Kraken was sacked by the SEC for $30M. However, that doesn’t mean that they had a case.
Kraken reached a settlement with SEC, but it didn’t change the law. Staking is not a security. Opinion Buy this piece of history As an NFT Kraken, one of the most compliant crypto exchanges in existence, decided to make peace with the SEC rather than continue to fight the SEC for years over whether it was offering unregistered securities through its staking program. The settlement was not a formal admission or denial of the SEC’s allegations. It is clear that it will chill crypto staking in America, and that the settlement matters. As SEC Chairman Gary Gensler said, “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 casts a wide net, indeed, for what the SEC considers to be “investment contracts,” and running staking out of business was perhaps precisely what he had in mind.Related: Expect the SEC to use its Kraken playbook against staking protocolsThat the SEC was successful in pressuring Kraken out of $30 million does not, however, make the agency’s position legally or logically correct. “Staking” and “lending”, are two completely different things. Staking is when one pledges his coins or tokens to a proof of-stake blockchain. One can do this either directly or by delegating one’s coins to third parties for the purpose to secure the network. The consensus mechanism of the blockchain works through the Stakers, who “vote” for which blocks will be added. The process is algorithmic and the reward is automatically given when one’s position becomes the validator for a block. Settlements are not laws. They are a decision that the economics and benefits of settling are better then fighting, no more. The SEC considers staking as a service a security. Kraken didn’t admit or deny either of these statements.
The stake holders don’t know the identities of the other stakers. They also don’t need to know. The fate of a stake depends on the rules of the blockchain, such as “liveness” (availability), and other technical considerations. While there are some risks of “slashing”, or losing your coins, this is an algorithmic remedy that is automatically applied according to transparent rules in the code. Put simply, in staking, it’s between you and the blockchain, not you and the intermediary.Lending, in contrast, invokes the entrepreneurial and managerial skill (or lack thereof) of the people to whom you lend. This is a very human venture. One doesn’t necessarily know what the borrower does with the money. One just hopes to get it back with some return. This counterparty risk is part of what securities laws are designed to address. Paul Grewal, Coinbase’s chief legal officer, wrote in a blog post that the reasons why staking arrangements do not constitute “investment contracts” and thereby “securities” were explained clearly. Simply put, serving as an intermediary doesn’t make the underlying economic relationship an investment contract. However, Coinbase chief legal officer Paul Grewal stated in a blog post that Kraken may have the private keys to the coins that the client wanted to stake. It is not a discrete service to serve as a custodian for a fungible asset, particularly if collateral is held on a 1:1 basis to support every customer account. There is no evidence that Kraken, Coinbase, or any other staking service provider uses human judgment, intuition or grit to further or hinder the staker’s goals. The performance of the intermediary does not affect one’s reward. While there should be (and do have) rules and regulations regarding how custodians operate, possession is not a security. Ari Good is an attorney who represents token issuers, payments companies, and cryptocurrency exchanges. His practice areas include tax, securities, and financial services compliance. He earned his juris doctor in 1997 from DePaul University College of Law, and his Master of Laws degree in taxation in 2005 from the University of Florida. He is currently a candidate for the Executive Master of Laws for securities and financial regulation at Georgetown University Law Center. These views, thoughts, opinions are solely those of the author and do not necessarily reflect the views or opinions of Cointelegraph.