Cryptocurrency exchange Kraken has agreed to pay $30 million in penalties and shut down its staking business in a settlement with the U.S. Securities and Exchange Commission Thursday.
The crypto exchange had more than $2.7 billion in crypto assets in its staking program in April 2022 and advertised annual returns of up to 21%, according to the SEC’s complaint.
Under the staking program, individual investors locked up their crypto-assets in a pool “staked” by Kraken to validate blockchain transactions in exchange for rewards. A validator is rewarded for successfully verifying information on a blockchain, and that reward is shared with the investors who stake their assets.
“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,” the SEC said in a press release.
The SEC contends that Kraken’s staking program was an “unlawful offer and sale of securities.” Since this was an unregistered offering, the SEC said in its complaint that investors lacked material information about Kraken’s staking program including investment risks, fees charged, and the company’s financial condition.
“Kraken not only offered investors outsized returns untethered to any economic realities, but also retained the right to pay them no returns at all,” said Gurbir Grewal, Director of the SEC’s Division of Enforcement, in a press release.
Brian Armstrong, CEO of rival crypto-exchange Coinbase, tweeted his concerns yesterday about a potential SEC ban on staking for retail investors. Kraken’s settlement may open the door for the SEC to go after other players such as Coinbase and Binance which offer similar products.
“At the very minimum it’s going to chill innovation, especially around additional staking opportunities, and potentially harm some of the broader evolutions in the digital assets space,” said Gabriella Kusz, CEO of the Global Digital Asset and Cryptocurrency Association, in an emailed statement.