Kraken stops staking service, agrees to pay $30 Mln in penalties to S.E.C.

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Key Takeaways

  • S.E.C. argues that by letting users hand over their crypto in exchange for a promised return, the exchange’s staking service constituted a securities sale. 
  • Kraken has to pay $30 million in disgorgement, prejudgment interest, and civil penalties to S.E.C.

US-based cryptocurrency exchange Kraken has agreed to discontinue its staking program as part of a settlement with the U.S. Securities and Exchange Commission (S.E.C.). The agreement also includes the exchange to pay $30 million in prejudgment interest, disgorgement, and civil penalties to S.E.C.

The regulator argued that by letting users hand over their crypto in exchange for a promised return, the exchange’s staking service constituted a securities sale.  S.E.C. states that it had charged the exchange with “failing to register the offer and sale of their crypto-asset staking-as-a-service program,” S.E.C. probe into Kraken pertained to certain offerings that the exchange has made to U.S.-based clients.

Kraken had, however, stated that it would keep offering staking services for non-U.S. users through a separate subsidiary. Gurbir Grewal, S.E.C.’s Division of Enforcement director, alleges that “Kraken not only offered investors outsized returns untethered to any economic realities but also retained the right to pay them no returns at all.” 

Commenting on the development, Gary Gensler, chair of the S.E.C., stated “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.”

He further added that the S.E.C. action means that every staking as a service provider must now ‘register and provide full, fair, and truthful disclosure and investor protection.’ The latest development also comes amid the crypto community increasingly worrying about rumors that S.E.C. was seeking to ban cryptocurrency staking for retail customers.

Earlier this week, Coinbase C.E.O. Brian Armstrong clarified that, for him, staking was not a security and that the move “would be a terrible path for the U.S.U.S. if that were allowed to happen.” He argued that staking services do not constitute securities and provide benefits to the industry such as “scalability, increased security, and reduced carbon footprints.”

Industry experts suggest that S.E.C. might go after centralized parties that offer staking services rather than the technology itself, adding that the regulator attacking the latter would be a losing battle that would “crush them in precedent.”

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Saniya Raahath
Saniya Raahath

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