- L Misthos and S Pettigrove
Kraken avoids further crack down after SEC settlement
Updated: Feb 10
Payward Ventures Inc. and Payward Trading Ltd, the two entities behind global crypto exchange Kraken, have announced an end to their ongoing on-chain staking program which attracted the attention of the Securities and Exchange Commission (SEC) in 2019.
In a blog post, Kraken announced US clients will no longer be able to stake new assets and all previously staked assets will be automatically unstaked. Aside from ETH, which cannot be unstaked and returned until the Shanghai upgrade, all staked digital assets will be returned to client's spot wallets.
Prior to the settlement, the SEC alleged Kraken was required to, and failed to register the offer and sale of their staking service under US securities laws. In addition to ceasing the staking service, Kraken has agreed to pay USD$30 million in settlement of the matter.
In a press release the SEC reiterated risks associated with staking:
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.
Importantly, Kraken's staking service touted specific returns for certain crypto assets which were available on Kraken's website and promoted through email advertisements and social media. Unlike many other staking services, customer returns were not fixed by the underlying blockchain protocol, but were pre-determined by Kraken.
The SEC who argued Kraken was entering into investment contracts with users whereby users would advance tokens and Kraken would supply returns based upon the value of the tokens.
The complaint, which was filed in the US District Court of the Northern District of California asserted that under the Howey framework, Kraken had offered and sold its staking program as a security. This case provides an important point of difference with respect to staking services in that staking based on pre-determined rewards, instead of providing rewards resulting from the function of an underlying protocol, involves a greater risk that regulatory bodies will argue token contributors are part of a type of scheme with a view to profit.
There is some similarity with ASIC commencing proceedings in Australia against staking offered by Block Earner and an interest reward program offered by Finder.