By: Tahmina Chowdhury
Cryptocurrency Decrypted: The link between Blockchains and Staking
Public doubt within financial institutions and government interference paved the way for cryptocurrency to become a superior option for financial growth. Cryptocurrency is a decentralized medium of exchange based on blockchain technology. Similar to the U.S. dollar, it can be used to buy goods and services. However, there is no central authority to manage or maintain the value of cryptocurrency.
Understanding blockchain concepts is crucial to the study of cryptocurrency. A blockchain is a ledger that records transactions in code. The transactions are recorded in “blocks” that are linked together on “chains” of previous cryptocurrency transactions. To prevent fraud, each transaction is checked using a validation mechanism, including proof of stake, to ensure only legitimate data and transactions are added to a blockchain.
To validate transactions, a proof of stake method can be used. Staking is the process of locking crypto tokens for a period of time to support the operation of a blockchain. In return for staking, the holder generates rewards. If flawed data is improperly validated, all or some of the stake may be lost as a penalty. If it is validated correctly, more crypto may be earned as a reward, which is generally why people turn to companies that offer staking services.
On February 9, 2023, the Securities and Exchange Commission (“SEC”) charged Payward Ventures, Inc. and Payward Trading Ltd. (“Kraken”) with failing to register the offer and sale of their crypto asset staking-as-a-service program. According to the complaint, Kraken offered and sold unregistered staking services to the general public since 2019. The staking-as-a-service program allows investors to transfer crypto assets to Kraken for staking in exchange for an advertised annual investment return of as much as 21%. The complaint alleged Kraken marketed its staking investment program as offering an easy-to-use platform with benefits that derive from Kraken’s efforts on behalf of investors, including strategies to obtain regular investment returns and payouts. The two Kraken entities agreed to immediately cease offering or selling securities through crypto asset staking services or staking programs and pay $30 million in disgorgement, prejudgment interest, and civil penalties to settle the SEC charges.
Kraken not only offered outsized returns, but also retained the right to pay no returns at all while providing this service. When investors provide tokens to staking-as-a-service providers, they lose control of those tokens and take on risks associated with the staking service platforms with little protection.
The Future of Cryptocurrency Regulation and Enforcement
Overall, Kraken’s settlement should make clear to other companies offering staking services that staking-as-a-service providers must register and provide truthful disclosure and investor protections as required by securities law. While truthful disclosure and the need to register staking services are both critical for investor protection in relation to crypto regulation, the decision to shut down Kraken’s staking program was met with opposition. SEC Commissioner Hester M. Peirce disagreed with the SEC’s decision to shut down Kraken’s staking program and counted it as a win for investors. According to Peirce, “[u]sing enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating. Moreover, staking services are not uniform, so one-off enforcement actions and cookie-cutter analysis does not cut it.”
It is currently unclear how the SEC plans to regulate companies offering staking-as-a-service programs in the future, but we can expect to see further cases of enforcement and regulation in the cryptocurrency sector in the next couple of years. For now, it is better for companies to err on the side of caution and register staking services with the SEC. Companies are recommended to provide clear disclosures of what the investors’ potential penalties and rewards are when entering into an agreement with a staking program.
 Katie Rees, Is the Government & SEC Going to Regulate Cryptocurrency?, Make Use Of (Oct. 12, 2022), https://www.makeuseof.com/is-government-sec-going-to-regulate-cryptocurrency.
 Kate Ashford, What is Cryptocurrency?, Forbes (Feb. 16, 2023, 10:52 AM), https://www.forbes.com/advisor/investing/cryptocurrency/what-is-cryptocurrency.
 Ashford, supra note 2.
 David Rodeck, Crypto Staking Basics, Forbes (Aug. 2, 2022, 11:16 AM), https://www.forbes.com/advisor/investing/cryptocurrency/crypto-staking-basics.
Rodeck, supra note 7.
 Press Release, U.S. Sec. & Exch. Comm’n, Kraken to Discontinue Unregistered Offer and Sale of Crypto Asset Staking-As-A-Service Program and Pay $30 Million to Settle SEC Charges, SEC (Feb. 9, 2023), [hereinafter SEC Press Release] https://www.sec.gov/news/press-release/2023-25.
 SEC Press Release, supra note 12.
 Hester M. Peirce, Kraken Down: Statement on SEC v. Payward Ventures, Inc., et al., SEC (Feb. 9, 2023), https://www.sec.gov/news/statement/peirce-statement-kraken-020923.
 Q.ai, Crypto Regulations Update: The SEC Goes After Unregistered Securities, Forbes (Feb. 15, 2023, 9:28 AM), https://www.forbes.com/sites/qai/2023/02/15/crypto-regulations-update-the-sec-goes-after-unregistered-securities/?sh=28c1f3ae77f6.