Mainstay Minute: What happened between the SEC and Kraken?
Kraken, the well-known cryptocurrency exchange, is in hot water with the SEC over allegations that it failed to register its staking-as-a-service program. According to the SEC, Kraken has been offering and selling its staking services to the public since 2019, without adhering to appropriate securities laws.
To make matters worse, the SEC claims that Kraken promised investors annual returns of up to 21%, but investors who provide tokens to staking-as-a-service providers lose control of those tokens and face substantial risks. As a result, the SEC has charged Kraken with failing to register the offer and sale of their staking-as-a-service program as a security.
In an effort to settle these charges, Kraken has agreed to stop offering or selling securities through crypto asset staking services or staking programs, as well as pay $30 million in disgorgement, prejudgment interest, and civil penalties. While Kraken has not admitted to any wrongdoing, it has agreed to a permanent injunction that would prevent it from violating Section 5 of the Securities Act of 1933 and offering or selling securities through crypto asset staking services or programs.
It’s a major setback for Kraken, which has been one of the largest and most trusted cryptocurrency exchanges in the industry. The staking program in question was one of the company’s most popular offerings, and it’s unclear how the loss of this revenue stream will affect Kraken’s future growth.
However, this is not the first time that a cryptocurrency exchange has faced charges for failing to comply with securities laws. According to a recent report by the Cambridge Center for Alternative Finance, 71% of all cryptocurrency exchanges require some form of user identification, and 97% of exchanges report keeping some form of records on their users.
Nevertheless, this report also highlighted that only 32% of exchanges comply with Know Your Customer (KYC) regulations, and only 40% comply with Anti-Money Laundering (AML) regulations.
This case involving Kraken underscores the need for greater transparency and accountability in the cryptocurrency industry. Investors need to have confidence that they are not putting their money at undue risk, and the only way to achieve this is through stricter regulation and compliance with securities laws. While it’s a shame to see Kraken fall afoul of the SEC, this may serve as a wake-up call for other exchanges to clean up their act.