The settlement between Kraken (Payward Ventures) and the US Securities and Exchange Commission set off alarm bells in the crypto community this month. Apparently, Kraken — one of the most compliance-conscious cryptocurrency exchanges — decided to buy its integrity rather than fight with the SEC for years over whether it was offering unregistered “securities” through its staking program. The nature of the settlement is such that Kraken neither acknowledged nor denied the SEC’s allegations, and the existence of the settlement, technically speaking, cannot be used as a legal precedent for any argument that either side of the case might put forward.
However, the settlement is significant, as it will obviously cool cryptocurrency bets in the US. As SEC Chairman Gary Gensler said, “Whether through staking as-a-service, lending, or any other means, crypto brokers, when offering investment contracts against tokens to investors, need to provide the appropriate disclosures and safeguards required by us.” Securities laws.” Gensler casts a wide net, in fact, for what the SEC considers “investment contracts,” and getting rid of the business is probably exactly what he had in mind.
Related: Expect the SEC to use its Kraken guide against caching protocols
However, the SEC’s success in squeezing Kraken out of $30 million doesn’t make the agency’s position legally or logically correct. As a matter of course, “betting” and “lending” are two completely different things. Staking is the process by which an individual pledges coins or tokens in a blockchain for proof of stake, either directly or by delegating one’s coins to a third party, for the purpose of securing the network. Speculators are the ones through which the blockchain consensus mechanism operates, as they “vote” on which blocks to be added to the chain. This process is algorithmic, and the reward is automatic when a person is electronically selected as a validator for a given block.
Settlements are not legal. It is a decision that the economics of stability is better than combat, no more.
The SEC believes staking-as-a-service is a security. Kraken has neither admitted nor denied either case.
This could be a tough question, but the SEC didn’t answer it either way today.
– Jake Chervinsky (@jchervinsky) February 9, 2023
Speculators do not necessarily know who the other stakeholders are, nor do they need to know, because the fate of an individual stake depends solely on following the rules of the blockchain regarding “vitality” (availability) and other technical considerations. There are risks of “cutting” (losing your coins) due to bad behavior or unavailability, but again, these are algorithmic treatments that are given automatically according to transparent rules built into the code. Simply put, in staking mode, it is between you and the blockchain, not between you and the broker.
By contrast, lending calls for the entrepreneurial and management skill (or lack thereof) of the people you lend to. This is a clear humanitarian project. One does not necessarily know what the borrower is doing with the money; One simply hopes to get it back with a return. this counterparty risk It is in part what the securities laws are intended to address. In lending, the relationship is between the lender and the borrower, and the relationship can take all kinds of unexpected turns.
Related: Banning the Kraken stack is another nail in the coffin for cryptocurrency — and that’s a good thing
The reasons why staking arrangements are not “investment contracts” (and therefore “securities”) were eloquently stated by Coinbase’s Chief Legal Officer Paul Grewal in a recent blog post. Simply put, simply acting as an intermediary does not make the underlying economic relationship an “investment contract”. However, the SEC here does not seem willing to accommodate the differences between service providers and counterparties.
It is true that third parties, such as Kraken, perform a trustee role in the staking relationship – that is, they may hold the private keys to the particular coins that the customer intends to share. However, acting as a custodian of a fungible asset, especially when the custodian holds collateral on a 1:1 basis backing each client account, is a confidential favor.
There is no indication that Kraken, Coinbase, or any other staking-as-a-service provider, is otherwise using human judgment, intuition, grit, or any other hallmark of one’s entrepreneurial or management ability, to further or inhibit a stakeholder’s goal. . An individual’s reward does not improve or decline based on the broker’s performance. There should be (and do) rules and regulations for how custodians operate, but holding by itself does not provide security.
Ari is good A lawyer whose clients include payments companies, cryptocurrency exchanges and token issuers. His areas of work focus on tax compliance, securities and financial services matters. He received his Juris Doctor from DePaul University School of Law in 1997, his Master of Laws in Taxation from the University of Florida in 2005, and is currently an Executive Master of Laws candidate in securities and financial regulation from Georgetown University Law School. center.
This article is for general information purposes and is not intended and should not be considered legal or investment advice. The views, ideas and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.