US makes first crackdown on crypto staking as Kraken shuts down service

Washington - Kraken will pay US$30 million (S$39.8 million) to settle allegations by the Securities and Exchange Commission (SEC) that it broke the agency’s rules with its crypto asset staking products and will discontinue them in the United States as part of the agreement.

The SEC on Thursday alleged that the firm’s staking service was an illegal sale of securities. The settlement marks its first crackdown on staking.

It could have a sweeping impact on the industry because major crypto exchanges, including those run by Coinbase Global and Binance Holdings, have waded into the products to diversify revenues.

Staking works by letting users generate yields in return for allowing their tokens to be used to facilitate transactions on a blockchain. In the case of the yields offered by Kraken, they could be as high as 21 per cent, according to the SEC’s complaint.

A report from Kraken estimated the global value of staked assets at US$42 billion as at the end of 2022.

A Kraken representative said in a statement the firm will end its staking services only for US clients. These customers will be “unstaked” and those outside the US will receive staking services from a separate Kraken subsidiary. Kraken did not admit to or deny the SEC’s allegations in its settlement.

Over the past 1½ years, SEC chairman Gary Gensler has argued that many crypto assets are really just unregistered securities trading on the blockchain. He has said firms must follow the agency’s tough trading and investment rules or face the consequences. He has repeatedly warned trading platforms that he plans to hold them accountable.

“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,” Mr Gensler said in a statement.

Staking services have gathered steam in recent months after Ethereum – the biggest commercial highway in crypto – switched over to the so-called proof-of-stake method of ordering blockchain transactions in September 2022.

Mr Francesco Melpignano, chief executive officer of Kadena Eco, which is a unit of a company that built a proof-of-work blockchain, said the settlement could be “strictly negative in the sense that US residents may be banned from staking, even natively, on a blockchain altogether”.

San Francisco-based Kraken is a top cryptocurrency exchange, with a daily trading volume of roughly US$650 million globally, according to CoinMarketCap. The Internal Revenue Service, which in a separate filing asked a court to compel Kraken to turn over its books and other data, said the exchange had failed to comply with a previous summons issued in 2021.

Last August, Coinbase disclosed that it was being probed by the SEC over its staking programmes. The exchange is the second-largest depositor of staked Ether, according to tracker Etherscan. Lido Finance, a decentralised finance (DeFi) platform, is the largest.

Mr Henry Elder, head of DeFi at Wave Financial, said the case was a “huge gift to decentralised staking providers like Lido, RocketPool and StakeWise”.

As apps like Lido and RocketPool are decentralised, meaning that no single company runs them, they might be harder for regulators to control, he added.

Republican SEC commissioner Hester Peirce disagreed with the commission’s Democratic majority, calling for the agency to regulate by issuing guidance on staking, instead of speaking “through an enforcement action”.

“A paternalistic and lazy regulator settles on a solution like the one in this settlement,” he wrote in a dissent. BLOOMBERG