TL:DR:
- Kraken agreed to pay a $30 million fine to the SEC for not registering its crypto staking-as-a-service program.
- The news caused concern among centralized exchanges offering staking services but had little impact on decentralized staking platforms.
- The SEC took issue with the fact that Kraken determined the returns its customers would receive, instead of leaving it to the underlying blockchain protocols.
Staking has been a hot topic in the crypto world, especially with Ethereum’s recent shift to a proof-of-stake consensus algorithm. This change has made staking more accessible to retail investors, who may not have the 32 ETH (worth roughly $48,000) required to become a standalone Ethereum validator. To fill this gap, staking-as-a-service and pooled staking providers have emerged to offer an easier way for investors to get involved in staking.
In a recent development, crypto exchange Kraken has agreed to pay a $30 million fine to the SEC for not registering the offering and sale of its crypto asset staking-as-a-service program. This has put other centralized exchanges that offer staking services on notice, but it may also be a boon for decentralized staking alternatives. In fact, the governance tokens for Lido and Rocket Pool, two of the largest pooled staking services, rose as much as 11% following the news.
Staking on proof-of-stake networks like Ethereum helps keep these networks running. Validators who run hardware to store data and process transactions are incentivized to participate in the network with rewards, and staking helps to ensure that validators have a vested interest in the network.
However, becoming a standalone Ethereum validator is not an option for many retail investors, which is where staking-as-a-service providers come in. These providers offer two different services: straightforward and liquid staking. Liquid staking is meant to provide the best of both worlds, with investors receiving a share of validator rewards for their staked ETH, as well as a token that can be traded or used as collateral.
According to DeFi Llama, 65 liquid-staking protocols are currently tracked, with $12 billion (26% of the $47 billion in the DeFi ecosystem) worth of assets being staked. Of these assets, more than $11 billion are Ethereum, with Lido being the largest provider, accounting for $8 billion (75%) of the funds that have been deposited.
It seems that the SEC took issue with Kraken’s staking program because it oversimplified staking to make it more accessible to retail customers. The SEC complaint highlighted that Kraken itself determined the returns that its customers would receive, rather than leaving it to the underlying blockchain protocols.
This raises the question of how much intermediation is too much, with Alex Mogul, Senior Director of Staking and Infrastructure at Republic Crypto, stating that Kraken made itself too much of an intermediary by determining the returns. Coinbase, on the other hand, has stated that its staking program is not like Kraken’s.
In conclusion, the Kraken crackdown on staking-as-a-service providers has put other centralized exchanges on notice, but it may also provide an opportunity for decentralized alternatives to shine. The key takeaway from this situation is that the underlying blockchain protocols should determine the returns from staking, rather than the intermediaries.
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