Nick Corso – On February 9th, 2023, the Securities Exchange Commission (SEC) brought an action against Kraken, a cryptocurrency exchange based in the United States, for failing to register the offer and sale of its staking-as-a-service program. The parties agreed to settle the charges, ultimately requiring Kraken to shut down its staking programs and pay $30 million in disgorgement, prejudgment interest, and civil penalties.
Since Ethereum merged to a proof-of-stake consensus mechanism, regulatory agencies have begun to carefully scrutinize the various staking programs offered by companies. In Kraken’s staking-as-a-service program, customers would allow Kraken to stake their assets on their behalf, enabling customers to capitalize on staking rewards without having to conduct the process of on-chain staking themselves. While customers may opt into these staking programs due to convenience, there are a wide range of variations in these programs that include an inconsistent and misleading use of the word “staking”. Some companies refer to their programs as “staking,” but in reality, the high yields customers receive as a result are from the company’s own high-risk investments; rather, the returns are not generated from a company staking assets for customers. Therefore, it is important to differentiate between the types of staking programs to understand the action against Kraken.
It is important to note that this is a settlement, and therefore not law. Whether these types of staking programs indeed require securities registration has yet to be hashed out, and there is likely a long road ahead before this issue is resolved. The settlement itself has created a divide in opinions between the SEC staff; some are in favor of such action, and others, like the SEC Commissioner Hester Pierce, have dissented against the action. Commissioner Pierce argues that SEC registration for Kraken, and companies offering similar staking programs, are likely not possible because there are so many unanswered questions regarding registration as a staking program. She further argues against the SEC’s approach of regulation by enforcement, and instead has urged the SEC to release guidance for the nuanced regulatory issues surrounding staking programs. According to Commissioner Pierce, “using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating.”
Prominent leaders in the cryptocurrency industry, including Brian Armstrong, CEO of Coinbase, fear that this action is the beginning of the SEC’s attempt to ban cryptocurrency staking. Even if this is not the SEC’s intention, requiring staking services to register with the SEC could lead innovators in the industry to offer services off-shore and exclude U.S. customers from participating in such programs to avoid registration. Staking programs are undoubtedly one of largest revenue generating sources for cryptocurrencies companies. Therefore, how these issues are resolved is critical to the U.S.’s opportunity to be a world leader in a rapidly emerging area of innovation.
