SEC pushes Kraken out of U.S. staking business.
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The Kraken crypto exchange will cease offering staking services to U.S. customers to settle charges by the U.S. that its investment program should have been registered under securities laws.
The announcement by the SEC came after Brian Armstrong, head of the rival Coinbase exchange, cited rumors that the agency wants to ban retail staking, which allows individual investors to lend cryptocurrencies in exchange for interest payments. Kraken advertised yields of up to 21% a year, according to the SEC. Bloomberg reported yesterday that the SEC was investigating the San Francisco-based exchange and that a settlement was under discussion.
Kraken acknowledged the settlement in a blog post and specified that it would not affect users in other countries.
The SEC posted a video featuring its chairman, Gary Gensler, warning investors of the danger of “staking-as-a-service,” a term used to define third-party programs offered by centralized entities such as Kraken. He said that when such services allow an exchange to take control of an investor’s crypto tokens in a staking program “that relationship should come with the protections of the federal securities laws.” It is similar logic to the charges brought by the SEC and state regulators against companies such as Gemini and BlockFi that offered yiel- generating offerings to customers in a manner akin to savings accounts.
That interpretation conveniently sidesteps the debate raging in Washington over whether most cryptocurrencies themselves are securities that would fall under the SEC’s jurisdiction, but it implies a way for the agency to regulate the tokens’ use nonetheless. In previous public statements Gentler has suggested that every cryptocurrency with the exception of bitcoin is a security. However the SEC’s sister agency, the Commodity Futures Trading Commission (CFTC), is of the belief that at least ether, the native token to EthereumETH, is a commodity.
In a dissension issued after the announcement, SEC Commissioner Hester Peirce, appointed by Biden’s predecessor Donald Trump, lambasted the action, placing blame on her own agency for not offering a reliable path to registration if Kraken chose to seek one for its staking service. “We have known about crypto staking programs for a long time. Although it may not have made a difference, I should have called for us to put out guidance on staking long before now. Instead of taking the path of thinking through staking programs and issuing guidance, we again chose to speak through an enforcement action.”
Today’s action will do nothing to quell complaints that the Biden administration is trying to ban cryptocurrencies more broadly in a move that’s been described as “Operation Choke Point 2.0″—referring to a 2013 government initiative that sought to cut off undesirable industries from banking services. “Some in the crypto space believe that the recent attempts to ringfence the crypto industry and cut off its connectivity to the banking system are reminiscent of this little-known Obama-era program,” bitcoin and crypto-focused venture capitalist Nic Carter, a partner at Castle Island Ventures, wrote in a Substack post published by fellow investor Mike SolanaSOL.
Attention will now turn to the future of similar staking services offered to U.S. customers from exchanges such as Coinbase, Gemini, and Binance.US.
One cryptocurrency that was seen to potentially benefit from today’s action was LDOLDO, the governance token for the Lido platform, a staking service that allows users to earn yield on Ethereum. It is that blockchain’s largest staking platform, custodying 30% of all staked assets. Its token is up 16% since the announcement just before 3 p.m. New York time. BitcoinBTC and ether are down 3.27% and 4.82% respectively since the announcement.
LDO surged on the news of Kraken’s SEC settlement
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However, Gensler has also taken a skeptical view towards decentralized government models in crypto, openly wondering whether they are as distributed as they are marketed to be, suggesting that Lido could face similar scrutiny in the future.
Along with withdrawing its staking service, Kraken will pay $30 million in disgorgement, prejudgment interest and civil penalties.
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Updated February 9 to add background and market reaction.
