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Welcome to The Node. This is Daniel Kuhn, here to take you through the latest in crypto news and why it matters. In today’s newsletter:

Winding Down

Kraken is reportedly under investigation by the U.S. Securities and Exchange Commission (SEC) for offering certain off limits services. Bloomberg reported the probe is at an advanced stage and a settlement could be announced in coming days. Elsewhere, popular P2P bitcoin exchange LocalBitcoins will close this month, and set accounts to withdrawal only on Feb. 16. The Helsinki-based exchange is one of the longest-running exchanges, though has seen trading volumes collapse during the Crypto Winter. Also, Affirm, a fintech company led by PayPal co-founder Max Levchin, will sunset its crypto platform on March 2, part of a larger corporate retrenchment that includes layoffs, according to a Wednesday shareholders letter. Finally, CEO of beleaguered, publicly-traded bitcoin mining firm Argo Blockchain, Peter Wall, has resigned after three years, and Seif El-Bakly will step up as interim CEO. After trying to raise funds to stave off bankruptcy, Argo sold a major Texas facility to Galaxy Digital for $65 million.

Bitcoin Ballyhoo

Craig Wright, the technologist who claims to have invented Bitcoin, lost an intellectual property lawsuit in the U.K., after a judge found the file format of the Bitcoin blockchain can’t be copyrighted like a “literary work.” Coinbase was among the defendants. Additional cases concerning Wright’s authorship and copyright of the 2008 white paper will be the subject of later rulings, the judge said, as Wright fights to challenge Bitcoin and Bitcoin Cash development. Meanwhile, Bitcoin network activity has hit a level not seen since China banned crypto in 2021, according to CryptoQuant. This uptick in activity stems from the popularity of the Ordinals protocol, which allows for NFTs to be stored on the Bitcoin blockchain. Derivative exchange BitMEX found over 13,000 Bitcoin NFTs minted since December. Ordinals’ success has triggered a debate on what should be stored on-chain, a conversation with some history as Satoshi Nakamoto once argued against non-financial uses of Bitcoin. (Perhaps Wright has a comment.)

Something to Chew On

Reigning stablecoin issuer Tether has met its target date to eliminate any commercial paper (a type of short-term, unsecured debt) holdings backing the dollar-pegged USDT. The company also posted a Q4 $700 million profit. Separately, Tron plans to invest over $100 million in AI-related crypto projects through the Tron Artificial Intelligence Development Fund. Meanwhile, in the world of DeFi, lending protocol Aave has deployed its native stablecoin GHO on Ethereum’s Goerli testnet in anticipation of a full mainnet rollout. Finally, several team members have resigned from Umami Labs, the company developing Umami Finance, while its CEO dumped his token holdings. Some team members have pitched this as a move towards “decentralization,” with a DAO white paper said to be in progress, after the institutional-focused project halted yield payments to token holders last week citing regulatory considerations.

"Just because you're creating this digital art doesn't mean that consumer protection laws are unapplicable."

– Enclave Markets chief compliance officer Olta Andoni, on CoinDesk TV's "First Mover"

The Takeaway: SEC Stakes Out Staking

Earlier this week, Coinbase CEO Brian Armstrong went public with rumors about the U.S. Securities and Exchange Commission (SEC) working to “get rid of” retail-focused crypto staking offerings. If concerning, the scuttlebutt isn’t new: SEC Chair Gary Gensler took the moment of Ethereum’s historic “Merge” to proof-of-stake to call the yield-generating practice into question, much like he’s drawn a line around the entire token economy, while in August news broke that the securities regulator was probing Coinbase specifically over its staking services.

Staking, the process of locking native blockchain tokens to secure the network and receive rewards, has become a major business line for centralized exchanges looking to diversify their revenue streams away from transaction fees. Coinbase is the second-largest ETH staker, though competitors like Kraken and Binance have moved into the business. In many ways, if the SEC is successful in banning staking programs, decentralized alternatives like Lido and RocketPool, the largest and third largest ETH-based platforms by value, will benefit.

The SEC cannot block users from posting 32 ETH to become an Ethereum validator, or from pledging coins to other hosts, even if they can put serious restrictions around the activity for crypto economy on-ramps like Coinbase. That message seems to have moved the market: Lido’s governance token has surged following Armstong’s tweets. As my colleague Sam Reynolds put it: “As a decentralized protocol, it's unlikely it will have the same compliance with securities rules as a U.S.-domiciled centralized entity like Coinbase.”

If the SEC does move to restrict staking, I’d expect for the crypto industry to put up a major legal challenge – much in the way diverse participants collaborated to prevent the Trump Administration’s eleventh-hour ban on “unhosted wallets.” In just a few years, staking has gone from a theoretical security mechanism to the backbone of many high-valued blockchains – comprising about a quarter of the industry’s market cap. And while Armstrong may be a bit bold in calling staking a “national security” interest, it is a growing economic activity regularly tracked by firms like JPMorgan.

For all I know, the SEC could be right in saying that staking – which incentivizes people to secure a crypto network through payments – does satisfy the “Howey Test” to determine if an asset is a security. But that shouldn’t be up to the SEC to decide alone. It’s also worth noting that staking is not really like “crypto lending,” which requires exchanges to seek out yield to pay to depositors like the shuttered Gemini “Earn” platform or Coinbase’s DOA offering the SEC shut down. Staking has its risks – protocols could be compromised, companies can cheat – but it’s part of an open source process baked into a blockchain’s security, making it far less risky than rehypothecation-driven yield programs.

All that said, the recent staking rumors seem to be part of a widespread crackdown against the crypto industry. As venture capitalist Nic Carter wrote, nearly every financial watchdog seems to be working towards detaching crypto from the real economy – in particular by using the private banking sector as a cudgel. If this speculation is true, what Carter deemed “Operation Choke Point 2.0” after the Obama-era campaign to debank legal-but-morally-dubious businesses, crypto has bigger problems at hand. Staking should stay open, even if Coinbase went down.

– D.K.

@DanielGKuhn

[email protected]

The Chaser: P2P Pain

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