OnFebruary 9, 2023, the SEC Charged Payward Ventures, Inc. and Payward Trading Ltd. (d/b/a Kraken) (collectively, “Kraken”) with violating Sections 5(a) and 5(c) of the Securities Act for operating a crypto asset “staking-as-a-service program” without properly completing the registration process. According to the SEC, a staking program allows investors to lock up “their crypto tokens with a blockchain validator with the goal of being rewarded with new tokens when their staked crypto tokens become part of the process for validating data for the blockchain.” The SEC alleged that Kraken offered and sold its crypto asset staking services, which allowed investors to transfer crypto assets to Kraken in exchange for promised annual investment returns, but failed to make any public disclosures relating to its financial history, the associated fees for its services, or how it would obtain investment returns. In settlement, Kraken agreed to pay over $30 million and to immediately stop offering or selling securities through its staking programs.
The enforcement action against Kraken establishes, as SEC policy, that staking-as-a-service providers must register with the SEC and publicly disclose all material information to inform and protect potential investors. This is a significant development because the SEC had not previously issued guidance on staking programs. Further, Commissioner Hester Peirce dissented on this ground and noted that the SEC’s “solution to a registration violation is to shut down entirely a program that has served people well.” Notwithstanding these concerns, the SEC permanently enjoined Kraken from offering or selling securities through its crypto asset staking programs. Based upon this enforcement action, the SEC may in the future look to further increase transparency around similar staking programs.