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Home News

SEC Versus Kraken

How One Agency Took on Crypto

Dennis Chen by Dennis Chen
February 16, 2023
in News, Trading
0
SEC Versus Kraken

SEC Chairman Gary Gensler has been outspoken against Kraken.

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The Securities and Exchange Commission (SEC) is making its lists and checking them twice. Guess who made the naughty list this year? 

This should come as no surprise, but just about everyone in the crypto community, except for a saintly few, made the SEC’s purview list this year. And they are in full Bad Santa mode when it comes to delivering coal in their stockings (albeit a few months too early and too late this season). 

Chairman of the SEC, Gary Gensler, announced this week that the SEC would be fining Kraken a not-so-horrible $30 million. But the fervent chairman did not stop there. They made sure they made a loud and clear point about how they felt about staking. 

SEC Cracks Down on Kraken

In short, the SEC chairman not only froze all staking on Kraken but expressed his forewarning to all other major crypto players: we’re coming for your staking, beware and prepare because the crypto winter is just beginning. 

Let’s back up a bit. What exactly is staking? What does it mean for the rest of the crypto community that it might be gone in a matter of weeks? 

Staking is the widely-used cryptosystem where investors lock up crypto tokens on a specific blockchain. In exchange, the client earns more tokens. 

Staking can be lucrative for investors, with annual returns of as much as 21%, the SEC said. It’s incredibly popular in crypto, with proponents touting the “passive income” that investors could earn. 

The Downsides of Staking

But it’s a very risky offering. Investors can “lose control of those tokens and take on risks associated with those platforms, with very little protection,” the SEC said. 

Kraken “neither admitted nor denied” the SEC allegations, a company spokesperson told The Examiner, adding that the agreement covers only U.S. clients. “Staking services for non-U.S. clients will continue uninterrupted,” the spokesperson said. 

The case highlights the SEC’s argument that most crypto products and services are, in fact, investment contracts that should be subject to regulations, including detailed disclosures about what the companies are selling. However, the SEC has yet to issue detailed guidelines on which specific cryptocurrencies and digital assets should be registered as securities, which is why crypto companies that sell crypto products and services have, in effect, operated in a gray area. 

SEC Chairman Gary Gensler Sounds Off

The settlement with Kraken “should make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection,” SEC Chair Gary Gensler said in a statement. 

Crypto industry leaders and their supporters were quick to criticize the SEC’s move. 

Kristin Smith, CEO of the Blockchain Association, the industry lobby organization, called staking “an important part of the crypto ecosystem, allowing individuals to participate in decentralized networks and giving investors more options to earn passive income.”

“The SEC continues its attack on U.S. crypto companies and retail investors, regulating by enforcement and undercutting the potential of public blockchain networks in the United States”

Before the SEC settlement was announced, Brian Armstrong, CEO of Coinbase, another San Francisco crypto exchange, tweeted that the company was “hearing rumors that the SEC would like to get rid of crypto staking in the U.S. for retail customers. 

“I hope that’s not the case, as I believe it would be a terrible path for the U.S. if that were allowed to happen.” 

He accused the SEC of resorting to enforcement actions instead of working with crypto companies to clarify the rules.

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Dennis Chen

Dennis Chen

Dennis Chen has spent over a decade working in corporate finance and an MBA from USC. His research focuses on how defi is disrupting traditional finance spaces. He joined the Hodl Ninjas team to help amplify awareness of great crypto projects.

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