SEC fines Kraken $30 million and bans its staking service in the US

According to the SEC complaint, since 2019, Kraken offers and sells its “staking” services. of cryptocurrencies to the general public, whereby Kraken stacks certain cryptocurrencies transferred by investors and stakes them on behalf of the latter. The regulator alleges that Kraken “promotes the fact that its staking investment program provides a user-friendly platform and benefits that flow from Kraken’s efforts on behalf of investors, including Kraken’s strategies for obtaining investment returns and regular payments.

Today we accused Kraken of failing to register the offer and sale of its crypto asset staking program as a service, in which investors transfer crypto assets to Kraken to stake them in exchange announced annual returns on investment of up to 21%.

— US Securities and Exchange Commission (@SECGov) February 9, 2023

“Today we have taken another step in protecting retail investors by shutting down this unregistered cryptocurrency gaming program, whereby Kraken not only offered investors exorbitant returns unrelated to economic reality, but also reserved the right to pay them no return.. At the same time, she provided them with no information about, among other things, her financial situation and whether she even had the means to pay the marketed returns in the first place,” he said. Gurbir S. GrewalDirector of the SEC’s Enforcement Division.

Grewal added that, “case after case, we have seen the consequences when individuals and corporations tout and offer crypto investments outside of federal law protections. securities laws: investors do not receive the information they deserve and are harmed when they do not receive it”.

“Whether through staking-as-a-service, lending or other means, crypto intermediaries, when offering investment contracts in exchange for investors’ tokens, must provide the information and appropriate safeguards required by our securities laws. Today’s action should make it clear to the market that gambling service providers must register and provide complete, fair and accurate information, as well as investor protection,” he stressed. Gary GenslerChairman of the SEC.

Staking is a process in which investors block or “stake” their cryptocurrency tokens to a blockchain validator with the goal of being rewarded with new tokens when their staked tokens go through the validation process. data for blockchains based on the proof-of-stake model, such as Ethereum. When investors provide tokens to gambling service providers, they lose control of those tokens and assume the risks associated with those platforms, with little protection.

Kraken agreed to pay a $30 million fine in “restitution, late interest, and civil penalties.” However, the company noted in a company blog post that will continue to offer gambling services to non-US users. through a separate subsidiary. For its part, the SEC’s ruling outright and categorically prohibits Kraken “and any entity they control, directly or indirectly” from selling “securities through cryptocurrency betting services or trading programs.” Paris “.

The SEC’s announcement of the deal comes after officials from the Internal Revenue Service applied to federal court for the Northern District of California for permission to issue subpoenas seeking information about the Kraken users. According to the court filing dated February 3, Kraken did not respond to a similar subpoena issued in May 2021.

CRITICISM OF THE SEC

The reactions to this judgment were not long in coming. One of the most virulent is that of one of the officials of the SEC, the commissioner. Hester Pricewho publicly berated the regulator for shutting down Kraken’s staking program.

My thoughts on today’s Kraken settlement: https://t.co/mijt3MNN4U

—Hester Peirce (@HesterPeirce) February 9, 2023

“Today the SEC shut down Kraken’s gambling program and called it a victory for investors. I disagree and therefore dissent. The Commission argues that this betting program should have been registered with the SEC as an offering of securities. Whether or not one agrees with this analysis, the more fundamental question is whether SEC registration would have been possible. In the current environment, offers related to cryptocurrencies are not registered by the SEC. An offer such as the betting service in question raises a number of complex questions. We have known about cryptocurrency betting programs for a long time. Even if it didn’t change anything, you should have asked us to publish betting guidelines much earlier.“Price criticized.

According to the SEC commissioner, the regulatory authority acted in a “stubborn and lazy” manner and “contented itself” with a simplistic solution.Not initiating a public process to develop a viable registration process that provides valuable information to investors, but simply shutting it down”. “Using regulatory measures to tell people what the law is in an emerging industry is not an efficient or fair way to regulate. Also, gambling services are not uniform, so one-off measurements and uniform analysis are not helpful,” he added.

Well said. There was no way to register (misleading offer).

“Using enforcement to tell people what the law is in an emerging industry is not an effective or fair way to regulate. » https://t.co/6wVZZbQt23

— Brian Armstrong (@brian_armstrong) February 9, 2023

AT greater transparency around cryptocurrency programs such as Kraken could be a good thing. On the other hand, it is less obvious whether we need a uniform regulatory solution and whether this regulatory solution must be provided by a regulator hostile to cryptocurrencies, in the form of a coercive measure,” he said. he concluded.

The post was applauded by Brian ArmstrongCEO and co-founder of Coinbasewho recently assessed rumors that the regulator is considering banning cryptocurrency staking, which would hurt its stock market considerably, since it offers this type of service..

1/ We hear rumors that the SEC wants to get rid of cryptocurrency staking in the US for retail clients. I hope it’s not, because I believe it would be a terrible path for the United States if allowed.

— Brian Armstrong (@brian_armstrong) February 8, 2023

“I hope that’s not the case. It would be a terrible path for the United States if that happened. Tax regulation does not work. It encourages companies to operate in tax havens, which happened with FTX. said Armstrong. It should be recalled that, according to estimates, 16 million ETH tokens could be released on the market once the operation is completed. Shanghai Update next March, which could lead to heavy selling pressure, as well as a staking rally that Coinbase could benefit from.

For his part, the Policy Director of the Blockchain Association, Jake Chervinskypointed out that settlements such as the one reached between Kraken and the SEC “do not have the force of law” and were the result of an economic rather than a legal agreement.

Regulations are not laws. It’s a decision that the economy of arrangement is better than that of combat, no more.

The SEC thinks staking-as-a-service is security. Kraken neither admitted nor denied.

This may be a tough question, but the SEC did not answer it today.

—Jake Chervinsky (@jchervinsky) February 9, 2023

” Agreements are not laws. They are the decision that the economy of compromise is better than fighting, nothing more. The SEC believes that gaming as a service is value. Kraken neither admitted nor denied. This may be a tough question, but the SEC did not answer one way or the other today,” he said.