SEC Crypto Staking Ban – SEC Charges Kraken for Staking-as-a-Service Program
The SEC has recently taken action against crypto exchange Kraken, accusing the platform of offering unregistered securities products through its staking-as-a-service program. To resolve the charges, Kraken has agreed to pay $30 million and halt all of its staking services in the U.S.
This has caused a stir in the crypto world, as it raises questions about the future of staking in the country. To clarify, staking involves locking up one’s crypto as a way of supporting the network and earning rewards. This is different from proof-of-work consensus mechanisms, where computational power and energy is used to secure the blockchain.
Staking has become more popular in recent years, especially after Ethereum transitioned to proof-of-stake. Some companies offer staking services in the U.S. to make it easier for people to participate.
Coinbase CEO Brian Armstrong recently tweeted about rumors that the SEC was targeting retail staking, but it seems that the agency is actually going after companies like Kraken that are offering staking services and promising yields to their customers. According to SEC Chair Gary Gensler, staking through an intermediary “looks very similar – with some changes of labeling – to lending.”
The SEC has stated that they view the offering of staking services as similar to offering any other type of security, meaning that companies would have to register as a securities platform, get SEC approval, and file regular disclosures. However, SEC Commissioner Hester Peirce raised concerns about the complexity of the registration process and the implications for the company and the staking program.
The SEC also filed a lawsuit against Kraken, mentioning that the exchange determined the staking rewards for its users and was not just sending the actual protocol rewards. An SEC official did not comment much on this aspect, but an attorney suggested that this may make a big difference legally.
The officials declined to comment on whether the case has any implications for staking in general, leaving the crypto community with many questions and uncertainties.
What is staking?
Proof-of-Stake (PoS) is a consensus mechanism in the crypto world where nodes are supported by users who lock up, or “stake”, their crypto. This mechanism is different from the proof-of-work consensus as it requires the user to put their “money” into the system rather than energy and computing power.
Why is this important?
This action has raised questions about the future of staking in the US. With the growing popularity of staking, especially after Ethereum transitioned from proof-of-work to proof-of-stake in 2022, companies in the US have started offering staking services.
SEC Chair Gary Gensler has previously stated that staking through intermediaries “looks very similar to lending” and could meet the parameters of the Howey Test. The SEC views the offering of a staking service as similar to the offering of any other type of security. Companies offering staking services must register as a securities platform with the SEC, get SEC Division of Corporation Finance approval to offer the product, and file regular disclosures.
Questions Raised by the Kraken Incident: About SEC Crypto Staking Ban
Is the SEC targeting all staking services in the US?
How can crypto companies offer staking services while avoiding SEC charges?
Will the SEC provide any guidance to companies offering staking services?
SEC Commissioner’s Dissent:
SEC Commissioner Hester Peirce pointed out that the mere act of registering the staking service could raise complicated questions such as whether the staking program as a whole would be registered or each token’s staking program separately registered, and what the accounting implications would be for the company.
Details of the Lawsuit against Kraken:
The lawsuit filed by the SEC against Kraken notes that the company determined the staking rewards for its users, and the exchange was not simply passing on the protocol rewards to its investors. This aspect of the case may have been a significant factor in the SEC’s charges. However, the SEC declined to comment on the implications of this aspect of the case.
The charges against Kraken have sparked a discussion about the future of staking services in the US and the SEC’s stance on the matter. The SEC views staking services as similar to other securities offerings, and companies offering such services must follow SEC regulations. The complexity of registering a staking service has been raised as a concern by SEC Commissioner Hester Peirce.
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