On February 9, the Securities and Exchange Commission (SEC) charged Kraken, a leading centralised crypto exchange, with a securities violation over its staking-as-a-service platform. In response, Kraken has taken down its staking service for customers in the US and agreed to pay $30 million to settle the case. What’s more, is that the action is likely to affect similar services offered by other centralised exchanges. As such, the decision has had far-reaching effects on the crypto market, with major coins like ETH and BTC registering their first losses for the year following the SEC’s announcement.
Why has the SEC targeted Kraken?
The issue with the staking-as-a-service program offered by centralised exchanges is that investors need to transfer their tokens to the service provider to begin staking. In the process, they hand over control of their assets to the centralised exchange. The SEC sees this as a threat to customers.
“When crypto investors provide tokens to staking-as-a-service providers, they lose control of those tokens and take on risks associated with those platforms,” the SEC said in a statement.
In addition, the SEC also called for transparency in staking services offered by centralised exchanges. “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 Gary Gensler, Chairman of the SEC.
“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,” Gensler added. As such, the ruling seems to be in the interest of investors.
Crypto community reacts
While the SEC may have investor interests in mind, the move to ban Kraken’s staking-as-a-service has drawn the ire of the crypto community. Major firms and several investors have come out against the regulator, labelling the ruling as heavy-handed and extreme. Many users have also proposed better-suited alternatives to an all-out ban on Kraken’s staking platform.
“You could have mandated proof-of-reserves, required staking transparency, supported decentralized staking. Instead, we just got another Gary G. ban hammer to the head. And we have no confidence you won't come for decentralized staking next. You're driving it all offshore,” said Ryan Sean Adams, founder of the Bankless Podcast.
Other users called Gensler an “agent of an anti-crypto agenda” and accused the SEC of being biased toward certain exchanges. “Gensler is not a regulator. He is an agent of an anti-crypto agenda, who only aims to wield his power as a cudgel for those he doesn't agree with. So the big question then, is why didn't FTX get this treatment? Whose pocket is he in,” said Adam Cochran, a reputed crypto venture capitalist.
Brian Armstrong, CEO of leading crypto exchange Coinbase has also weighed in on the debate. “Coinbase's staking services are not securities. We will happily defend this in court if needed,” Armstrong said in a February 12 tweet. Of course, the tweet was accompanied by a blog post explaining how Coinbase staking customers were safe from the ruling.
However, not everyone was against the SEC. In fact, some crypto experts even welcomed the move. "Not your keys ... @GaryGensler. The @SECGov understands the importance of self-custody,” said Michael Saylor, co-founder of MicroStrategy, the largest institutional investor in Bitcoin.
Saylor’s comment refers to the crypto wallets provided by centralised exchanges. These storage solutions are known as custodial wallets. This means that the issuing entity retains control of the wallet’s private keys. And as the crypto saying goes, not your keys, not your crypto.
Some also feel that the move could push decentralised staking solutions such as Lido, StakeWise, Rocket Pool, etc. These platforms do not take control of a customer’s tokens, instead, they allow them to stake crypto straight from their own personal wallets. “That actually sounded pretty bullish for decentralised staking,” said one user in response to the SEC’s ban on Kraken’s staking-as-a-service.
Jacob Blish, head of business development at the Lido DAO backed this notion. Speaking to Bloomberg, Blish stated that the SEC’s move could be a “net benefit” for decentralised exchanges. However, he also explained that it “really depends on what the final resolution is.” At the same time, the unclear nature of the SEC’s announcement and how it will affect crypto staking has Blish worried and a bit disappointed.
“The most disappointing thing is we as an industry keep getting asked for transparency, but then me as a U.S. citizen, I get no transparency and how
Conclusion
After the settlement, Kraken has agreed to unstake all its staked cryptocurrency, except ETH, which will be unlocked only once the Shanghai Update goes live later this year. As such, all staked tokens will be returned to customers and Kraken’s staking-as-a-service will effectively come to an end. However, what repercussions the SEC’s move will have on the rest of the crypto staking space remains to be seen.
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