Feb 11, 2023

Kraken Fined $30M for Failing to Register Staking-as-a-Service Program

The crypto community was recently shocked by the charges that were brought against the popular crypto exchange Kraken over its staking-as-a-service program in the United States. On Feb. 9, the United States Securities Exchange Commission (SEC) declared that Kraken had failed to register the offer and sale of its crypto asset staking-as-a-service program, which it classified as a security under its purview.

Kraken agreed to pay a $30 million fine and cease offering staking services to U.S. retail investors, though it will continue to be offered offshore. This move sparked a lot of controversy among investors, politicians, industry executives and the crypto community at large.

Adam Cochran, a partner at Cinneamhain Ventures and an Ethereum bull, called out SEC chief Gary Gensler, describing him as “an agent of an anti-crypto agenda” rather than a regulator, and wondered why the same standards weren’t applied to Sam Bankman-Fried and FTX. Kristin Smith, CEO of the Blockchain Association, argued that the situation is a textbook example why Congress — not the SEC — should be working with industry players to forge appropriate legislation.

U.S. Congressman Tom Emmer, who has long been a critic of Gary Gensler, argued that staking services will play an important role in “building the next generation of the internet” and that the “purgatory strategy” will hurt “everyday Americans the most,” as they may soon be forced to fetch such services offshore. Ryan Sean Adams, the founder of the Ethereum show Bankless, suggested that the SEC could have taken other measures rather than charging Kraken out of the blue.

The SEC’s decision has also sparked a debate about how Kraken could possibly have registered with the securities regulator, as there was “no clear path” to approve crypto staking. Some have also questioned whether it could impact Ethereum’s consensus layer, given Kraken is the fourth-largest validator on Ethereum, according to on-chain metrics platform Nansen.

Michael Saylor, a prominent Bitcoin bull, agreed with Gensler’s analysis that retail investors “lose control” of their tokens when they’re delegated to external staking service providers. However, attorney and chief policy officer of the Blockchain Association, Jake Chervinsky, noted that such “settlements are not law” and that Kraken’s decision to settle was likely an economic decision rather than a legal one.

The SEC’s charge towards enforcing action against staking service providers has prompted Coinbase CEO Brian Armstrong to say that “regulation by enforcement” would be a “terrible path” for U.S. innovators, as they’ll be forced to push more of their services offshore.

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