Kraken to pay $30 million in disgorgement after SEC charges

Kraken to pay $30 million in disgorgement after SEC charges

Kraken will pay $30 million for selling unregistered crypto staking service after SEC alleged that the exchange breached securities laws.

Failure to register staking service

The Securities and Exchange Commission (SEC) charged Kraken for selling unregistered digital assets staking service according to a recent press release. The agency said that it sanctioned Payward Ventures, Inc. and Payward Trading Ltd, the two entities commonly known as Kraken, for their failure to register their staking service. 

The SEC release said that Kraken’s staking-as-a-service program, which rewards investors for staking crypto assets, advertised annual returns of up to 21% that were not registered with the regulator and therefore termed an illegal offering. Consequently, the two entities behind the exchange have conceded to the charges and agreed to pay $30 million in civil penalties, prejudgment interest, and disgorgement.

Investors staked digital assets in pools

The complaint filed by SEC said that Kraken had sold its staking service to the public since 2019. The service requires interested investors to send their cryptocurrency assets to pools controlled by Kraken, where they are staked for investors.

The process involves locking up the tokens with a validator on the blockchain with the expectation of being rewarded at a later date. The staked token is used in the validation of blockchain data on the network.

Staked tokens are no longer controlled by their owners. SEC maintained that investors who stake their tokens on blockchain networks assume the risks associated with such networks. The agency reiterated that such investors have little protection in the course of staking their tokens.

Unsubstantiated claims by Kraken

The SEC further alleged that Kraken, in the promotion of its staking service, claimed that the regular returns that investors make on its staking platform were due to efforts on the part of the exchange to make regular payouts possible.

The SEC Chairman, Gary Gensler, while reacting to the charge, emphasized the need for full disclosure when companies offer such services:

“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,” Gensler said.

He added that truthful disclosure is essential to investor protection at all stages of the service in the exchange.

A common occurrence

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, said that the Kraken case followed a pattern that the agency regularly encounters with crypto businesses that offer investment opportunities without recourse to investor protection. He said that this contradicts federal securities laws since investors are harmed when there are no disclosures. Grewal said:

“Today, we take another step in protecting retail investors by shutting down this unregistered crypto staking program, through which Kraken not only offered investors outsized returns untethered to any economic realities, but also retained the right to pay them no returns at all. All the while, it provided them zero insight into, among other things, its financial condition and whether it even had the means of paying the marketed returns in the first place.”

Kraken did not deny or admit the allegations

The report said that even though Kraken didn’t admit or deny the SEC allegations, the company agreed to cease the offering of its staking service to the public, which the agency said violated Section 5 of the Securities Act of 1933.

As seen on the platform’s website, Kraken boasts of being the staking destination for holders of non-fungible tokens (NFTs). The exchange said that its clients have staked $725 million in FLOW, a platform that enables users to mint NFTs.

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