Kraken consented to remit $30 million in penalties and to terminate its on chain staking program for United States customers under an agreement reached with the Securities but also Exchange Commission on Thursday.
According to the SEC complaint filed in federal court, the exchange held $2.7 billion in client crypto assets in the program during April 2022. Marketing material promised annual yields that reached 21 percent.
Participants transferred tokens to a pooled address controlled by Kraken. The exchange operated validator nodes on proof-of-stake networks. Block rewards, transaction fees along with protocol inflation flowed to the pool. Kraken deducted an undisclosed commission – distributed the remainder to participants on a bi weekly schedule denominated in the same asset that each user had supplied.
The SEC stated that investors surrendered custody of tokens to the platform; they faced counter party risk, smart contract risk in addition to slashing risk with minimal disclosure.
The agency alleged that the staking program constituted an unregistered securities offering. The complaint listed omissions – fee schedules, financial statements, risk factors next to the method used to calculate advertised yields.
Gurbir Grewal, director of the SEC Division of Enforcement, said in a press release: âKraken promised returns that bore no relation to underlying cash flow. The exchange reserved the right to withhold all rewards.â
Kraken accepted the settlement without admitting or denying the allegations.
Effective immediately, the exchange disabled new staking deposits from U.S. residents. A separate subsidiary located in the Republic of Ireland continues to serve non-U.S. clients.
Kraken posted a blog update: âAll staked assets except ether will be unstaked automatically. Rewards accrued through 09 February 2023 will be credited to spot wallets. U.S. clients lose the ability to stake additional ether.â
Tokens will appear in user spot wallets within seventy two hours. Rewards will be prorated to the cutoff date.
Bitcoin slid beneath $21,000 within minutes of the announcement. BNB, cardano each lost between 4.8 and 6.2 percent on spot exchanges.
Brian Armstrong, chief executive of Coinbase, tweeted on Wednesday that the SEC contemplated a nationwide prohibition on retail staking. The Kraken accord supplies a template for future enforcement against Coinbase, Binance.US along with smaller providers.
Gabriella Kusz, chief executive of the Global Digital Asset besides Cryptocurrency Association, wrote in an email: âThe settlement will deter protocol teams from offering staking services to U.S. residents. Retail investors will migrate to offshore platforms or self custodial solutions.â
SEC Commissioner Hester Pierce published a dissenting statement.
Pierce wrote: âThe Commission elected to extinguish a service that thousands of investors used. Kraken faces a permanent bar against any future staking offer in the United States, registered or exempt. Rather than craft a disclosure regime, the regulator chose prohibition.â
Correction – Feb. 10, 2023: An earlier headline failed to specify that Kraken terminated staking only for U.S. customers.