Feb. 9, 2023, the SEC has taken action against Payward Ventures, Inc. and Payward Trading Ltd., commonly known as Kraken, for violating federal securities laws by failing to register the offer and sale of their crypto-asset staking-as-a-service program.
Both Kraken entities have agreed to a settlement, which requires them to immediately halt their crypto asset staking services and pay a total of $30 million in penalties and disgorgement.
The SEC’s complaint against the Kracken entities states that since 2019, Kraken has been offering staking services to the public by pooling crypto assets from investors and staking them on their behalf. This process, known as staking, involves investors locking up their crypto tokens with a blockchain validator with the expectation of being rewarded with new tokens. However, the complaint alleges that Kraken failed to provide the necessary disclosures and safeguards required by federal securities laws when offering investment contracts in exchange for investors’ tokens.
Staking is a process in the world of cryptocurrency that involves holding onto a certain amount of cryptocurrency in a wallet and participating in the validation of transactions on a blockchain network. The idea behind staking is that, by locking up your cryptocurrency and helping to secure the network, you earn rewards in the form of new tokens.
Staking is used as an alternative to proof-of-work (PoW), which is the consensus mechanism used by many cryptocurrencies, such as Bitcoin. Proof-of-work involves miners solving complex mathematical problems to validate transactions and create new blocks, which requires a significant amount of computing power and energy. Staking, on the other hand, uses a proof-of-stake (PoS) mechanism, where validators are chosen randomly to validate transactions and create new blocks, based on the amount of cryptocurrency they hold and are willing to “stake” as collateral.
Staking has become increasingly popular as it allows individuals to earn rewards without the need for specialized hardware or excessive energy consumption. Additionally, staking can increase the decentralization and security of a blockchain network, as it incentivizes more individuals to hold and use the cryptocurrency.
SEC Chair Gary Gensler emphasized that “crypto intermediaries” need to abide by the securities laws when offering investment contracts, such as staking-as-a-service or lending. The Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, added that the SEC’s action today aims to protect retail investors by shutting down this unregistered staking program and preventing future harm to investors.
The settlement requires Payward Ventures, Inc. and Payward Trading Ltd. to cease the staking program, pay monetary relief, and, without admitting or denying the allegations, consent to a final judgment that permanently enjoins them from violating federal securities laws and offering securities through crypto asset staking services or programs in the future.
Have a securities law question? Call New York Securities Lawyers at 212-509-6544.