CoinLoan Weekly: SEC's action, staking controversy, PayPal's crypto holdings

Price dynamics

BTC price

After wobbling around $23,000 for two days, the BTC price peaked at $23,610.19 on Tuesday, February 7. The next day, it only managed to touch $23,380 and gradually descended — first below $23,000, then to nearly $22,500 on Thursday, February 9, and around $21,800 the next day. Over the weekend, BTC failed to rise above $22,000, save for an uptick on Sunday, February 12. The following evening, it rolled down below $21,500.

Last week put a damper on Bitcoin's gains. The coin recorded the most severe intra-week loss this year, mainly due to the actions of US regulators. On Wednesday, February 8, the market reacted to a tweet by Brian Armstrong, CEO of Coinbase, who shared "rumors that the SEC would like to get rid of crypto staking in the US for retail customers." Those rumors were confirmed the next day, as the regulator imposed a $30 million fine on the Kraken exchange and forced it to shut down staking services for US residents. As a result, the Crypto Fear & Greed Index dropped below 50, indicating a shift from greed to a neutral sentiment.

As of this writing, BTC is changing hands at $21,709.98, with a 24-hour change of -0.6% and a 7-day loss of -4.7%.

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ETH price

Like BTC, ETH started falling mid-week after trading between $1,620 and $1,650 and peaking at $1,690.67 on Tuesday, February 7. It stayed above $1,670 the next day and moved downward. The price sank to $1,540 on Friday, February 10, approached $1,500 at the start of the weekend, and finished at around $1,540. On Monday, February 13, ETH dove past $1,500.

The SEC's crackdown on staking has affected Ether, as the blockchain has recently transitioned to Proof of Stake. This consensus mechanism let users get rewards for locking up their coins to help secure the network. On the day of the announcement, ETH saw the worst daily performance since December 16, 2022, plunging by almost 6.5%. Commenting on the news, Brian Armstrong shared an article arguing that PoS does not make Ether a security, and those who think otherwise misinterpret the Howey Test. Meanwhile, the upcoming Shanghai update, which will let validators unlock their stakes and yield rewards, may become a bullish event.

As of now, ETH is worth $1,500.39, with a 24-hour slip of -1.3% and a 7-day change of -7.2%.

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XRP price

XRP was also in the red, moving along a similar trajectory. After holding close to $0.40, it jumped to $0.405109 on Tuesday, February 7, and $0.406083 on Thursday, February 9. The price dropped to $0.378204 the following day and held above $0.38 for the rest of the week. Weekend trading did not bring significant change. Monday, February 13, sent the token down to as low as $0.365899.

Following the SEC's announcement, Stuart Alderoty, Chief Legal Officer of Ripple, called SEC Chairman Gary Gansler "a political liability," suggesting the crackdown may negatively affect the Biden Administration and the Democratic party. Alderoty noted that most of the country's 40+ million crypto holders are voters, and the market sentiment may indicate public disgruntlement with the government's handling of the crypto space. Another negative factor for XRP is a decline in active addresses combined with falling transaction frequency on the network. Whales with balances between 10 million and 100 million XRP have also been selling quite actively, showing behavior that usually coincides with significant slumps.

At press time, XRP is trading at $0.368686, with a 24-hour loss of -1.3% and a 7-day drop of -6.4%.

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Cryptocurrency news

Kraken's SEC settlement may affect the future of staking

On Thursday, February 9, the Securities and Exchange Commission (SEC) charged the Kraken crypto exchange with "failing to register the offer and sale of their crypto asset staking-as-a-service program." Settling the charges will cost the company $30 million, and its staking services are no longer available to US residents. This move raised questions about the future of staking in the United States.

The regulator alleges that Kraken's program, which offered annual returns of as much as 24%, constituted a provision of unregistered securities products. According to SEC Chair Gary Gensler, the charges should demonstrate to the market at large "that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection."

