What does Kraken’s SEC settlement mean for crypto stakes?

There were a number of bankruptcy hearings this week, but the big news was that Kraken settled with the US Securities and Exchange Commission and ended its US crypto stake program as a result.

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The US Securities and Exchange Commission (SEC) announced charges against crypto exchange Kraken on Thursday, alleging that the offering of a crypto-staking-as-a-service program amounted to offering unregistered securities products in the US. To settle the costs, Kraken is paying $30 million and shutting down all of its US betting services. (CoinDesk was the first to report this news.)

The action has raised a number of questions about what this means for investing in freedom in the USA

Before we get into this in more detail, it is worth defining some terms. Proof-of-stake is a consensus mechanism where nodes are supported by people who unlock, or “stake”, their crypto. It differs from proof-of-work consensus mechanisms in that instead of putting energy and computing power into securing the blockchain, you put your “money”.

Staking has gained increasing attention in recent years, especially in 2022 after Ethereum, the world’s second most valuable cryptocurrency network, transitioned from proof-of-work to proof-of-stake.

Companies offer deployment services in the US because servicing your own node is not as easy as having someone else do it for you (I’m not judging!).

Coinbase CEO Brian Armstrong sounded the alarm on Wednesday when he tweeted about rumors the SEC was targeting retail betting at large.

But it seems to me that what is really happening is that the SEC is going after companies like Kraken, which offer betting services and promise their clients some kind of return.

Let’s look at SEC Chairman Gary Gensler’s own past comments to set a bit of a baseline here: In September, he said that staking could meet the parameters of the Howey test.

He singled out intermediaries in an interview with the Wall Street Journal, saying that betting through an intermediary “looks very similar — with some changes in labeling — to lending.”

Some of the big questions bouncing around after the Kraken announcement (and, to be perfectly honest, Armstrong’s tweet) include whether the SEC is going after all bets in the US, how crypto companies can actually offer betting services and whether the SEC will offer any guidance for companies that hoping to provide services without incurring the agency’s ire.

An SEC official, speaking at a media briefing after the settlement’s announcement, told reporters that the agency initially views the offering of an escrow service as being similar to offering any other type of security.

In other words, companies hoping to offer betting services must register as a securities platform with the regulator, get approval from the SEC Division of Corporation Finance to offer the product and file regular disclosures.

The security in this case was the investment program itself, meaning the representations Kraken made in offering the product and the agreement it entered into with users, another official said.

SEC Commissioner Hester Peirce, in one of her most fiery dissents to date, pointed out that just the act of filing may be more complex than meets the eye.

“An offering like the staking service at issue here raises a whole host of complicated questions, including whether the staking program as a whole will be registered or whether each token’s staking program will be registered separately and what the accounting implications will be for Kraken,” she said.

The officials refused to comment on whether the case had any implications for the effort in general.

Another part of the lawsuit the SEC filed against Kraken noted that the company decided what the stake rewards would be for users. The exchange didn’t just send the actual protocol rewards to Kraken’s investors.

An SEC official said during the briefing that the agency could not comment much on that aspect, although the official said not to read too much into it.

If you have thoughts or questions about what I should discuss next week or any other feedback you’d like to share, feel free to email me at [email protected] or find me on Twitter @nikhileshde.

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