Sophie Shapiro
Associate Editor
Loyola University Chicago School of Law, JD 2024
Kraken will pay $30 million to settle SEC (Securities and Exchange Commission) allegations that it broke the agency’s rules with its cryptoasset staking products and will discontinue them in the United States as part of the agreement with the regulator.
What is Kraken?
Founded in 2011, Kraken is a cryptocurrency exchange and bank, based in the United States. As of 2022, Kraken was valued at more than $10.8 billion, and as of 2020, it had more than $1.1 billion in revenue. As a general matter, Kraken has offered staking services to the general public since 2019. According to Reuters, staking is “a process in which cryptocurrency holders volunteer to take part in validating transactions on the blockchain.”
Companies like Kraken offer staking services in the United States due to its high demand – it is a lot easier to let a specialized staking-services company operate your node than to try and attempt to do it yourself. Essentially, companies like Kraken pool customers’ assets, making it easier for ordinary users to state their holdings and earn money.
What does the SEC complaint state?
On Thursday, February 9, the SEC released the following statement:
“The complaint alleges that Kraken touts that its staking investment program offers an easy-to-use platform and benefits that derive from Kraken’s efforts on behalf of investors, including Kraken’s strategies to obtain regular investment returns and payouts.”
Essentially, the SEC’s charges against Kraken allege its offering of a crypto staking program amounted to offering unregistered securities products in the United States. The SEC is accusing Kraken of selling unregistered investment contracts, since staking customers are promised regular returns and payouts.
How has Kraken responded?
A Kraken spokesperson stated that the company neither admits nor denies the SEC’s allegations. The statement specifically read, “[s]tarting today, with the exception of staked ether (ETH), assets enrolled in the on-chain staking program by U.S. clients will automatically be un-staked and will no longer earn staking rewards.”
However, despite neither admitting nor denying the SEC’s allegations, Kraken is paying $30 million to settle the charges. Kraken also agreed to shut down all of its United States staking services.
What does Kraken’s SEC settlement mean for crypto staking?
The SEC’s decision to charge Kraken with securities violations over a popular way for the cryptocurrency industry to make money has worried a lot of executives within the cryptocurrency industry. In fact, the day the announcement was made, the price of Bitcoin went down nearly 4% in just a matter of 24 hours. Many crypto companies and executives fear what further methods of regulation the SEC might take in an effort to impose on the crypto industry.
The Chief Executive Officer of Coinbase, Brian Armstrong, has expressed his concerns over further rumors that the SEC may eliminate cryptocurrency staking for retail customers in the United States. Armstrong was adamant that staking is “not a security” and that the trend allows users to “participate directly in running open crypto networks.” More pointedly, Armstrong said that should the SEC eliminate cryptocurrency staking for all retail customers in the US, it would be a “terrible path” to go down.
Why does this matter?
The SEC’s purpose is to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation. In terms of the Kraken settlement, is quite evident that the SEC is doing everything it can as an organization to prove it can keep the cryptocurrency industry in line. However, it is important to consider what is too far and how much is too much regulation.
Staking is not a new concept to the cryptocurrency industry, and it is important to recognize that governmental bodies, like the SEC, shouldn’t punish entities without notice and the opportunity to align themselves with the policies and preferences of the SEC. Perhaps the SEC should have provided guidance for such staking programs and companies, like Kraken, instead of immediately investigating them.
However, it is important to consider SEC chairman Gary Gensler’s remarks. He said that most staking providers fail to provide customers proper disclosures such as how a company is protecting a user’s staked assets. Those providers should register their staking services with the SEC. Further, he added, “[w]hen a company or platform offers you these kinds of returns, whether they call their services ‘lending,’ ‘earn,’ ‘rewards,’ ‘APY,’ or ‘staking’ – that relationship should come with the protections of the federal securities laws.” Thus, perhaps the SEC’s behavior is in line with their mission and choosing to make a conscious effort to protect investors as much as it possibly can, even if that means at the expense of companies, like Kraken.