The U.S. Securities and Exchange Commission (SEC) began an investigation against the cryptocurrency exchange Kraken. The regulator accused the platform of distributing unregistered securities, requiring it to pay a $30 million fine and shut down its crypto staking program.
Kraken has been under investigation by the SEC since February 8. The regulator charges the exchange with Securities Act violations. This is reported by Bloomberg, citing a source inside the company.
On February 9, the regulator filed charges against Kraken. The crypto exchange is accused of “failing to register the offer and sale of their Crypto Asset Staking-as-a-Service program.” According to the allegation, Kraken’s offered staking program qualifies as securities manipulation by the regulator and requires mandatory registration.
To settle the case, Kraken’s subsidiaries, Payward Ventures Inc. and Payward Trading Ltd., must pay a $30 million fine and immediately cease supporting the staking program. Gurbir Grewal, Director of the SEC’s Division of Enforcement, said Kraken offered investors outsized returns “untethered to any economic realities” and also reserved the right not to pay users any rewards at all.
It’s currently unknown what specific “securities offerings” are in question. However, the crypto exchange suspended staking cryptocurrencies on its platform for users from the United States. The restrictions apply to all digital assets that have been returned to users. Staked ETH, which can’t be withdrawn before the Shanghai hard fork, remains locked.
Kraken representatives clarified that the restrictions affect only users from the United States. Customers who are not U.S. citizens can continue to stake assets and receive rewards automatically.
The regulator’s actions received a negative reaction from the cryptocurrency community. For example, Adam Cochran, Partner at Cinneamhain Ventures, called Gary Gensler “an agent of an anti-crypto agenda.” Cochran accused the SEC Chair of “wielding his power” against crypto companies without getting to the bottom of the matter. He also questioned why similar charges hadn’t been made against FTX, hinting at the regulator’s patronage.
Kristin Smith, Blockchain Association CEO, accused the SEC of “undercutting the potential of public blockchain networks in the United States.” In Smith’s opinion, the SEC’s actions are “taking online freedoms away from individual users” and “driving innovation offshore” due to these attacks.
The regulator’s own spokesperson was also dissatisfied with the SEC’s actions. Thus, Hester Peirce, Commissioner of the SEC, publicly disagreed with the actions of her agency. In her words, regulating an emerging industry through enforcement “is not an efficient or fair way of regulating.” Peirce believes the Crypto Asset Staking-as-a-Service program has “served people well,” and the regulator shouldn’t have shut it down. Instead, the SEC should’ve required the company to find solutions to develop a “workable registration process.”
Regulating the industry through enforcement is a common practice for the SEC, and the agency previously announced plans to regulate crypto staking. Most cryptocurrency companies caught in the regulator’s crosshairs don’t seek to oppose it. However, the SEC may still lose one trial soon — the one against Ripple Labs. Read about the impact of the SEC vs. Ripple case on the crypto industry in CP Media’s article.
