The Securities and Exchange Commission has reached a $30 million settlement with the cryptocurrency platform Kraken that will force it to unwind a program offering investment returns to US users who committed their digital assets to the company.
That practice, known as “staking,” reflected an unregistered offer and sale of securities, the SEC alleged in a complaint announced Thursday. According to the SEC, Kraken failed to adequately disclose the risks of participating in the program, which had advertised annual yields of as much as 21%.
If approved by a court, the settlement marks a potential turning point for cryptocurrency regulation and the SEC’s broader efforts to bring the industry under its jurisdiction. But according to cryptocurrency advocates, the SEC clampdown on staking could have wider effects that undermine the US cryptocurrency ecosystem.
The SEC complaint zeroes in on a practice that the industry says is vital to supporting the healthy function of some virtual currencies. When investors agree to contribute, or stake, their cryptocurrency tokens, their contributions become part of the computerized, technical process used to validate transactions. Those who do may be rewarded with additional tokens.
In its complaint, however, the SEC alleged Kraken failed to notify users about the lack of protections it offered to those who engaged in staking through Kraken’s program. The SEC also said Kraken failed to disclose information about the company’s health, the fees it charged, or how the company would handle its customers’ tokens.
“Investors have had no insight into Defendants’ financial condition and whether Defendants have the means of paying the marketed returns — and indeed, per the Kraken Terms of Service, Defendants retain the right not to pay any investor return,” the complaint said.
Kraken’s program had offered “outsized returns untethered to any economic realities,” said Gurbir Grewal, director of the SEC’s enforcement division, in a statement.
As part of the agreement resolving the charges, Kraken said Thursday in a blog post that on top of the $30 million payment, it would “automatically unstake all U.S. client assets” that were a part of the program and that its US customers would no longer be eligible to participate in staking. Staking and the associated rewards will continue to be offered for non-US customers, the company said.
Kraken is not the only cryptocurrency platform that offers so-called staking-as-a-service. The industry giant Coinbase offers a similar program whose website advertises up to 6% annual returns.
Ahead of the SEC settlement announcement, Coinbase CEO Brian Armstrong had tweeted about “rumors” of a possible crackdown on staking, which he described as a “terrible path for the U.S.” and “a matter of national security” if restrictions on staking wound up driving cryptocurrency development to other countries.
“Staking is a really important innovation in crypto,” Armstrong tweeted. “It allows users to participate directly in running open crypto networks. Staking brings many positive improvements to the space, including scalability, increased security, and reduced carbon footprints.”
“Staking is not a security,” he added.