A new article published in Lexology navigates the evolving landscape of crypto staking and custody.
The article, published by the law firm Wilson Elser, looks at current rules and regulations relating to the oversight and enforcement of crypto firms engaged in activities like staking and stablecoins.
With Ethereum’s transition to proof-of-stake, the Securities and Exchange Commission’s (SEC) recent scrutiny of crypto staking has raised questions on the practice’s legality, the article points out.
Staking as service
With the emergence of “staking as a service” (SaaS) offered by numerous crypto firms and exchanges, investors can now lend their digital assets in exchange for potentially high returns. The concept is comparable to depositing cash in a bank account to earn interest, albeit without the assurance of Federal Deposit Insurance Corporation (FDIC) backing to safeguard the funds.
Case against Kraken
On Feb. 9, the Securities and Exchange Commission (SEC) took action against Karken for allegedly violating federal securities laws by offering a highly profitable crypto asset staking-as-a-service (SaaS) program.
The program allowed investors to stake their digital assets with Kraken in exchange for annual investment returns of up to 21 percent. The SEC claims that this program constituted an unregistered sale of securities, which is a violation of federal securities laws. Furthermore, the SEC alleges that Kraken failed to adequately disclose the potential risks associated with its staking program, charges to which Kraken admitted and settled with the SEC for $30 million.
In response to these and other issues, Kraken announced plans to launch its own bank on Mar. 6.
The Lexology report also highlighted the ongoing case around the BUSD stablecoin issued by the US-based financial trust company Paxos.
The New York Department of Financial Services (NY DFS) issued a consumer alert on Feb. 13, directing Paxos Trust Company (Paxos) to cease the issuance of BUSD, a stablecoin pegged to the US dollar and reportedly the third largest by market cap.
CryptoSlate’s in-depth report ‘the SEC vs. Paxos’ examines the potential ramifications of the SEC’s order for Paxos to discontinue BUSD minting.
The Lexology report cites an announcement by SEC Chair Gary Gensler, who proposed last month proposed changes to the “custody rule” that is part of the Investment Advisers Act of 1940. The rule changes prevent investment advisers from misusing or losing investors’ assets, a “safeguarding rule” to keep client assets, including cryptocurrency assets, in qualified custodial accounts.
According to the SEC, custodians have had to adapt their practices to safeguard various types of assets in the past. Ultimately, the Lexology report states that the proposed safeguarding rule would require an investment adviser to enter into a written agreement with the qualified custodian.
The custodial agreement proposed in Lexology includes:
- Appropriate measures to safeguard an advisory client’s assets
- Indemnifying an advisory client when its negligence, recklessness, or willful misconduct results in that client’s loss
- Segregating an advisory client’s assets from its proprietary assets
- Keeping certain records relating to an advisory client’s assets
- Providing an advisory client with periodic custodial account statements
- Evaluating the effectiveness of its internal controls related to its custodial practices
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