Crypto Exchange Kraken Shuts Down Staking Service, Pays $30 Million Fine in SEC Settlement

Crypto exchange Kraken will “immediately” end its crypto-staking-as-a-service platform for US customers and pay $30 million to settle Securities and Exchange Commission (SEC) charges it offered unregistered securities, the US agency announced on Thursday.

Payward Ventures, Inc. and Payward Trading Ltd., the registered companies that make up Kraken, will terminate betting services and programs, the SEC said. The programs have given the general public access to staking services since at least 2019.

“The complaint alleges that Kraken claims that its venture investment program offers a user-friendly platform and benefits derived from Kraken’s efforts on behalf of investors, including Kraken’s strategies for achieving regular investment returns and payouts,” the SEC release said.

In a blog post, Kraken said it will automatically remove all assets staked by US customers, except for staked ether, which will not be unstaked until after the Ethereum Network’s Shanghai upgrade takes effect. US customers will also not be able to stake new assets (including Ether). Non-US clients are unaffected.

The SEC filed its lawsuit in federal court Thursday.

While Kraken’s website offered a 20% return on its staking service, the SEC press release suggested it could be as high as 21%.

The SEC’s characterization of Kraken’s staking setup highlighted the “risk” investors take when staking their tokens with “staking-as-a-service” providers, which provide them with “very little protection,” a press release said.

Staking is the process by which proof-of-stake blockchain networks such as Ethereum maintain security. The network’s decentralized validators post crypto as a form of security to verify that they will remain honest. In return for processing transactions, they are rewarded with more tokens. Many crypto actors lend their tokens to service providers who operate the nodes, sharing the returns.

Coinbase (COIN) also offers stakes for its customers, as do a number of decentralized protocols including Lido.

“Whether through stake-as-a-service, lending or other means, crypto-intermediaries, when offering investment contracts in exchange for investors’ tokens, must provide the proper disclosures and safeguards required by our securities laws,” the SEC chief said. Gary Gensler. “Today’s action should make clear to the market that staking-as-a-service providers must register and provide full, fair and truthful disclosure and investor protection.”

UPDATE (February 9, 2023, 20:15 UTC): Adds SEC settlement, additional details.

UPDATE (February 9, 20:30 UTC): Adding Kraken blog posts.