Kraken CEO Jesse Powell has a conspiracy theory to sell you: regulators like the Securities and Exchange Commission, allowed FTX’s misdeeds to go unstopped in order to blow up all of crypto.
Earlier this month, Powell’s exchange paid a $30 million fine and agreed to shutter its crypto-staking Earn program after the SEC sued it, alleging they were unregistered securities.
On Sunday, Powell tweeted his theory:
“Regulators let the bad guys get big and blow up because it serves their agenda.”
That agenda has three parts, he said. First is to “destroy capital [and] resources in the crypto ecosystem.
The second is to “burn people [and] “deter adoption” of crypto, Powell said. The third is to “give air cover to attack good actors.”
Presumably like Kraken, which has long strided to be on the right side of regulators.
That would make bad actors “on-side” with the agency, Powell said.
Meaning the SEC wanted catastrophe’s like the collapse of Sam Bankman-Fried’s FTX and Do Kwon’s UST/LUNA ecosystem — which the SEC has alleged was a fraud — to happen. He added:
“If the bad guys can run long enough without blowing up, they might just kill the good guys for you.”
Powell added that bad actors have “huge competitive advantages” that let them “suck up users, revenue and venture capital that would otherwise have gone to good guys.”
Bad guys, he said, “can always be jailed later.”
Whether you buy the idea of the SEC allowing millions of Americans to lose billions of dollars to destroy crypto or not, Powell’s comments sound less like sour grapes in the context of tweets last week by him and Custodia Bank CEO Caitlin Long, who both claimed to have warned the agency about FTX before it blew up.
Two days earlier, on Feb. 17, crypto bank founder Long announced at the head of a long Twitter thread:
“I’m publicly disclosing for the first time that (a) I handed over evidence to law enforcement of probable crimes committed by a big crypto fraud, starting months before that company imploded and stuck its millions of customers with losses.”
Which could hardly be anything but FTX.
She added that she also warned of “mounting bank-run risk” among crypto lenders. Led by Celsius and Voyager Digital, a number of crypto lenders saw runs after it was revealed how much they had lost making bad loans.
Like Powell, Long had reason to be aggrieved, although not at the SEC. Custodia Bank was recently denied a “master account” at the Federal Reserve. That would allow it to store funds at the Fed, and access the payment rails that banks use to transfer funds to each other.
It’s an important step to make a crypto-first bank like Custodia a serious player.
The Federal Reserve Bank of Kansas said in January that Custodia’s “novel business model and proposed focus on cryptoassets presented significant safety and soundness risks.”
The two are not the only ones to see a plan to sideline crypto, although others don’t see something as deliberately malicious and long-existing as Powell suggested.
A recent SEC proposal to overhaul asset custody rules for the entire financial sector would have the effect of making it much harder for the investment advisors who work with major institutional investors to find the crypto custodians they would need to use, The Wall Street Journal reported last week.
That would push those hedge funds and other big investors to use banks as crypto custodians. But the Federal Reserve has been pushing banks to avoid working with crypto firms. The Custodia ruling is part of that push. Together, that could push big institutional investors out of crypto, or at least make it harder for them to get in.
That caused SEC Commissioner Mark Uyeda, a Republican appointee, to tell the WSJ:
“This approach to custody appears to mask a policy decision to block access to crypto as an asset class.”
Which is not the same thing as what Powell is saying.
Another way to look at it is that having seen all the disasters, the SEC, the Fed and other agencies are saying “never again” and getting tougher on everyone.