Implications for staking

Staking is the foundation of Proof of Stake, a consensus mechanism that is more energy-efficient and sustainable than Bitcoin's Proof of Work. Instead of mining, it relies on nodes supported by those who lock up their crypto. Companies essentially delegate node operation to users through staking services, paying them a yield in return. In recent years, this technology has received increasing media attention, particularly after Ethereum's transition to PoS in late 2022.

At a media briefing in the wake of the announcement, an SEC spokesman said the commission generally regarded staking services on par with other security offerings. In Kraken's case, the investment program — i.e., the promotional representations and the agreements between the exchange and its users — constituted a security.

Previously, Gary Gensler suggested that staking services could pass the Howey Test, which would classify them as securities. Meanwhile, staking through intermediaries was, in his words, "very similar" to lending "with some changes of labeling."

Repercussions remain unclear

Staking providers may soon have to register as securities platforms, get approved by the SEC Division of Corporation Finance, and file regular disclosures. However, the officials must first clarify whether the case has large-scale implications.

Following the news, Coinbase Chief Legal Officer Paul Grewal denied that the SEC's action affected his company, as its staking services differed from Kraken's. "Kraken was essentially offering a yield product [...] our customers' rewards depend on the rewards paid by the protocol, and commissions we disclose," he said.

Criticism of the crackdown

SEC Commissioner Hester Peirce believes that imposing generic requirements is controversial, and registration could turn out to be more complex than it seems. In particular, it is unclear "whether the staking program as a whole would be registered or whether each token's staking program would be separately registered and what the accounting implications would be for Kraken."

Peirce, nicknamed Crypto Mom, described the SEC's actions as "not an efficient or fair way of regulating" crypto, as the institution had again chosen enforcement action. Her dissent also suggests that staking providers are not created equal, which is why "cookie-cutter" methods are questionable.

PayPal's customer crypto holdings exceeded $600 million in Q4 2022

PayPal's annual report to the SEC has revealed crypto holdings totaling $604 million as of December 31. Nearly 90% of the amount held on behalf of customers included Bitcoin (BTC) and Ether (ETH), with the remainder divided between Litecoin (LTC) and Bitcoin Cash (BCH).

According to the document, the payments provider kept $291 million in BTC, $250 million in ETH, and $63 million in LTC and BCH. The December total was lower than in September ($690 million), reflecting steep valuation declines in the aftermath of the FTX downfall.

The filing reads, "We allow our customers in certain markets to buy, hold, sell, receive, and send certain cryptocurrencies as well as use the proceeds from sales of cryptocurrencies to pay for purchases at checkout." PayPal's customers have been buying and selling digital assets since October 2020. Withdrawing crypto off the platform to external wallets became possible in June 2022.

Yet PayPal has only recently included crypto holdings in its SEC filings. Breaking them down is now mandatory under the SEC's Staff Accounting Bulletin No. 121 (SAB 121) released in March 2022.

PayPal CEO Dan Schulman admitted owning Bitcoin in 2019. The following year, he said he was "very bullish on digital currencies of all kinds." At a Web Summit, Schulman emphasized the advantages of blockchain technology, including speed, low cost, and efficiency, which could increase financial inclusion and "help drive financial health for so many people."

In 2022, PayPal obtained a BitLicense from the Department of Financial Services, which governs entities working with digital assets. PayPal claimed to be the first company to convert a conditional license of this kind into a full one.

Stablecoin project halted

On Friday, February 10, Bloomberg reported that PayPal Holdings Inc was halting work on its stablecoin project, previously scheduled to launch in a few weeks. Amanda Miller, a PayPal spokesperson, explained that the company had not abandoned the idea of its own dollar-backed asset. Miller said, "If and when we seek to move forward, we will, of course, work closely with relevant regulators."

Last year, a string of crypto bankruptcies intensified the regulatory scrutiny. Paxos, PayPal's key partner, is now faced with a probe by the New York State Department of Financial Services. As a result, the payments company has put the stablecoin endeavor on hold, citing the shifting legal landscape.