Gensler’s Kraken heads and taking names

From: POLITICO's Morning Money - Friday Feb 10,2023 01:01 pm

Feb 10, 2023

Presented by

Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our s each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro.

The crypto winter has set SEC Chair Gary Gensler on the warpath.

The securities regulator has unveiled a blistering series of enforcement actions against some of the industry’s biggest personalities and largest firms following Sam Bankman-Fried’s belly-flop into ignominy late last year.

The latest blow? Kraken, the world’s third-largest cryptocurrency exchange, late Thursday agreed to pay $30 million to settle charges that it sold traders an unlicensed investment product on the promise of double-digit returns.

From us: “Since 2019, the SEC alleged, investors have been able to “stake” crypto tokens on Kraken with advertised annual returns of as much as 21 percent. The investors’ tokens would then be pooled together to help validate transactions on the tokens’ underlying blockchains, effectively making it run. But the SEC said investors have no control over their staked tokens and few protections when using platforms like Kraken.

‘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,” SEC Chair Gary Gensler said in a statement. “Today’s action should make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection.’”

STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president’s ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.

There’s an environmental policy angle to this as well.

Democrats have blasted the crypto industry over its energy use. Bitcoin, in particular, relies on a “proof-of-work” system where expensive, energy-guzzling computer rigs compete to solve cryptographic puzzles in order to validate crypto transactions and mint new digital assets.

Blockchains that rely on proof-of-stake — where investors “stake” a set amount of crypto in exchange for a shot at processing transactions and earning new tokens — consume much less energy.

That’s why top Democrats celebrated when Ethereum switched to a proof-of-stake mode l earlier this year. The White House identified that process, as a more environmentally-friendly alternative in a 2022 report.

The catch, however, is that it takes around $50,000 worth of ether, ethereum’s native token, to become a validator. That’s why Kraken — along with several other major crypto exchanges — created platforms by which small traders could pool their tokens to generate those returns.

As today’s settlement made clear, the SEC believes some of the services that are powering more eco-friendly blockchains are actually unregistered investment contracts. That won’t make convincing crypto-skeptic Democrats any easier.

“Everytime [the industry] starts to make gains, there’s something like this that encourages Dems to pull the reins back in terms of support,” one crypto lobbyist who was granted anonymity to discuss regulatory issues affecting their clients told POLITICO.

Here’s another wrinkle:

Billions of dollars worth of staked ether tokens will be locked on the Ethereum blockchain until it completes a system upgrade that’s scheduled for March. (Those deadlines are malleable.)

SEC officials declined comment when asked about the upgrade during a briefing on Thursday. However, the official complaint notes that one of the ways Kraken ran afoul was because it promised users that they “could immediately return their investors’ crypto even if the staked tokens were locked on a protocol.”

To that end: “All staked ETH will become unstaked after the Shanghai upgrade and will continue to earn rewards until then. There are no changes to the payout structure until after the Shanghai upgrade, when ETH will be unstaked,” the exchange said in a statement (emphasis ours).

Kraken has neither admitted nor denied the SEC’s allegations.

IT’S FRIDAY — Who ya got? Chiefs or Eagles? BBQ or cheesesteak? Melissa Etheridge or Boyz II Men? Send your thoughts and news tips to Sam at ssutton@politico.com and Zach Warmbrodt at zwarmbrodt@politico.com. You can also find us on Twitter @samjsutton and @zachary

A message from the American Bankers Association:

Large credit unions are going on a spending spree on taxpayers’ dime. They’re using their federal tax exemption to buy tax-paying banks, stadium naming rights, private jets, and Super Bowl ads. Tell Congress it’s time to Reform Credit Unions.

Driving the Day

Acting Comptroller of the Currency Michael Hsu speaks at bank merger symposium at 9:15 a.m. … The University of Michigan inflation expectations survey will be released at 10 a.m. … Fed Gov. Christopher Waller will deliver a speech on digital assets at 12:30 … Federal budget balance will be released at 2 p.m. … Philadelphia Fed President Patrick Harker speaks at 4 p.m.

BULLETIN BOARD MATERIAL — President Joe Biden is leaning hard into the CFPB’s plan to limit credit card late fees to $8. “Americans are tired," Biden said during his State of the Union. "We're tired of being played for suckers."

Believe it or not, big businesses and top banking groups aren’t exactly thrilled with Biden’s populist broadside. From Sam: “The president’s populist rhetoric has roiled financial services and business groups like the U.S. Chamber of Commerce that were already upset about CFPB Director Rohit Chopra’s stewardship of the consumer watchdog agency.”

“They’re prepared to attack the proposal, with prominent banking and credit union associations pledging to mobilize their members for a grassroots advocacy campaign to enlist congressional allies and flood the agency with comment letters. Some organizations are starting to explore possible legal challenges to the proposed cap, officials at several industry organizations told POLITICO. Many groups — including the American Bankers Association and Bank Policy Institute — claim that Chopra overstepped his authority and bypassed procedural hurdles in a race to finalize the rule by the end of the year.”

