A new article published in Lexology navigates the evolving landscape of cryptocurrency staking and custody.
of articleThis article, published by law firm Wilson Elser, examines current rules and regulations regarding the supervision and enforcement of cryptocurrency companies engaged in activities such as staking and stablecoins.
With Ethereum’s move to proof-of-stake, the recent scrutiny of cryptocurrency staking by the Securities and Exchange Commission (SEC) calls into question the legality of that practice, the article points out.
Staking as a service
The emergence of “staking as a service” (SaaS) offered by numerous cryptocurrency companies and exchanges has enabled investors to lend digital assets in exchange for potentially higher returns. This concept is comparable to depositing cash in a bank account and earning interest without a Federal Deposit Insurance Corporation (FDIC) guarantee to protect the funds.
Lawsuit Against Kraken
On February 9, the U.S. Securities and Exchange Commission (SEC) sued Kirkken for violating federal securities laws by offering a highly profitable crypto staking-as-a-service (SaaS) program. caused
The program allowed investors to wager digital assets on Kraken in exchange for up to 21% annual return on investment. The SEC alleges that the program constitutes an unregistered sale of securities in violation of federal securities laws. Additionally, the SEC alleges that Kraken did not adequately disclose potential risks associated with its staking program, which Kraken admitted and the SEC and he settled for $30 million.
In response to these and other issues, Kraken announced plans to launch its own bank on March 6th.
PXOS/BUSD Fund
Lexology’s report also highlights ongoing litigation surrounding the BUSD stablecoin issued by US-based financial trust firm Paxos.
The New York Department of Financial Services (NY DFS) issued a consumer alert on February 13, instructing Paxos Trust Company (Paxos) to stop issuing BUSD. BUSD is pegged to the US dollar, making him the third largest by market cap.
CryptoSlate’s in-depth report, “SEC vs. Paxos,” examines the potential impact of the SEC’s order to Paxos to stop issuing BUSD.
Lexology’s report cites an announcement last month by SEC Chairman Gary Gensler who proposed changes to the “custody rules” that are part of the Investment Advisers Act of 1940. “Protection Rules” for holding client assets, including cryptocurrency assets, in qualified custody accounts.
Custodians have in the past had to adapt their practices to protect different types of assets, according to the SEC. Ultimately, Rexology’s report says the proposed protection rule would require investment advisers to enter into written agreements with qualified custodians.
Lexology’s proposed storage agreement includes:
- Appropriate measures to protect advisory client assets
- Indemnify advisory clients if negligence, recklessness, or willful misconduct leads to client losses
- Separating Advisory Client Assets from Your Own Assets
- Maintain certain records regarding advisory client assets
- Provide regular custody statements to advisory clients
- Evaluating the effectiveness of internal controls related to custody practices
