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SEC charges Kraken with selling unregistered securities, effectively criminalizes staking-as-a-service

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(Kitco News) - In a move that seemed increasingly likely as the day wore on and the leaks piled up, the United States’ Securities and Exchange Commission (SEC) announced that they have charged the Kraken cryptocurrency exchange with the unregistered offer and sale of securities, effectively criminalizing staking-as-a-service for all U.S.-based exchanges.

The announcement was published on twitter at 3:16 PM EST, and it was accompanied by a video in which SEC Chair Gary Gensler attempted to explain what staking was, and what was wrong with it.

“When a company or platform offers you these kinds of returns, whether they call their services ‘lending’, ‘earn’, ‘rewards’, ‘APY’, or ‘staking’, that relationship should come with the protections of the federal securities laws,” Gensler said. “That means you, the investor, should receive important disclosures.”

Gensler went on to list some of the key questions that staking-as-a-service raises. “What do they actually do with your tokens? Are they really staking them or are they lending, borrowing or trading with them? Are they commingling them with their other businesses? Where do the rewards come from are you getting your fair share?”

He also raised the possibility that the underlying crypto protocol may not be creating value through the staked assets but might simply be creating new tokens that dilute the value of existing ones.

“Remember, if you have a steak, that's S-T-E-A-K, if you have a steak meant for two and cut it into three pieces, it's still the same amount of steak,” he said. “Unfortunately, because these staking-as-a-service providers generally are not providing proper disclosures, there’s currently no reliable way as an investor to know the answers to these important investment questions.”

Gensler’s jovial and humorous style stood in sharp contrast to the SEC press release that spelled out the charges against Kraken. Here, the tone was all business.

“The Securities and Exchange Commission today charged Payward Ventures, Inc. and Payward Trading Ltd., both commonly known as Kraken, with failing to register the offer and sale of their crypto asset staking-as-a-service program, whereby investors transfer crypto assets to Kraken for staking in exchange for advertised annual investment returns of as much as 21 percent,” they wrote.

“To settle the SEC’s charges, the two Kraken entities agreed to immediately cease offering or selling securities through crypto asset staking services or staking programs and pay $30 million in disgorgement, prejudgment interest, and civil penalties.”

The SEC wrote in their complaint that since 2019, Kraken offered and sold its crypto asset ‘staking services’ to the general public, and that investors effectively lost control of their tokens and took on the risks associated with staking-as-a-service platforms.

“Whether it’s through staking-as-a-service, lending, or other means, crypto intermediaries, when offering investment contracts in exchange for investors’ tokens, need to provide the proper disclosures and safeguards required by our securities laws,” said Gensler. “Today’s action should make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection.”

Kraken issued their own statement shortly after the SEC’s. “Today, two Kraken subsidiaries announced a settlement with the U.S. Securities and Exchange Commission (SEC) concerning Kraken’s on-chain staking program,” they wrote. “Because of this settlement, Kraken has agreed to end its on-chain staking services for U.S. clients.”

Kraken said that effective immediately, they will “automatically unstake all U.S. client assets enrolled in the on-chain staking program” except for staked ether (ETH), which will be unstaked after the Shanghai upgrade, and these assets will no longer earn staking rewards.

“Kraken will continue to offer staking services for non-U.S. clients through a separate Kraken subsidiary,” they wrote.

The Kraken exchange processes around $660 million in transactions each day, around 40% of the $1.6 billion in daily volume processed on number two exchange Coinbase, which is also based in the United States. Both are dwarfed by the over $23 billion in daily volume of Binance, which has moved into a near-monopolistic position among exchanges following the collapse of erstwhile number two FTX in November.

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