SEC enforces full disclosure & investor protection rule on staking-as-a-service

SEC alleges Kraken to violate securities laws by failing to register the offer and sale of its “crypto asset staking-as-a-service program."

SEC enforces full disclosure & investor protection rule on staking-as-a-service

On February 9, 2023, the SEC made an announcement, according to which SEC alleged that Kraken has violated securities laws by failing to register the offer and sale of its “crypto asset staking-as-a-service program." Investors transfer crypto assets to Kraken for staking in exchange for advertised annual investment returns of as much as 21 percent.

To settle the charges, Kraken agreed to pay $30 million in fines and agreed to immediately cease offering or selling securities through crypto asset staking services or staking programs.

Staking is a process in which investors 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. 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 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.

Because crypto is a global industry, the main result of this “investor protection” operation by the SEC is to prevent United States citizens and residents of Kraken’s staking services as currently configured. Kraken is free to reconfigure its staking services to fit the SEC’s conception of a “security” or to continue offering staking-as-a-service (SAAS) the very same way to its many customers outside the United States.

SEC alleged that Kraken’s staking program “aggregates investors crypto assets to enable Kraken to stake these pooled investor assets and achieve a competitive advantage in the staking marketplace.” It further alleged that pooling and retaining control over the tokens potentially reduces Kraken’s transaction costs and risks and increases the likelihood that Kraken will be selected to validate blockchain transactions and therefore earn rewards.

SEC enforces full disclosure and investor protection rule
on "Staking As A Service provider" as today’s action should make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection.

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