Shares of Coinbase Global Inc. fell the most in six months after rival Kraken was forced to stop offering investment services that the largest U.S. cryptocurrency exchange also offers.
Kraken will pay $30 million to settle SEC charges that its crypto-staking products violated U.S. regulations and will stop using them in the U.S. as part of an agreement with the regulator. The SEC charged that Kraken’s staking service was an illegal sale of securities.
In response to Kraken’s settlement, Coinbase’s chief legal officer, Paul Grewal, said the company’s on-chain staking service is “fundamentally different.”
“Coinbase’s staking plans are unaffected by today’s news,” Grewal said in a statement to Bloomberg News. “It is clear from today’s announcement that Kraken is essentially offering a yield product. Coinbase’s staking service is fundamentally different and not a security.”
The stock tumbled 14%, its biggest drop since July 26. Bloomberg reported at the time that Coinbase was facing a U.S. investigation into whether it improperly allowed Americans to trade digital assets that were supposed to be registered as securities. Coinbase CEO Brian Armstrong previewed the settlement late Wednesday by slamming the SEC for allegedly wanting to get rid of retail investors’ cryptocurrency pledges.
Crypto staking programs have become an important source of revenue for exchanges such as Kraken and Coinbase as the price of digital assets has plummeted leading to reduced trading volumes.
At Coinbase, blockchain reward revenue, primarily from staking, accounted for 11% of net revenue in the third quarter of 2022, up from 8.5% in the second quarter. Coinbase is the second largest depositor of ether. Billions of dollars worth of ether have been staked on exchanges as well as decentralized protocols such as Lido and Rocket Pool to stake the cryptocurrency for yield.
In an interview, Grewal said that Coinbase’s staking product differs from Kraken’s because staking rewards are fully disclosed and determined by the blockchain protocol, and the staked assets are always customer assets because “there is no transfer of ownership.”
Staking involves earning rewards by locking up coins to help order transactions on various blockchains such as Ethereum.
With ethereum switching its consensus mechanism to proof-of-stake last September, major exchanges including Coinbase and Binance began offering ether staking services to their customers. This enables investors to stake their ether on the blockchain and earn a return.
“The Kraken settlement sets a precedent for other exchanges offering similar products to staking customers,” said Marc Arjoon, a research associate at cryptocurrency investment firm CoinShares.
Coinbase and Binance also offer derivative tokens for staking customers. These tokens are traded on a one-to-one basis with ether, allowing people to trade their ether even though the tokens are still locked on ethereum. According to data from CoinGecko, the liquidity derivative token cbETH for Coinbase users has fallen by 5.6% in the past 24 hours.
