Kraken Settles With SEC for $30 Million and Will Close US Crypto Staking Operations

Then-Commodity Futures Trading Commission Chairman Gary Gensler testifies before the Senate Banking, Housing and Urban Affairs Committee in the Dirksen Senate Office Building on Capitol Hill in Washington, D.C., on July 30, 2013. Chip Somodevilla/Getty Images

The Securities and Exchange Commission (SEC) settled a case with the cryptocurrency exchange Kraken, as it cracked down on one of its U.S. operations.

Kraken agreed to shut down its cryptocurrency staking service and paid a $30 million fine to settle charges that it failed to register the offer or sale of the program, the SEC announced on Feb. 9.

This is the first time the SEC has successfully terminated the much-used service offered by crypto exchanges, which have become very popular throughout the United States.

Staking services let customers earn a yield on their digital assets by temporarily handing their crypto tokens over to an intermediary, or a major cryptocurrency network like Kraken and Gemini, which would otherwise sit idle on their platforms.

Crypto staking normally allowed investors to store their crypto assets via a blockchain validator, which verifies the accuracy of transactions on the blockchain, from which they can later receive additional crypto tokens as a reward for locking their assets away.

SEC Launches Big Crackdown On US-Based Crypto Operations

The company’s settlement with the regulatory agency sends a signal to other big crypto platforms that offer similar offerings, as the government begins a crackdown on actions targeting the crypto industry.

The move comes just weeks after the SEC accused the crypto lender Genesis and crypto exchange Gemini for allegedly offering and selling unregistered securities.

“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 in a statement.

“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.”

The SEC claims that Kraken failed to register the offer and sale of its crypto staking-as-a-service program.

American-based investors allegedly had crypto assets worth over $2.7 billion on the company’s platform, which earned Kraken around $147 million in revenue, according to the SEC complaint.

More than 135,000 users throughout the Untied States had registered for Kraken’s staking platform, the SEC said.

Kraken Accused of Setting Up Crypto Investment Program Without Authorization

The SEC further accused Kraken of incentivizing investors by promising them “enhanced liquidity and immediate rewards” by using their staking program.

The agency said that the crypto exchange marketed the staking platform as an investment opportunity, earning it a net income of nearly $15 million on revenue of $45.2 million from U.S.-based users.

Customers on Kraken’s website were sold returns of up to 20 percent annual percentage yield through its staking product and it also promised to deliver those rewards to customers twice a week basis.

Kraken released a press statement explaining that their agreement with the SEC would affect only American-based clients and that most assets enrolled in its program by domestic users would be automatically “unstaked” immediately, on Feb. 9

Coinbase CEO Brian Armstrong stated this week that said a ban on staking for American crypto investors would be “a terrible path for the U.S.”

“We need to make sure that new technologies are encouraged to grow in the U.S., and not stifled by lack of clear rules,” Armstrong said.

Kraken did not admit or deny the allegations made in the SEC’s complaint.

Coinbase, which also offers a staking service in the United States, saw its shares tumble more than 14 percent, after the settlement was announced on Feb. 9.

Reuters contributed to this report.