As The Sec Warns Investors, Cryptocurrency's Existential Crisis Continues

The route to regulatory recognition for cryptocurrency is growing longer by the day.

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Several pessimistic analysts fear the industry will soon be rendered obsolete in the United States.

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As the United States. The Securities and Exchange Commission (SEC) issued a caution to investors on Thursday (March 23), highlighting that cryptocurrency offers in the United States may be unlawful since they are not registered with the regulator.

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Frictions between cryptocurrency companies and US regulators have reached a boiling point in recent days, with both sides being increasingly vocal in their condemnation of the other.

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"The only money you should put at risk with any speculative investment is money you can afford to lose completely," said Gary Gensler, chairman of the Gary Gensler Agency. "There is no crypto asset company registered with the SEC as a national securities exchange... and no existing national securities exchange trades crypto asset securities."

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The United States has yet to develop a complete framework or set of rules for the crypto business in particular, instead relying on existing securities and commodities laws, frustrating crypto enterprises who have thus far run afoul of them.

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The SEC has so far pursued Terra, Coinbase, Kraken, Paxos, and Binance, alleging that the crypto businesses either provided users with unlawful securities or violated investor protection regulations.

In a tweet, Brian Armstrong, CEO of cryptocurrency exchange Coinbase, stated, "the SEC just has not been fair, reasonable, or even showed a seriousness of purpose when it comes to their engagement on digital assets."

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Coinbase, a publicly traded US corporation, made its market debut on the same day that US senators approved Gary Gensler as SEC chairman: April 14, 2021.

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Since Gensler's confirmation nearly two years ago, the government has increased its operations against the crypto industry, stepping up its efforts even more with the November 2022 collapse of the once-popular exchange FTX.

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Although the SEC claims must be challenged in court, Gensler addressed much of the industry's ongoing criticism of his agency's enforcement operations in an op-ed published earlier this month (March 9).

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"I find the talking point that there is a lack of clarity in the securities laws unpersuasive," Gensler wrote in the piece titled "Getting crypto firms to do their work within the bounds of the law." He went on to say, "Some crypto companies may message that the laws are unclear rather than admitting that their platforms do not provide adequate investor protection."

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"At times, it appeared that some sought clearance for non-compliant activities rather than reforming a fundamentally non-compliant business model replete with conflicts," the SEC chair continued.

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What is at stake with cryptocurrency staking?

The SEC wrote in its recent investor alert that "entities and platforms involved in lending or staking crypto assets may be subject to federal securities laws," and a common thread among the recent SEC actions taken against both Coinbase and Kraken is the targeting of their centralized crypto staking services.

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According to Trade Algo, speculation has been widespread since the Ethereum network converted last year from a "proof-of-work" design to a "proof-of-stake" (PoS) blockchain network where investors may "stake" their currencies in exchange for incentives.

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Industry observers have noted that the new "staking" protocol is not dissimilar to the interest paid out on bonds in practice — but a careful reading of the SEC action taken against Kraken reveals that the agency may not be opposed to the concept of staking as much as it is how staking services are currently being offered to retail investors.

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The blockchain is regulated by validators rather than miners under the Ethereum network's PoS protocol. Operating a validator on the Ethereum network takes more technical knowledge than many retail crypto investors have, which is why firms like Kraken and Coinbase provide staking as a service.

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The SEC's anti-staking efforts are focused squarely on these products, not on individuals' capacity to serve as validators.

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Industry analysts and crypto proponents think that by removing centralized staking from the marketplace, the SEC will eventually encourage PoS blockchains to be more decentralized and dispersed, as crypto was designed to be.

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To be a validator, however, stakes must deposit about $50,000 worth of the token into Ethereum's PoS smart contract, putting it out of reach for many ordinary retail investors and muddying the protocol's future sustainability.

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