INFLATION AT THE TAILGATE? — It's a mixed bag. The price of beer and nonalcoholic alternatives have climbed. Processed foods and cheeses — shout out to those who order whiz-wit — are relatively flat year-over-year while, ahem, natural cheeses have climbed. The retail price for whole wings was $2.50 cents per pound in December, compared to more than $4 earlier this year, per the Agriculture Department. We were going to look up the prices of various crudité but, much like assembling crudité, that’s a bit more trouble than it’s worth.

— Our friends at S&P Global Market Intelligence compiled a few fun facts about how markets perform post-Super Bowl. The stock market returns 15.9 percent on average when the combined score totals at least 46 points and just 7.2 percent on the under. Markets also tend to perform better when the favored team wins.

CBS reports the Eagles are favored by 1.5 and total points line was at 51 as of Friday. Your MM host likes the under and the Chiefs. (Don’t take any of this as investment or gambling advice).

STRESS TESTS KICK OFF — The Federal Reserve on Thursday launched its stress tests as usual with a hypothetical recession scenarios that banks will have to run through to determine their capital requirements. Not business as usual, though: this year’s exercise will include an “exploratory market shock.”

For context, Vice Chair of Supervision Michael Barr previously suggested that the central bank might move to multiple severe scenarios. This seems to be a step in that direction, although the exploratory shock only applies to megabanks and won’t affect their capital requirements: “While this year’s global market shock is characterized by a severe recession with fading inflation expectations, the exploratory market shock is characterized by a less severe recession with greater inflationary pressures induced by higher inflation expectations. Such differences in scenarios could reveal different losses across banks, depending on the positions held in their portfolios.”

NO PLAN OF ATTACK — David Freedlander for POLITICO Magazine: “Republican Party donors and leaders are talking about how best to stop Trump from running away with the nomination again in 2024. But they don’t have a clear plan to stop him.”

DOWNLOAD THE POLITICO MOBILE APP: Stay up to speed with the newly updated POLITICO mobile app, featuring timely political news, insights and analysis from the best journalists in the business. The sleek and navigable design offers a convenient way to access POLITICO's scoops and groundbreaking reporting. Don’t miss out on the app you can rely on for the news you need, reimagined. DOWNLOAD FOR iOS– DOWNLOAD FOR ANDROID.

Markets

FINALLY, A QB HEADLINE FOR FULLBACK POSITION — The WSJ’s By Sarah Chaney Cambon and Ray A. Smith: “Interest rates are rising, inflation is elevated and recession fears linger. Despite all that, employers keep hiring … Driving the jobs boom are large but often overlooked sectors of the economy. Restaurants, hospitals, nursing homes and child-care centers are finally staffing up as they enter the last stage of the pandemic recovery.”

TROUBLE AHEAD? — Bloomberg’s John Gittelsohn: “Global commercial real estate prices slipped late last year, the first quarterly decline since 2009.”

— Reuters: “A 46% drop in natural gas prices this year is rippling across the U.S. shale patch, threatening to slow drilling and chill deal-making in a move unthinkable six months ago as global demand soared.”

— Our Johanna Treeck: “Eurozone inflation at the start of the year eased less than estimated, delayed German data released on Thursday suggests, highlighting that the region faces a long and winding road towards stable prices. Along the way, businesses and consumers will face the twin evils of high inflation and rising interest rates.”

THROWING INTO NICKEL COVERAGE — Bloomberg’s Archie Hunter and Jack Farchy: “Commodity trader Trafigura Group is facing more than half a billion dollars in losses after discovering metal cargoes it bought didn’t contain the nickel they were supposed to.”

A message from American Bankers Association:

Crypto

MORE ON KRAKEN — The Blockchain Association, which counts Kraken’s Chief Legal Officer Marco Santori as a board member, blasted the SEC’s enforcement action as “another example of why we need Congress — not regulators — to determine appropriate legislation for this new technology,” CEO Kristin Smith said in a statement.

MARKET MOVER — Bloomberg’s David Pan: “Coinbase Global Inc.’s shares fell the most in more than six months after rival Kraken was forced to stop providing an investment service also offered by the largest US cryptocurrency exchange.”

— Coinbase also put out a statement claiming its staking services for customers “are fundamentally different and are not securities. For example, our customers’ rewards depend on the rewards paid by the protocol, and commissions we disclose.”

UH-OH — CoinDesk’s Nikhilesh De: “The New York Department of Financial Services (NYDFS) is investigating stablecoin issuer Paxos, CoinDesk has learned. The full scope of the investigation is unclear. Paxos’ stablecoins include the Pax dollar (USDP) and Binance USD (BUSD), a Binance-branded stablecoin offered through a white-label service.”

A message from the American Bankers Association:

Reform Credit Unions is a national campaign committed to exposing large credit unions that exploit their tax-exempt status to market to the rich while abandoning their mission to help financially at-risk communities. The federal subsidy for credit unions will cost taxpayers $24 billion over the next 10 years. Tell Congress it’s time to Reform Credit Unions now. For more information, visit our website and follow us on Twitter @reform_cu. Reform Credit Unions is sponsored by the American Bankers Association.