Cryptocurrency exchange Kraken and the United States Securities and Exchange Commission (SEC) have reached a settlement under which Kraken will pay a $30 million fine and shutter its staking business.
The SEC voted on the settlement during a closed-door meeting held on Thursday, with an announcement on the same imminent.
Kraken-SEC Reach Settlement
Cryptocurrency exchange Kraken has agreed to pay $30 million in penalties to the United States Securities and Exchange Commission and shutter its staking business as part of a settlement with the SEC. The settlement was discussed and voted on during a closed-door meeting held on Thursday afternoon. The SEC also confirmed that Kraken had agreed to shut down its staking operations for its U.S. customers.
The decision by the SEC comes just a day after Brian Armstrong, CEO of Coinbase, tweeted that he had come across rumors that the SEC was planning to bar retail customers from staking. However, the SEC did not comment on Armstrong’s statement at the time.
Kraken’s Staking Program
Kraken offers a host of services under its staking umbrella. This includes a lending product that offers up to 24% yield. However, this program is also expected to shut down under the settlement with the SEC. Kraken offered its customers a 20% APY through its staking service, sending them staking rewards twice a week. Investors could lock up their crypto assets in a pool, contributing to the validation of transactions and receiving rewards in return.
The SEC’s View On Staking
Gary Gensler, the SEC Chair, has stated that he believes staking through intermediaries, in this case, Kraken, possibly meets the requirements of the Howey Test. The Howey Test is a decades-old case often used as a benchmark to decide if something can be defined as a security under U.S. law. According to Gensler, staking is similar to lending, with the SEC having brought and settled charges previously with other lending companies such as the now-bankrupt BlockFi. The SEC stated in a press release,
“When investors provide tokens to staking-as-a-service providers, they lose control of those tokens and take on risks associated with those platforms, with very little protection.”
The SEC in its argument, stated that Kraken’s staking program was an unlawful offer and sale of securities. According to the SEC, because this was an unregistered offering, investors in Kraken’s staking program did not have adequate information about the company’s financial condition, fees charged, and investment risks.
“Kraken not only offered investors outsized returns untethered to any economic realities but also retained the right to pay them no returns at all.”
What About Kraken Customers?
The settlement with the SEC signals the end of Kraken’s staking services to its U.S. customers. Customers outside the United States of America will be able to continue staking as usual through a separate subsidiary of the company, Kraken clarified in a blog post. It stated,
“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.”
The company will return all stakes to their respective spot wallets, and any rewards that need to be paid on previously staked assets will be prorated to the 9th of February, 2023.
Impact On Markets
Understandably, such a major announcement did have an impact on the larger markets. Following the news of the settlement, Bitcoin prices slipped below the $21,000 mark, while other major cryptocurrencies also saw a downward price trend. Brian Armstrong had already stated his concerns about a potential SEC-led ban on staking and what it meant for retail customers. He added that the settlement could mean the SEC would now go after other players offering similar services, such as Binance and Coinbase. The CEO of the Global Digital Asset and Cryptocurrency Association, Gabriella Kusz, in a statement said,
“At the very minimum, it’s going to chill innovation, especially around additional staking opportunities, and potentially harm some of the broader evolutions in the digital assets space.”
SEC Commissioner Hester Peirce Dissents Publicly
However, not all are on board with the decision. SEC commissioner Hester Peirce has openly criticized forcing Kraken to shutter its staking services. Penning an official letter of dissent, Peirce stated that the SEC’s repeated efforts to regulate and stifle the crypto industry are bad for the average American investor in the long run.
“Today, the SEC shut down Kraken’s staking program and counted it as a win for investors. I disagree and, therefore, dissent. “[O]ur solution to a registration violation is to shut down entirely a program that has served people well. The program will no longer be available in the United States, and Kraken is enjoined from ever offering a staking service in the United States, registered or not. A paternalistic and lazy regulator settles on a solution like the one in this settlement: do not initiate a public process to develop a workable registration process that provides valuable information to investors, just shut it down.”
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
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