Kraken To Shut US Crypto Staking-As-A-Service Program, Pay $30 Million SEC Fine

Staking is a process in which investors lock up – or “stake” – their crypto tokens with a blockchain validator with the goal of being rewarded with new tokens

US market regulator Securities and Exchange Commission (SEC) on Thursday announced that crypto exchange Kraken will immediately end its crypto staking-as-a-service platform for US customers and pay $30 million to settle charges brought by the SEC regarding Kraken “failing to register the offer and sale of their crypto-asset staking-as-a-service program.”

Payward Ventures, Inc. and Payward Trading Ltd., two entities that makeup Kraken, SEC in a press release said, “agreed to immediately cease offering or selling securities through crypto asset staking services or staking programs and pay $30 million in disgorgement, prejudgment interest, and civil penalties.”

Staking is a process in which investors lock up – or “stake” – their crypto tokens with a blockchain validator with the goal of being rewarded with new tokens when their staked crypto tokens become part of the process for validating data for the blockchain. SEC said, when investors provide tokens to staking-as-a-service providers, they lose control of those tokens and take on risks associated with those platforms, with very little protection. 

According to the SEC, since 2019, Kraken has offered and sold its crypto asset “staking services” to the general public, whereby Kraken pools certain crypto assets transferred by investors and stakes them on behalf of those investors. 

Kraken's website says that their staking service would generate a 20 per cent return, while the SEC press release said that it might even be as high as 21 per cent.

The complaint alleges that Kraken touts that its staking investment program offers an easy-to-use platform and benefits that derive from Kraken’s efforts on behalf of investors, including Kraken’s strategies to obtain regular investment returns and payouts.

“Whether it’s through staking-as-a-service, lending, or other means, crypto intermediaries, when offering investment contracts in exchange for investors’ tokens, need to provide the proper disclosures and safeguards required by our securities laws,” said SEC Chair Gary Gensler. 

The crypto exchange Kraken in a blog post said, “Starting today, Kraken will automatically unstake all US client assets enrolled in the on-chain staking program. These assets will no longer earn staking rewards. This applies to all staked assets except for staked ether (ETH), which will be unstaked after the Shanghai upgrade. U.S. clients will not be able to stake any additional assets, including ETH.”

Kraken will continue to offer staking services for non-U.S. clients through a separate Kraken subsidiary, it added. 

Kraken also said that previously staked non-ETH assets will be automatically unstaked. These assets will be returned to the client’s spot wallet and will no longer earn rewards. Kraken will prorate final rewards through February 9. These rewards will not become staked. Kraken will instead pay rewards out in their non-staked form.

“In case after case, we’ve seen the consequences when individuals and businesses tout and offer crypto investments outside of the protections provided by the federal securities laws: investors lack the disclosures they deserve and are harmed when they don’t receive them,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. 

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