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The SEC shook Kraken down for $30M, but it doesn’t mean they had a case

The SEC shook Kraken down for $30M, but it doesn't mean they had a case


The settlement between Kraken (Payward Ventures) and the United States Securities and Exchange Commission set off alarm bells in the crypto community this month. Apparently, Kraken — one of the most compliance-minded crypto exchanges in existence — decided to buy its peace rather than fight with the SEC for years over whether it was offering unregistered “securities” through its staking program. The nature of the settlement is that Kraken neither admitted nor denied the SEC’s allegations, and the existence of the settlement, technically speaking, cannot be used as legal precedent for any argument either side of the issue might present.

That said, the settlement matters, as it will clearly chill crypto staking in the United States. As SEC Chairman Gary Gensler said, “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.” Gensler casts a wide net, indeed, for what the SEC considers to be “investment contracts,” and running staking out of business was perhaps precisely what he had in mind.

Related: Expect the SEC to use its Kraken playbook against staking protocols

That the SEC was successful in pressuring Kraken out of $30 million does not, however, make the agency’s position legally or logically correct. As a preliminary matter, “staking” and “lending” are totally different things. Staking is the process by which one pledges one’s coins or tokens to a proof-of-stake blockchain, either directly or by delegating one’s coins to a third party, for the purpose of securing the network. Stakers are the ones through whom the blockchain’s consensus mechanism operates, as they “vote” on which blocks will be added to the chain. The process is algorithmic, and the reward is automatic when one’s position is electronically “selected” as the validator for a given block.

Stakers don’t necessarily know who the other stakers are, nor do they need to know, as the fate of one’s stake is dependent only on following…

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