Notes 2/8: The Shutdown Game: LocalBitcoins and Kraken’s Staking Service

Bitcoin is moving further away from inventor Satoshi Nakamoto’s vision for the cryptocurrency as a peer-to-peer version of electronic cash. It is hardly used as a medium of exchange for transactions. Now one of the few places that offered peer-to-peer interactions in the bitcoin ecosystem is shutting down.

LocalBitcoins, a peer-to-peer bitcoin exchange platform, announced today that it planning to close operations at the end of this month. The official reason being peddled is the “ongoing very cold crypto winter”. The ostensible implication here is that the service’s business activities were affected due to a downturn in crypto markets.

A Long Winter

But the service has been in winter mode far longer than the rest of the market.

Launched in 2013, LocalBitcoins achieved its peak bitcoin trading volumes during the 2017 run up in bitcoin prices. The 2018 slump resulted in a crash in its trading volumes, and they haven’t recovered since. Even Bitcoin’s record-setting spree in 2021 failed to revive trading volumes for the service.

Dwindling volumes are just one part of the story. The service was also mentioned as a significant liquidity provider to Bitzlato, a Hong Kong exchange which was the subject of an enforcement action by FinCen. It is likely that the service would have faced legal problems down the road.

Eventually, though, LocalBitcoins – or its business model – became an anachronism in a bitcoin ecosystem dominated by crypto exchanges that offer a menu of options – purchase, custody, staking etc. – from a single window. LocalBitcoins plodded behind its competition. In the service’s initial days, users are supposed to have met in person and used cash to purchase bitcoin. It evolved into an escrow service in 2016 and remained stuck in that avatar until its announcement today.

Kraken Staking Service Shuts Down In The U.S.  

The Securities Exchange Commission (SEC) is again wielding the Howey test baton to bring rogue crypto services in line. Cryptocurrency exchange Kraken has shut down its staking product in the U.S. and paid a penalty of $30 million in response to charges by the agency that it was selling unregistered securities through the service.

Briefly, the complaint claims that Kraken’s investment contract with customers constituted a security because it fulfilled the four prongs of the Howey test – investment of money, profit expectations, common enterprise, and efforts made to derive profits by a third party.

According to the agency, Kraken advertised the benefits and revenue that investors could accrue from staking their tokens on its service in various online forums. It, then, determined the rewards rate arbitrarily, diverging from those offered by the protocols.

In its 2021 Annual Shareholder Report, the company referred to the Kraken Staking Service as its “fastest growing product”. The report went on to state that more assets would increase the amount of capital available for clients to exchange between assets.

Is Coinbase Next?

Caught in the crosshairs of the SEC’s action today is Coinbase. The company’s CEO Brian Armstrong hinted at possible action by the SEC in a tweet yesterday. Coinbase also offers staking-as-a-service to customers and has prioritized development of staking products. It has plans to become the number one provider of staking products in the future. News of today’s action against Kraken, however, seems to have spooked investors that it might be next in line for SEC action.

Will the SEC really go after Coinbase next?

It seems unlikely. According to a previous filing, the company offers a service known as “Delegated Proof of Stake” that enables users to retain ownership of their tokens and keep staking rewards, less a commission fee charged by the exchange. Thus, at least on the face of it, the service does not guarantee profits and depend on efforts made by a third party – in this case, Coinbase – for its success.

The San Francisco-based company also does not offer wild returns on unproven tokens. Based on a cursory reading of the SEC’s complaint, the agency’s beef seems to be with Kraken’s program arbitrary setting of rewards, distinct from the rewards handed out by protocols themselves for staking, for consumers. Coinbase’s advertised rewards for its Earn program seem to be more in line with prevailing rates offered for tokens at their home protocol.

LDO Surges

Meanwhile, LDO – the governance token for Lido Finance, a decentralized finance (DeFi) app for staking – surged in response to the SEC’s action.


Because Lido claims to be a decentralized service that is governed by a decentralized autonomous organization (DAO), a venture entity of sorts that takes important decisions relating to its operations. Presumably, investors expect decentralized services will garner more users from the SEC’s action against a centralized service like Kraken.

Lido is hardly in the clear as far as governance is concerned. An exclusive group of people control the service. As of last year, as many as 70% of the total number of LDO tokens were split between insiders – founders, employees, and venture investors.

That last-mentioned category seems to have paid a premium to get in on the decentralization game. No doubt, they were motivated by the kind of price action for LDO tokens seen today.

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