Cryptocurrencies Fall Amid Concern Over Regulatory Crackdown

The decline in cryptocurrencies gained momentum Thursday as signs of a regulatory crackdown on the industry and a broader pullback from risk assets weighed on investor sentiment.

Bitcoin, the largest digital coin by market value, fell as much as 4.9%, its worst performance since the end of January, data compiled by Bloomberg show. The token traded around $21,900 as of 3:30 p.m. in New York, after hovering above $23,000 earlier this week. Others also lost ground, with Ether dropping more than 5%. Dogecoin and Avalanche, meanwhile, each fell more than 8%.

The drops followed news that exchange Kraken will pay $30 million to settle Securities and Exchange Commission allegations that it broke US securities rules with its crypto-asset staking products and will discontinue them as part of the settlement.

“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,” SEC Chair Gary Gensler said in a statement.

Crypto Exchange Kraken Ends Staking Program in SEC Settlement

Meanwhile, Coinbase Global Inc.’s head Brian Armstrong escalated his war of words with the SEC, warning yesterday that he’d heard rumors the agency wants to “get rid of” crypto staking by retail investors.

Proof-of-stake — a process of using stashes of coins to order transactions — is used on a multitude of blockchains, including Ethereum. At the end of last year, the value of staked coins totaled $42 billion, according to Kraken and Staked’s quarterly report. Blockchains that use staking add up to 23% of crypto’s total market cap, according to the report.

Ethereum is the most popular blockchain for staking. The network moved to proof of stake last September. Kraken is a top-five depositor of staked Ether on the Ethereum blockchain.

“Proof-of-stake protocols like Ethereum will be impacted significantly, as the vast majority of people use centralized staking services rather than running their own nodes,” said Cory Klippsten, CEO of financial firm Swan Bitcoin.

Still, the staking development might be more significant for exchanges than it is for crypto as a whole, says Sean Farrell, head of digital-asset strategy at Fundstrat.

“The custodial nature of staking through certain exchanges is perceived as a debt-like instrument. The customer lends their assets to the exchange, which then deposits them into a validator, receives a reward, and passes that reward onto the customer,” he said. “Non-custodial staking, on the other hand, is likely to be considered fine.”

Meanwhile, US stocks also fell on Thursday, with the S&P 500 headed toward its third session lower out of four this week. The Nasdaq 100 dropped 1.2%. Market analysts have noted how closely crypto and equities — tech, in particular — have moved with one another, meaning that when stocks are selling off, crypto often is, too.

“It’s a risk asset,” Chuck Cumello, president and chief executive officer of Essex Financial Services, said in an interview. “It performs much more in line like a long-duration asset, a tech stock — something very volatile. Just as tech stocks sold off, Bitcoin sold off.”

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