SEC targets ‘crypto-staking’ in $30 million Kraken settlement

Washington (CNN) The Securities and Exchange Commission has reached a $30 million settlement with cryptocurrency platform Kraken that will force it to shut down a program that offers investment returns to US users who have pledged 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 disclose the risks of participating in the program, which had advertised annual returns 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 crackdown on betting could have broader effects that undermine the U.S. cryptocurrency ecosystem.

The SEC complaint zeroes in on a practice that the industry says is essential to supporting the healthy functioning of some virtual currencies. When investors agree to contribute, or stake, their cryptocurrency tokens, their contribution becomes part of the computerized, technical process used to validate transactions. Those who do can be rewarded with extra tokens.

However, in its complaint, the SEC alleged that Kraken failed to notify users of the lack of protection it offered those who engaged in staking through Kraken’s program. The SEC also said Kraken failed to disclose information about its company’s health, the fees it charged, or how the company would manage its customers’ tokens.

“Investors have had no insight into the defendant’s financial condition and whether the defendant has the means to pay marketed returns — and indeed, under Kraken’s terms of service, the defendant retains the right not to pay any investor returns,” the complaint states.

Kraken’s program had offered “outsized returns untethered to any economic realities,” Gurbir Grewal, director of the SEC’s enforcement division, said in a statement.

As part of the deal resolving the charges, Kraken said in a blog post Thursday that in addition to the $30 million payment, it would “automatically offset all U.S. client funds” that were part of the program and that its U.S. clients would no longer be eligible to participate in strike action. Bets 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. Industry giant Coinbase offers a similar program whose website advertises up to 6% annual returns.

Ahead of the announcement of the SEC settlement, Coinbase CEO Brian Armstrong had tweeted about “rumors” of a possible crackdown on staking, which he described as a “terrible path for the United States” and “a matter of national security” if restrictions on staking ended up driving cryptocurrency development to other countries.

“Staking is a very important innovation in crypto,” Armstrong tweeted. “It allows users to directly participate in running open crypto networks. Staking brings many positive improvements to the space, including scalability, increased security, and reduced carbon footprints.”

“Strike is not a certainty,” he added.