The Securities and Exchange Commission has reached a $30 million settlement with the cryptocurrency platform Kraken that will require it to unwind a program offering investment returns to US users who committed their digital assets to the company.
Kraken’s “staking” program was an illegal securities offering, the SEC alleged in a Thursday complaint. The program, which advertised annual yields of up to 21%, failed to disclose the risks of participating, the SEC said.
The recent settlement between the SEC and cryptocurrency startup Block.one could mark a potential turning point for cryptocurrency regulation and the SEC’s broader efforts to bring the industry under its jurisdiction. But according to cryptocurrency advocates, the SEC clampdown on staking could have wider effects that undermine the US cryptocurrency ecosystem.
The SEC has filed a complaint against a startup that it says is violating securities laws by rewarding investors with additional tokens for contributing to the validation of transactions on its network. The startup says that this practice is vital to the healthy function of its virtual currency and that the rewards are not a form of securities.
In its complaint, the SEC alleged that Kraken failed to disclose information about the company’s health, the fees it charged, or how the company would handle its customers’ tokens. The SEC also said Kraken failed to notify users about the lack of protections it offered to those who engaged in staking through Kraken’s program.
Investors are in the dark about the financial status of the defendants and whether they will be able to pay the promised returns. In fact, per the Kraken Terms of Service, the defendants reserve the right not to pay any investor returns at all. This has investors worried, as they should be.
Kraken’s program offered outsized returns that were not based on economic realities, said Gurbir Grewal, director of the SEC’s enforcement division, in a statement.
Kraken announces that it will unstake all US customer assets as part of the agreement resolving the charges and that US customers will no longer be eligible to participate in staking. The company says that staking and the associated rewards will continue to be offered for non-US customers.