The Securities and Exchange Commission (SEC) has recently taken steps to crack down on cryptocurrency staking, a form of investing that involves holding digital assets for an extended period of time. This new approach is causing waves in the crypto world, as many are unsure how this will impact the industry. In this article, we’ll explore what the SEC’s crackdown means for crypto staking, what this could mean for regulations, and the legal side of cryptocurrency staking.
What is Staking?
Cryptocurrency staking is the process of locking funds in a cryptocurrency wallet to earn rewards from the network. In cryptocurrency staking, users “stake” their crypto coins to receive rewards generated from the network’s transaction fees. The amount of reward received depends on the number of coins held by the user and the total amount of coins staked by all users of the network. This process is used to secure the network, ensure its validity, and incentivize users to continue staking their coins.
How Does The SEC View Staking As A Service?
Staking is the process of locking up – or staking – cryptocurrency tokens with a validator that can earn a cryptocurrency in return. However, according to the U.S. Securities and Exchange Commission (SEC), when investors provide tokens to staking-as-a-service providers, they will lose control over them, and they can be exposed to risks associated with those platforms with very limited protection.
SEC Chair Gary Gensler noted, “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…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’s Crackdown on Kraken
On Feb. 9, 2023, the Securities and Exchange Commission charged Payward Ventures, Inc. and Payward Trading Ltd., commonly known as Kraken, with the illegal sale of their Crypto Asset Staking-as-a-Service program.
The Kraken entities agreed to cease offering or selling securities through crypto asset staking services or staking programs and to pay $30 million in disgorgement, prejudgment interest, and civil penalties.
What Are The Implications of This Crackdown?
Some of the big questions post-Kraken announcement and Armstrong’s tweet (if you’re keeping up with these!) involve the SEC going after all staking in the U.S., how crypto companies can actually offer staking services, and if the SEC will provide guidance to companies that want to provide staking services.
The SEC may now view offerings for staking services as securities offerings, and these services may not pass the Howey Test. Consequently, companies currently offering staking services in the U.S. may be looking to pull their services.
That being said, companies and exchanges looking to offer staking services and staking rewards programs may likely have to register as a securities platform with the SEC, and go through the stringent approval process.
This action could shake up the cryptocurrency industry and potentially lead to congress implementing laws for staking services.