Can We Expect Any Changes to Crypto Staking as a Result of Kraken’s SEC Settlement?

Several bankruptcies were heard this week, but the most noteworthy event was Kraken’s settlement with the U.S. Securities and Exchange Commission, which led to the closure of Kraken’s crypto staking program in the United States.

Banning all staking

On Thursday, the U.S. Securities and Exchange Commission (SEC) issued charges against Kraken, a cryptocurrency exchange, charging that its provision of a crypto staking-as-a-service program amounted to the provision of unregistered securities products in the U.S. Kraken has agreed to pay $30 million and cease all of its staking operations in the United States as part of a settlement.

Concerns have been expressed concerning the implications of this decision for staking generally in the United States.

It would be helpful to establish some terminology before proceeding. Staking, or locking up, one’s crypto assets in support of nodes, is the basis of the Proof-of-Stake consensus method. In contrast to proof-of-work consensus methods, in which computational power and energy are committed toward securing the blockchain, proof-of-stake consensus techniques have participants put “money” toward that end.

Especially when Ethereum, the second most valuable cryptocurrency network in the world, switched from proof-of-work to proof-of-stake in 2022, staking has gained a lot of attention in recent years.

In the United States, businesses provide staking services because it is difficult to operate your own node.

On Wednesday, Coinbase CEO Brian Armstrong tweeted about allegations the SEC was targeting retail staking generally.

However, it appears that the SEC is targeting staking service providers like Kraken because of the returns they promise their consumers. As a point of reference, let’s look at SEC Chair Gary Gensler’s own prior statements: Back in September, he argued that staking may pass the Howey Test with certain tweaks.

In an interview with the Wall Street Journal, he discussed the need of middlemen, noting that stakes through an intermediary “looks quite similar – with some modifications of labeling to lending.”

Questions about whether the SEC is going after all staking in the U.S., how crypto companies can actually offer staking services, and whether the SEC would offer any guidance for companies hoping to offer services without drawing the agency’s ire have been circulating since the Kraken announcement (and, quite frankly, Armstrong’s tweet).
During a press conference following the settlement’s announcement, an SEC official explained that the agency treats the offering of a staking service in much the same way as the offering of any other security.

In other words, businesses planning to provide staking services must register as a securities platform with the SEC, obtain approval from the SEC’s Division of Corporation Finance to do so, and then file periodic disclosures.
According to another source, the security at question was the investment program itself, or the promises Kraken made when it launched the product and the user agreement it afterwards signed.

In one of her most vehement dissents to date, Hester Peirce, a commissioner at the Securities and Exchange Commission (SEC), noted that the process of registering itself may be more involved than it seems at first appearance.

She said, “An offering like the staking service at issue here raises a whole host of complicated questions, including whether the staking program as a whole would be registered or whether each token’s staking program would be separately registered and what the accounting implications would be for Kraken.”

The authorities were unwilling to say whether or not this case has wider ramifications for staking.

The SEC’s claim against Kraken also included a statement that the exchange itself decided on the stake incentives. Kraken’s investors received more than just the real protocol payouts from the exchange.

It’s possible this was a major contributing factor. Probably “does make a major impact legally,” as lawyer Gabe Shapiro puts it.

During the meeting, an SEC official admitted that the agency had limited information to share on this topic, but cautioned against drawing any conclusions.

Disclaimer: The opinion expressed here is not investment advice – it is provided for informational purposes only. It does not necessarily reflect the opinion of EGG Finance. Every investment and all trading involves risk, so you should always perform your own research prior to making decisions. We do not recommend investing money you cannot afford to lose.

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