Kraken vs SEC: The Impact of the $30 Million Fine on the Cryptocurrency Industry

How Kraken's Settlement with the SEC and the Closure of Staking Service Shook the Industry, But Decentralized Platforms Emerged Stronger

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There has been a lot of discussion in recent days about the extent to which the settlement of Kraken with the US Securities and Exchange Commission (SEC) and the closure of the staking service offered by the exchange affects the cryptocurrency industry.

As is known, last Thursday afternoon, the SEC announced that the cryptocurrency exchange, Kraken, agreed to pay a $30 million fine for failing to register its cryptocurrency staking program as a service.

Just a day before, Coinbase CEO Brian Armstrong warned via Twitter that he had heard that “the SEC would like to get rid of cryptocurrency staking in the US for retail investors.”

The first impression and who should be concerned

The first impression to the masses after the SEC’s move with Kraken was that it was a bad development for the cryptocurrency industry and especially the staking services. However, things are not quite like that.

For example, governance tokens for Lido and Rocket Pool, which are two of the largest decentralized bundled staking services, soared as much as 11% the next day, according to CoinGecko.

This is a sign that the market believes that the ones who should really be concerned by the Kraken case are the centralized exchanges that act as intermediaries, such as Kraken and Coinbase, rather than the rest of the cryptocurrency industry and especially the decentralized platforms, apps and protocols.

The staking services

Assets that are staked on networks that operate with the proof-of-participation mechanism, such as Ethereum, help maintain the secure and decentralized operation of networks. It is the way in which validators, whose hardware stores data and processes new transactions, prove that they are actively participating in the network.

Validators receive rewards for their participation in networks, but may lose some of their staked assets, either if they remain inactive or if they commit offences.

Becoming a standalone validator on Ethereum, which is now the largest proof-of-stake network, is not easy for most retail investors.

This is because a user needs to stake 32 ETH, worth about $48,000 at current prices, to become a standalone validator directly on the Ethereum network. Thus, users who want to participate in Ethereum staking but do not have the aforementioned amount of money, turn to staking and bundled staking providers.

These services are available in two categories: simple and liquid betting. The latter is intended to offer users the best elements of both options: They receive a share of validation rewards for the ETH they have deposited, as well as a redeemable token for their staked assets, which can be traded or used as collateral.

Liquid staking

As a category, the 65 liquid staking protocols tracked by DeFi Llama represent $12 billion, or 26%, of the $47 billion worth of assets in the DeFi ecosystem. That makes it the third largest category behind $13 billion in lending and $19 billion in decentralized exchanges, or DEX.

Over $11 billion of assets in liquid staking protocols are in Ethereum. And among the 16 protocols that support ETH staking, Lido is by far the largest. It represents $8 billion, or 75%, of the funds deposited.

What really troubled the SEC

It seems, at least, that part of the problem the SEC had with the Kraken program was the oversimplification of how one could get staked to make it more accessible to retail investors. One portion of the SEC’s complaint challenges the fact that Kraken itself determined the returns that its clients would receive, as opposed to the variable rate of rewards set by the protocol.

“Defendants set these returns, not the underlying blockchain protocols, and the returns do not necessarily depend on the actual returns Kraken receives from staking,” the commission said.

However, for its part, Coinbase pointed out that the staking program it offers is not like that of Kraken:

“Staking on Coinbase continues to be available and staked assets continue to earn protocol rewards. What is clear from today’s announcement is that Kraken essentially offered a performance product,” Paul Grewal, Coinbase’s chief legal officer, said, adding:

“Coinbase’s staking services are fundamentally different and are not securities. For example, our client rewards depend on the rewards paid by the protocol and the commissions we disclose.”

In addition, Jaydeep Korde, co-founder and CEO of Launchnodes, said the Kraken settlement will push firms towards decentralized alternatives.

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