Kraken, one of the biggest crypto exchange has been forced to stop providing staking services after paying a fine of $30 million to settle with the Securities and Exchanges Commission (SEC) for offering crypto assets “securities” for staking-as-a-service.
“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,” said SEC Chair Gary Gensler.
SEC therefore is classifying managed staking as an investment contract with the definition from the Supreme Court stating:
“An investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”
There is no common enterprise as such in staking, but a protocol, the ethereum blockchain. There are no efforts from others either, the protocol rules provide the staking reward.
This is an extreme stretch of the definition of investment contracts therefore, and a significant expansion of SEC’s jurisdiction.
In many ways it is similar to banning hosted mining. You can still stake yourself, or mine, but you can’t pay someone else to do it for you without that someone else being registered with SEC first.
The reason for this decision is most likely not directly related to staking itself. SEC simply wants crypto exchanges to be registered with SEC, and they’re going to some length to effectively force them to do so.
One can argue however that for managed staking there is a fiduciary relationship of trust, but for an entity like Kraken that applies ad inito as the act of depositing on Kraken creates that relationship, while the act of staking changes nothing further.
Why there’s this specific decision on staking therefore, beyond SEC trying to force crypto exchanges to be more like Nasdaq, is not clear but Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, made a very peculiar statement:
“Kraken not only offered investors outsized returns untethered to any economic realities, but also retained the right to pay them no returns at all.”
Untethered to any reality. That clearly applies to Grewal far more than Kraken which offers the protocol reward minus fees. If 5% is untethered, then Grewal should see the returns rich investors are afforded through their privilege of being able to invest in startups without competition from the wider public which is prohibited from doing so.
This decision on staking also means that for entities which are not registered with SEC, they will be limited to providing staking services only to the rich.
One rule for the masses, another for people like Gary Gensler who is worth some $100 million in the modern United States.
Eth dipped on the news, down some 7%, but this SEC decision will increase ethereum’s decentralization as it will limit centralized staking, strengthening decentralized options.
Like Lido, the decentralized tokenized staking project. That’s up 7%, with Europe also likely to benefit as Coinbase, Kraken and other crypto exchanges will find the continent a lot more attractive.