The SEC shook Kraken down for $30M, but it doesn’t mean they had a case

The settlement between Kraken (Payward Ventures) and the US Securities and Exchange Commission sent alarm bells to the cryptocurrency community this month. Apparently, Kraken, one of the most compliance-minded cryptocurrency exchanges in existence, has spent years fighting with the SEC over whether it offers unregistered securities through its staking program. , seems to have decided to buy peace. The nature of the settlement was such that Kraken neither admitted nor denied the SEC’s allegations, and technically speaking, the existence of the settlement serves as a legal precedent for arguments that either side of the issue may offer. cannot be used.

That said, the settlement is significant as it will clearly chill cryptocurrency staking in the US. SEC Chairman Gary Gensler said: Securities law. Indeed, Gensler casts a broad net against what the SEC considers to be an “investment contract.”

Related: Expect SEC to use Kraken playbook for staking protocol

But the SEC’s success in demanding $30 million from Kraken does not make the SEC’s position legally or logically correct. As a premise, staking and lending are completely different things. Staking is the process of pledging one’s coins or tokens directly to a proof-of-stake her blockchain or by delegating one’s coins to a third party for the purpose of securing the network. A staker is someone who votes on which blocks get added to the chain and thus the blockchain consensus mechanism works. The process is algorithmic and rewards occur automatically when your position is electronically picked as a validator for a particular block.

Settlement is not law. They are the decision that the economics of reconciliation are better than fighting, nothing more.

The SEC considers staking as a service to be a security. Either way, the Kraken neither admitted nor denied.

It may be a tough question, but the SEC isn’t answering it either way today.

Jake Chervinsky (@jchervinsky) February 9, 2023

Stakers do not necessarily know who the other stakers are, nor do they need to. Because the fate of your stake depends only on following the rules of that blockchain regarding liveness (availability) and other technical considerations. There is a risk of ‘thrashing’ (losing coins) due to bad behavior or unavailability, but these are algorithmic remedies that are automatic according to transparent rules built into the code. Staking is between you and the blockchain, not you and an intermediary.

Lending, by contrast, evokes the entrepreneurial and managerial skills (or lack thereof) of the people to whom it is lent. This is clearly a human enterprise. Borrowers don’t necessarily know what they’re doing with that money. Simply hoping to get it back with a return.this counterparty risk It’s part of what securities law is trying to address. In lending, there is a relationship between a lender and a borrower, and this relationship can lead to all sorts of unexpected changes.

Related: The Kraken Staking Ban Is Another Nail In The Crypto Coffin And It’s A Good Thing

Why the staking arrangement is not an investment contract (hence a securities) is eloquently stated by Coinbase Chief Legal Officer Paul Grewal in a blog post. Simply put, simply acting as an intermediary does not make the underlying economic relationship an ‘investment contract’. But here he doesn’t seem to be willing to accept the distinction between service providers and counterparties.

It is true that third parties such as Kraken play a controlling role in staking relationships. This means that the client may hold the private key of the particular coin they are trying to stake. However, acting as a custodian for alternative assets is a prudent service, especially if such custodian holds collateral on a one-to-one basis to back all customer accounts.

Suggest that Kraken, Coinbase, or any other staking-as-a-service provider uses human judgment, intuition, grit, or other characteristics of entrepreneurial or managerial capacity to further or hinder the staker’s objectives Nothing. Your reward will not increase or decrease based on the intermediary’s performance. There should be (and there are) rules and regulations about how custodians operate.

This article is for general information purposes and is not intended, and should not be construed as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author and do not necessarily reflect or represent the views or opinions of Cointelegraph.