Coinbase Drops Most Since July as SEC Cracks Down on Crypto Staking

David Pan and Yueqi Yang, Bloomberg News

(Bloomberg) -- 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.

Kraken will pay $30 million to settle Securities and Exchange Commission allegations that it broke US rules with its crypto staking products and will discontinue them in the US as part of the agreement with the regulator. The SEC alleged 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 services are “fundamentally different.”

“Coinbase’s staking program is not affected by today’s news.” Grewal said in a statement to Bloomberg News. “What’s clear from today’s announcement is that Kraken was essentially offering a yield product. Coinbase’s staking services are fundamentally different and are not securities.”

The stock tumbled 14%, the biggest drop since July 26. Bloomberg reported at that time that Coinbase was facing a US probe into whether it improperly let Americans trade digital assets that should have been registered as securities. Coinbase Chief Executive Brian Armstrong previewed the settlement late Wednesday by blasting the SEC for allegedly wanting to get rid of crypto staking by retail investors.

Crypto-staking programs have grown to be a significant revenue stream for exchanges such as Kraken and Coinbase as their trading volume dwindles amid a plunge in digital assets prices.

At Coinbase, blockchain-rewards 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 for Ether. Billions of dollars worth of Ether have been wagered in exchanges as well as decentralized protocols such as Lido and Rocket Pool to stake the cryptocurrency for yields.

In an interview, Grewal said Coinbase’s staking product is different from Kraken’s because the staking rewards are fully disclosed and determined by blockchain protocols, and that staked assets are always customer assets since there’s “no transfer of titles.”

Staking involves earning rewards by locking up coins to help order transactions on various blockchains such as Ethereum.

Major exchanges including Coinbase and Binance started offering Ether staking services for their customers as Ethereum transitioned its consensus mechanism to proof of stake in September last year. That has enabled investors to put their Ether coins on the blockchain and earn returns.

“The Kraken settlement sets a precedent for the other exchanges that offer similar products for their staking customers,” said Marc Arjoon, research associate at crypto investment firm CoinShares.

Coinbase and Binance also offer derivative tokens for staking customers. Trading at a one-to-one ratio with Ether, those tokens allow people to trade their Ether even if the coins are still locked on Ethereum. cbETH, the liquidity derivative token for Coinbase users fell 5.6% in the past 24 hours, according to CoinGecko.

(Updates with comment from Coinbase’s Grewal in the eighth paragraph.)