Today, the SEC shut down Kraken’s staking program and counted it as a win for investors. I disagree and therefore dissent.
Kraken operated a service through which its customers could offer their tokens up for staking. The customers earned returns, and the company earned a fee. The Commission argues that this staking program should have been registered with the SEC as a securities offering. Whether one agrees with that analysis or not, the more fundamental question is whether SEC registration would have been possible. In the current climate, crypto-related offerings are not making it through the SEC’s registration pipeline. An offering like the staking service at issue here raises a host of complicated questions, including whether the staking program as a whole would be registered or whether each token’s staking program would be separately registered, what the important disclosures what be, and what the accounting implications would be for Kraken.
We have known about crypto staking programs for a long time. Although it may not have made a difference, I should have called for us to put out guidance on staking long before now. Instead of taking the path of thinking through staking programs and issuing guidance, we again chose to speak through an enforcement action, purporting to “make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection.”[1] Using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating.[2] Moreover, staking services are not uniform, so one-off enforcement actions and cookie-cutter analysis does not cut it.[3]
Most concerning, though, is that our solution to a registration violation is to shut down entirely a program that has served people well. The program will no longer be available in the United States, and Kraken is enjoined from ever offering a staking service in the United States, registered or not. A paternalistic and lazy regulator settles on a solution like the one in this settlement: do not initiate a public process to develop a workable registration process that provides valuable information to investors, just shut it down.
More transparency around crypto-staking programs like Kraken’s might well be a good thing. However, whether we need a uniform regulatory solution and if that regulatory solution is best provided by a regulator that is hostile to crypto, in the form of an enforcement action, is less clear.[4]
[1] Press Release Announcing Action, https://www.sec.gov/news/press-release/2023-25
[2] For a longer discussion of this issue, see Hester Peirce, Outdated: Remarks before the Digital Assets at Duke Conference (Jan. 20, 2023), available at: https://www.sec.gov/news/speech/peirce-remarks-duke-conference-012023.
[3] For a discussion of this point, see Jessica S. Hart, Note: Policing Proof-of-Stake Networks: Regulatory Challenges Preserved by Staking-as-a-Service Providers and the Need for a Tailored Regime, 23 Col. Science & Tech. Rev. 192, 206-7 (2021) (discussing in variations in staking service provider business practices). See also Nicholas E. Gonzalez, Does Cryptocurrency Staking Fall Under SEC Jurisdiction?, 27 Ford. J. Corp. & Fin’l Law 557-58 (2022).
[4] Solutions need not come from a regulator. See, e.g., Proof of Stake Alliance, POSA Advances Staking as a Service Industry Driven Solutions (May 14, 2020) https://medium.com/proof-of-stake-alliance-posa/posa-advances-staking-as-a-service-industry-driven-solutions-60180943773b.
