in Tuesday's trading session following five successive red closes. The modest slump between Feb 2 and 7 knocked off hundreds of dollars in recovery gains registered at the start of this month after the market action turned slowly towards the end of January. The flagship crypto resumed the downtrend on Wednesday and extended the losses today.

BTC/USD chart. Source: TradingView

Market data shows the BTC/USD pair is hovering around $21,800 after the sharp plunge to a three-week low of $21,773. Ethereum posted a similar drop to $1,537 but has since moved up to $1,546, where it was last spotted. The latest retracement, which has seen Bitcoin fall below $22k for the first time since Jan 20, comes on the back of emerging concerns around crypto staking.

ETH/USD and BTC/USD 30-day. Source: TradingView

A late Wednesday report from Bloomberg revealed that Kraken exchange was under investigation by the US Securities and Exchange Commission. The person familiar with the matter said the probe was advanced, and Kraken would work out a settlement. This revelation became even more weighty after Coinbase CEO Brian Armstrong said in a tweet that the SEC could be after retail-focused crypto staking, including a crackdown on staking service providers. The post drew several reactions from the crypto community, specifically among users and enthusiasts of blockchain networks relying on proof-of-stake consensus.

To learn more about Ethereum, check out our Investing in Ethereum guide.

SEC orders shut down of Kraken staking

Confirming the Wednesday leaked reports, the SEC shared in a Feb 9 release that it has laid prejudgment interest and civil penalties on the exchange for the unregistered offering of its staking services.

“Kraken not only offered outsized returns [whereby investors transfer crypto assets to the platform for staking in exchange for advertised annual investment returns of as much as 21 percent] untethered to any economic realities, but also retained the right to pay them no returns at all,” Gurbir Grewal, the director of the SEC Division of Enforcement, said.

In addition to a $30 million fine, the exchange has been ordered to pull the plug on its staking service. The markets regulator also cautioned staking platforms running similar operations, advising them to register and provide adequate disclosures about the risks associated with their offering. Gensler has reiterated on several past occasions that tokens of PoS blockchains could constitute securities in and of themselves.

“Whether it's through staking-as-a-service, lending, or other means, crypto intermediaries, when offering investment contracts in exchange for investors' tokens, need to provide the proper disclosures and safeguards required by our securities laws,” Gensler remarked on the Kraken case.

The exchange neither refuted nor accepted the charges. Following the SEC orders, the Internal Revenue Service (IRS) also showed interest in the trading platform, explicitly seeking approval to review the books and papers of Kraken and its subsidiaries.

“The IRS is conducting an investigation to determine the identity and correct federal income tax liability of US persons who conducted transactions in cryptocurrency for the years ended Dec 31, 2016, 2017, 2018, 2019, and 2020,” a section of the related court filing read.

The US federal tax laws enforcer filed the petition today, adding that it previously summoned the exchange, which failed to heed.

“Despite discussions between the parties, Payward Ventures Inc. & Subsidiaries has failed to comply with the summons and has not produced the books, records, papers, and other data demanded in the summons. Payward Ventures Inc. & Subsidiaries' failure to comply with the summons continues to this date,” the revenue service said.

It adds up that Coinbase CEO raised the alarm on the planned enforcement action as Coinbase has a similar staking-as-a-service offering. Coinbase stock declined in reaction to the news reaching $60 at the close of the day.

COIN stock

Armstrong's tweet garnered reactions from many observers and views from several figures, including Cardano founder Charles Hoskinson and ConsenSys founder Joseph Lubin. Lubin and Hoskinson were both involved in the development of Ethereum in its early days.

“I think it's as likely, and would have the same impact, as if Uber was made illegal.” Lubin told CoinTelegraph.

Top gainers

Prices of the majority of tokens have retreated but some notable ones like RocketPool (RPL) have stood out in contrast, charting green candles. RPL has been one of the trending tokens this week, up  19.65% on the day and 457% in February, thanks to the growing popularity of its liquid staking solution for Ethereum.

RPL/USD. Source: TradingView

DeFiLlama data shows that the total value locked (TVL) in the protocol's Ethereum staking service was on course to the $1 billion mark on Thursday.

DeFi TVL chart. Source: DeFiLlama

RocketPool, like other platforms offering an alternative to conventional staking, allows users to become Ethereum node operators without necessarily depositing the specified 32 ETH minimum stake. In exchange for depositing a smaller sum of Ether, users get the platform's liquid staking token rETH to prove their claim to staking rewards accrued over time to the stake. Rocket Pool, in particular, offers better yields (~ 7.26% per year) compared to usual 4.68% returns.

These rates are variable and hinge on factors such as node demand and supply on the Ethereum chain.

To learn more about Rocket Pool, check out our Investing in Rocket Pool guide.

Former Coinbase product manager pleads to insider trading

In other developments this week, Ishan Wahi, a former Coinbase manager, admitted to insider trading charges in what was the first such case in cryptocurrency. The SEC accused Wahi of insider trading last July, alleging Wahi provided information to his brother Nikhil Wahi and friend Sameer Ramani on nine specific tokens before they were listed for trading on Coinbase. The trio would then sell said assets shortly after listing, accruing over $1 million in profits.

In a comprehensive 81-page brief filed on Feb 6, the Wahi brothers' defense lawyers argued a motion to dismiss the insider trading case. The legal team said that the tokens in question were not securities, as defined by law, but instead utility tokens meant for use on their native networks to enhance growth. They asserted that the tokens were never meant to be solely investments or like stocks rather were meant to drive activity on their respective networks. The lawyers added that the SEC was misguided in its generalization of the nine digital assets tokens as securities, as they lacked an investment contract, instead likening them to collectible items such as Beanie Babies and baseball cards.

In addition, they called out the watchdog over the fact that it has no congressional approval to regulate cryptocurrencies, accusing it of using a brute force approach to assert regulatory power over a massive new industry. Ishan ultimately admitted to the wrongdoing in a Feb 7 hearing at the Manhattan federal court. His brother, Nikhil, earlier pled guilty in a virtual hearing last September.