Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insight on policy and regulation.
On Friday, the day after the Securities and Exchange Commission announced a $30 million settlement with Kraken over its crypto staking service, SEC chair Gary Gensler appeared on CNBC’s Squawk Box. “Kraken knew how to register, others know how to register, it’s just a form on our website,” Gensler told host Andrew Ross Sorkin.
“Oh man, all I had to do was fill out a form on a website?” Kraken founder Jesse Powell tweeted in response.
Since taking over the SEC in 2021, Gary Gensler has made the point repeatedly to the crypto industry: All companies should come in and register their products and services. Powell’s ironic response reflects a view, shared by many in the industry, that Gensler’s offer is not sincere.
So who is right? I decided to toss Gensler’s invitation into the gaping maw of Crypto Twitter, posing a few key questions: Why didn’t Kraken just register its staking product with the SEC? Why don’t other companies? I received a torrent of responses, from digital assets-focused lawyers to Coinbase founder Brian Armstrong.
Here’s what I learned.
To offer and sell securities, companies must clear the project or service, or in some cases the platform itself, with the SEC. The definition of a security, of course, has become the central question for the crypto industry, but Gensler’s SEC has decided that nearly every cryptocurrency, with the exception of Bitcoin, falls under the category.
In other words, for a company like Kraken to offer its staking-as-a-service product, it must fill out a series of forms and gain approval from the SEC. As Hailey Lennon, a partner at Brown Rudnick, put it, “The whole SEC narrative of come in and talk to us and register isn’t genuine.”
Justin Slaughter, the policy director at the crypto venture firm Paradigm, said that Kraken could register as a staking broker-dealer or exchange, but it would need products to offer staking for. Gensler has taken the position that Ether is likely a security, but the SEC has not specified, meaning it isn’t clear if companies can register Ether in the first place.
Rodrigo Seira, the crypto counsel at Paradigm, said SEC registration forms are ill-fitting and ambiguous for a novel field like cryptocurrency. They would need clarification from the SEC, which Gensler has said he will not do. Seira added that the SEC likely wouldn’t approve the registration anyway, highlighting failed projects that have tried to register and folded, such as AirFox, Paragon, and BlockFi.
Finally, I put the question to Paul Grewal, Coinbase’s chief legal officer. He pointed to the fact that crypto companies haven't been able to successfully register during Gensler’s tenure. “We ought to have an honest conversation around that in a public way rather than having private one-off enforcement actions as part of a regulation-by-enforcement campaign that provides no clarity and only creates confusion,” Grewal said.
The dissenting voice came from Lee Reiners, a former Fed official and current policy director at the Duke Financial Economics Center. Called as a witness in Tuesday’s Senate Banking hearing on crypto, Reiners decried the “regulation by enforcement” refrain of the crypto industry. “The truth is that it’s just a catchphrase that the industry uses to deflect from the fact that they’ve willingly chosen to operate outside the regulatory perimeter,” he told the assembled senators.
Reiners said the only people confused about regulation are in the crypto industry. Crypto executives would probably suggest Gensler is equally confused.
Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz
