US SEC: Kraken’s cryptocurrency staking service violates securities laws

suing staking service

The U.S. Securities and Exchange Commission (SEC) has announced that it has indicted Kraken, a major U.S. cryptocurrency exchange, for violating securities laws.

The SEC argued that Kraken’s staking service had to be registered with the SEC in advance. The two parties have already reached a settlement, agreeing that Kraken will pay about 3.9 billion yen ($30 million), including fines and illegal gains, and to immediately stop providing staking services in the United States.

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The SEC said Kraken has been offering staking services since 2019. By collecting virtual currency from investors and staking on behalf of investors, the company was distributing an annual interest rate of 21%, calling the company’s service “staking-as-a-service.” )”.

And the SEC points out that investors lose control of their cryptocurrencies when they stake. He said there was little protection for investors here, and they were taking risks to the platform.

The SEC argues that Kraken’s staking service amounts to an investment contract because it collects funds from investors and expects revenue from Kraken’s efforts. SEC Chairman Gerry Gensler commented:

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Bloomberg reported on Monday that the SEC would settle allegations of securities law violations against Kraken.

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Kraken announced

Kraken announced on the 9th that it will terminate the “on-chain staking service” provided to US users. It said that from the same day, the target cryptocurrencies will be automatically de-staking.

It is explained that Ethereum (ETH), which cannot be withdrawn until the next upgrade, is excluded from the target. He also emphasized that the company will continue to offer staking services to users outside the United States.

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Stakeholder reaction

In addition to Bloomberg, Brian Armstrong, CEO of US Coinbase, commented on the 9th about regulation of staking services in the United States. “I heard rumors that the SEC wants to eliminate crypto staking for retail investors in the US. was saying

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Coinbase Chief Legal Officer Paul Grewal commented on the Kraken incident on the 10th. He tweeted that the rumors Armstrong mentioned were true.

Well, now we know the rumors @brian_armstrong referenced yesterday were true: @SECGov has settled claims against Kraken for particular “staking” products. https://t.co/QHgodkj2v1

— paulgrewal.eth (@iampaulgrewal) February 9, 2023

Grewal argued that a “true on-chain staking service” like that provided by Coinbase is different from Kraken’s. He explained that the company’s staking service rewards are governed by a protocol and a pre-published fee.

He argues that customers are entitled to rewards and that Coinbase cannot decide not to pay them. Client assets remain owned by the client, and Coinbase, a publicly traded company, also audits client assets and discloses information, it said.

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Opinion of SEC members

Hester Pearce of the SEC, known as a cryptocurrency advocate, also issued a statement in response to the Kraken incident. “I object to the SEC ending Kraken’s staking service and deeming it a win for investors,” he said.

Mr. Pierce sees the problem as whether it was possible to pre-register with the SEC rather than the SEC’s decision. He pointed out that there are many complex questions when it comes to registering cryptocurrency services like staking with the SEC.

For example, questions such as “Should staking services be registered on an individual stock basis or as a whole?” and “What information should be disclosed to investors?”

Pierce said the staking service had been around for a long time and should have asked the SEC to provide guidance in advance. “We also enforced and laid out the rules before issuing guidance,” he said.