Kraken exits US crypto venture to pay SEC fees

by Arthur · February 9, 2023

SEC pushes Kraken out of US betting business.

getty

The Kraken crypto exchange will stop offering staking services to US clients to pay US fees for their investment program to be registered under securities laws.

The SEC announcement came after Brian Armstrong, head of rival Coinbase exchange, cited rumors that the agency wants to ban retail staking, which allows individual investors to lend cryptocurrencies in exchange for interest payments. Kraken announced returns of up to 21% a year, according to the SEC. Bloomberg reported yesterday that the SEC was investigating the San Francisco-based exchange and that a settlement was under discussion.

Kraken acknowledged the settlement in a blog post and specified that it would not affect users in other countries.

The SEC released a video with its chairman, Gary Gensler, warning investors about the dangers of “staking-as-a-service,” a term used to define third-party programs offered by centralized entities like Kraken. He said that when such services allow an exchange to take control of an investor’s crypto tokens in a staking program, “that relationship should come with the protection of the federal securities laws.” It’s similar logic to the charges brought by the SEC and state regulators against companies like Gemini and BlockFi that offered yield-generating offerings to customers in a manner similar to savings accounts.

This interpretation virtually sidesteps the debate raging in Washington over whether most cryptocurrencies are themselves securities that would fall under the SEC’s jurisdiction, but it does provide a way for the agency to regulate the use of tokens nonetheless. In previous public statements, Gentler has suggested that every cryptocurrency with the exception of bitcoin is a security. However, the SEC’s sister agency, the Commodity Futures Trading Commission (CFTC), is of the belief that at least ether, the native symbol of EthereumETH, is a commodity.

In a dissent issued after the announcement, SEC Commissioner Hester Peirce, appointed by Biden’s predecessor Donald Trump, criticized the action, blaming her own agency for not offering a reliable path to registration if Kraken chose to seek one for its betting service. “We’ve known about crypto staking programs for a long time. While it may not have made a difference, I should have asked us to post staking guidance long before now. Instead of thinking through staking programs and providing guidance, chose we left to talk through an enforcement action.”

Today’s action will do nothing to quell complaints that the Biden administration is trying to ban cryptocurrencies more broadly in a move that has been described as “Operation Choke Point 2.0” — referring to a 2013 government initiative that sought to cut off unwanted industries from banking services. “Some in the crypto space believe that the recent efforts to delineate the crypto industry and cut its connection to the banking system are reminiscent of this little-known Obama-era program,” said bitcoin and crypto-focused venture capitalist Nic Carter, a partner. at Castle Island Ventures, wrote in a Substack post published by co-investor Mike SolanaSOL.

Attention will now turn to the future of similar staking services offered to US customers by exchanges such as Coinbase, Gemini and Binance.US.

One cryptocurrency that could potentially benefit from today’s action was LDOLDO, the governing token for the Lido platform, a staking service that allows users to earn returns on Ethereum. It is the blockchain’s largest staking platform, holding 30% of all assets staked. The token is up 16% since the announcement just before 3pm New York time. BitcoinBTC and ether are down 3.27% and 4.82% respectively since the announcement.

LDO surged on news of Kraken’s SEC settlement

TradingView

However, Gensler has also taken a skeptical view of decentralized government models in crypto, openly questioning whether they are as distributed as they are marketed to be, suggesting that Lido may face similar scrutiny in the future.

Along with withdrawing its betting service, Kraken will pay $30 million in disgorgement, prejudgment interest and civil penalties.

—

Updated February 9 to add background and market reaction.

[email protected]

read moreRead less

I am the Director of Digital Asset Research at Forbes. I was recently on Kraken, a cryptocurrency exchange based in the US. Prior to joining Kraken, I served as the Chief Operating Officer of the Wall Street Blockchain Alliance, a non-profit trade association dedicated to the widespread adoption of cryptocurrencies and blockchain technologies across global markets. Prior to joining WSBA, I was a senior associate in the Emerging Technologies practice at Spitzberg Partners, a boutique corporate advisory firm that advises leading firms across industries on blockchain technology. Previously, I was Vice President/Lead Strategy Analyst at Citi FinTech, where I drove strategic and new business development initiatives for Citigroup’s Global Retail and Consumer Bank operations in 20 countries. I also served five years as a senior intelligence analyst at Booz Allen Hamilton supporting the US Department of Defense. I have a BS in Business Administration from the Tepper School of Business at Carnegie Mellon University and an MA in International Affairs from Columbia University’s School of International and Public Affairs. In addition, I am a Certified Information Privacy Professional (USA, Canada and EU) and a Certified Information Privacy Technologist at the International Association of Privacy Professionals (IAPP).