Cryptocurrency exchange Kraken has agreed to pay $30 million in penalties and shut down its staking business in a settlement with the U.S. Securities and Exchange Commission Thursday.
The crypto exchange had more than $2.7 billion in crypto assets in its staking program in April 2022 and advertised annual returns of up to 21%, according to the SEC’s complaint.
Under the staking program, individual investors locked up their crypto-assets in a pool “staked” by Kraken to validate blockchain transactions in exchange for rewards. A validator is rewarded for successfully verifying information on a blockchain, and that reward is shared with the investors who stake their assets.
“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 said in a press release.
The SEC contends that Kraken’s staking program was an “unlawful offer and sale of securities.” Since this was an unregistered offering, the SEC said in its complaint that investors lacked material information about Kraken’s staking program including investment risks, fees charged, and the company’s financial condition.
“Kraken not only offered investors outsized returns untethered to any economic realities, but also retained the right to pay them no returns at all,” said Gurbir Grewal, Director of the SEC’s Division of Enforcement, in a press release.
Kraken agreed to this settlement without admitting or denying these allegations.
What Happens To Kraken Customers?
With this settlement, Kraken will end staking services to U.S. clients. Non-U.S. Kraken customers will be able to continue staking their crypto assets through a separate Kraken subsidiary, the company said in a blog post.
“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,” Kraken said.
All stake assets will return to customer’s spot wallets and any rewards that need to be paid out on previously staked crypto assets will be prorated to Feb. 9.
How Does This Order Impact The Crypto Markets?
Bitcoin prices slipped below $21,000 after the settlement was announced, and other major cryptocurrencies such as ether and binance coin (BNB) also saw their prices trend lower.
Brian Armstrong, CEO of rival crypto-exchange Coinbase (COIN), tweeted his concerns yesterday about a potential SEC ban on staking for retail investors. Kraken’s settlement may open the door for the SEC to go after other players such as Coinbase and Binance which offer similar products.
“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,” said Gabriella Kusz, CEO of the Global Digital Asset and Cryptocurrency Association, in an emailed statement.
SEC Commissioner Hester Pierce disagreed with the regulator’s action and made her dissent public.
“[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,” Pierce said.
Correction—Feb. 10, 2023: A previous version of this article did not state that Kraken shut its staking business in the U.S. in the headline.