February 2023 in Brief: Securities Law

Securities Regulation

The SEC Settles with Kraken for $30 Million over Crypto Asset Staking-As-A-Service Program

By Joseph Mayo, LL.M. Candidate at New York University School of Law

On February 9, 2023, the Securities and Exchange Commission announced a settlement with Payward Ventures, Inc. and Payward Trading Ltd., commonly known as Kraken, for the allegedly unregistered offer and sale of crypto asset investment contracts through their Staking-As-A-Service program.

Since cryptocurrency transaction data are recorded on a digital chain of information blocks, they must be validated before being added permanently to the blockchain. Staking cryptocurrency is one mechanism to validate the accuracy and authenticity of the information transferred through the blockchain. It ensures the security and integrity of the cryptocurrency network. By staking, the owners “lock up” their cryptocurrency in a wallet for a certain period. The cryptocurrency then can participate in the network’s consensus mechanism and validate transactions in exchange for tokens. Once their staked crypto token becomes part of the blockchain, owners get rewarded.

According to Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, Kraken touted its staking services to investors, who gave up control of their tokens and took on undisclosed risks in return for Kraken’s promises of outsized annual investment returns that bore no connection to economic realities.

The Kraken settlement joins the actions against crypto lender Nexo, which was fined $45 million, and Genesis, which was charged with offering unregistered securities. This enforcement action is another step in the government’s broader efforts to regulate the crypto industry. For instance, after last year’s collapse of FTX, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued in January this year a “joint statement on Crypto-Asset risks to banking organizations.”

The SEC has now clearly signaled to the marketplace that staking-as-a-service providers must register their offerings with the SEC and provide full, fair, and truthful disclosure and investor protection. SEC Chair Gary Gensler stated, “Whether it’s through staking-as-a-service, lending, or other means, crypto intermediaries, when offering investment contracts in exchange for investors’ tokens, need to provide the proper disclosures and safeguards required by our securities laws.” Without admitting or denying the allegations in the SEC’s complaint, in addition to the $30 million settlement, Kraken agreed not to violate Section 5 of the Securities Act of 1933 and not to offer or sell, directly or indirectly, unregistered securities through crypto asset staking services or staking programs.