Kraken Settles With SEC Over Crypto Staking Program
Kraken neither admitted nor denied the SEC’s allegations as it settled with Gensler’s regulator
Exclusive artwork by Axel Rangel, modified by Blockworks
As the SEC’s 2023 crypto crackdown builds, the US regulator on Thursday slapped Kraken with two charges related to its staking products.
Kraken settled on both SEC counts and shelled out $30 million accordingly. SEC Chair Gary Gensler — and other senior regulators — have recently emphasized their perceived need to protect retail investors from crypto staking activities.
The exchange agreed to “immediately cease offering or selling securities through crypto asset staking services or staking programs,” according to the SEC.
A Kraken spokesperson told Blockworks that it had reached an agreement with the SEC and that the company “has agreed to end its on-chain staking services for U.S. clients only. Starting today, with the exception of staked ether (ETH), assets enrolled in the on-chain staking program by U.S. clients will automatically be unstaked and will no longer earn staking rewards. Further, U.S. clients will not be able to stake additional assets, including ETH.”
“Staking services for non-U.S. clients will continue uninterrupted. These clients will receive staking services from a separate Kraken subsidiary,” the company said. “As part of the settlement, Kraken has neither admitted nor denied the SEC’s allegations.”
Francesco Melpignano, chief executive of proof-of-work blockchain Kadena Eco, told Blockworks that “we are starting to see the regulatory aftermath of the FTX meltdown,” with Kraken being the latest example.
It’s still too early to know what it all means for staking and validator networks, according to Melpignano — but there may be an unexpectedly optimistic outcome for those crypto entities.
“It may be positive by pushing users to use decentralized staking services, or negative by banning US residents [from participating] in staking all together,” Melpignano said.
Two entities of Kraken were charged by the US securities regulator for failing to register crypto staking products as securities. Both Kraken affiliates, Payward Ventures, Inc. and Payward Trading Ltd., were allegedly offering staking yields as high as 21% on those products.
Gensler said in a Thursday statement that “today’s action should make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection.”
“At all relevant times, the Kraken Staking Program was offered and sold as an investment contract and therefore a security whose offers and sales were subject to the registration requirements of the federal securities laws,” the SEC said in a court filing.
Not all regulators were on the same page. SEC Commissioner Hester Peirce lashed out at her agency on Thursday over its move to charge the crypto exchange.
“A paternalistic and lazy regulator settles on a solution like the one in this settlement,” she said.
Centralized exchanges including Kraken and Coinbase have increasingly started offering staking services as a way to earn revenue, though models for doing so differ widely.
Exchanges, stung by diminished trading volumes and shrinking spreads, have turned to everything from NFT platforms to both custodial and non-custodial staking solutions in bids to bolster bottom lines.
For Ethereum and other proof-of-stake blockchains, staking is crucial to the decentralization of the network — and verifying transactions. The mechanism allows retail and institutional stakers, or validators, alike to earn crypto rewards as a result.
Coinbase CEO Brian Armstrong tweeted yesterday that he had heard “rumors” that “the SEC would like to get rid of crypto staking in the U.S. for retail customers,
News analysis by David Canellis
So-called “staking as a service” is somewhat of a euphemism. It’s really just taking a cut from what’s accessible to regular users.
Crypto exchanges have historically suffered from a reliance on trading fees for their revenues and have been desperate to diversify away from that model.
Coinbase, for example, has previously generated upwards of 90% of its cash by taking a slice of every trade, and in Q3 last year, staking made up about 11% of its revenue.
Modern permissionless blockchain systems were built to allow regular folk to participate in consensus — without greedy intermediaries — and receive lucrative rewards for doing so.
“Staking as a service” providers like the Krakens and the Coinbases of the world do offer some utility for networks in which participation can still be prohibitively expensive (allowing Ethereum stakers to participate without fronting all 32 ETH ($72,700) and maintaining required suitable hardware).
But as these companies sow outrage among US retail investors over the SEC’s latest actions, let’s remember they inject trust into what’s supposed to be a trustless exercise, essentially as middlemen.
The industry is already trending towards decentralized exchanges, threatening their business model entirely. It’s likely that centralized exchanges will soon go the way of the dinosaurs.
The SEC going after staking as a service shouldn’t be viewed as an attack on cryptocurrency — after all, staking directly via blockchains remains completely unaffected.
Updated Feb. 9, 2023 at 6:09 pm ET: Added information on SEC Commissioner Hester Peirce’s stance on the regulator’s decision to charge Kraken.
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