What happened
Many cryptocurrencies are trading lower this morning along with the broader market, and as regulators seem to be indicating a more restrictive tone in regard to crypto policy.
Since late afternoon yesterday, the price of the world's second-largest cryptocurrency, Ethereum (ETH 2.99%), traded 2.3% lower as of 10:24 a.m. ET today. Meanwhile, the price of Solana (SOL 8.01%) traded 3.6% lower, and the price of Chainlink (LINK 5.77%) was down 5.2%.
So what
Crypto has rallied for most of the year along with the rest of the market, which has seen signs of softening inflation that could lead the Federal Reserve to soon stop its aggressive interest rate-hiking campaign. Higher interest rates make safer assets yield more, which makes riskier assets like crypto far less attractive.
Image source: Getty Images.
But yesterday, the market was thrown for a loop when the Bank of Mexico raised its key benchmark interest rate by half a percentage point, which was more than experts had expected. The surprise likely spooked investors all over the world about rates going higher than expected or staying there longer.
More specifically to the crypto industry, there has been some interesting news on the regulatory front that has investors concerned. The Securities and Exchange Commission (SEC) yesterday announced that they had charged the crypto exchange Kraken for not registering their crypto staking program with the SEC.
Staking is the process in which investors post various crypto tokens they own as collateral in order to become validators on blockchain networks that use a proof-of-stake governing consensus mechanism for their networks. These validators help approve transactions and form new blocks, and staking is a vital part of network security. In return, people staking their tokens are awarded new tokens.
Investors can also lend their tokens to companies like Kraken, which will do the staking for people and then split the rewards. Kraken was offering investors annual staking returns that were as high as 21%.
As a result of its settlement with the SEC, Kraken agreed to pay a $30 million fine and said it would immediately end its staking programs.
"Whether it's through staking-as-a-service, lending, or other means, crypto intermediaries, when offering investment contracts in exchange for investors' tokens, need to provide the proper disclosures and safeguards required by our securities laws," SEC Chair Gary Gensler said in a statement.
Ethereum just completed a series of huge upgrades to move to a proof-of-stake consensus mechanism. Solana also runs on proof-of-stake, and Chainlink uses a similar consensus mechanism.
Brian Armstrong, CEO of the large U.S. cryptocurrency exchange Coinbase, wrote on Twitter recently that he has heard rumors that the SEC is looking to ban crypto staking for all U.S. retail investors.
Now what
After the FTX debacle, I think most investors expected to see more regulation in the crypto space. Many believe it is needed to instill confidence in the industry, although I'm not sure a ban on crypto staking is exactly what they had in mind.
Uncertainty over inflation and the trajectory of interest rate hikes will likely continue to create volatility in the crypto market as well.
Ethereum, Solana, and Chainlink each possess strong technical capabilities that make them intriguing investments. However, in the current environment, I tend to prefer the largest, more established tokens like Ethereum.
