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Crypto exchange Kraken to shut staking service, pay $30M fine in SEC settlement

206 points by rib3ye 4y ago

duped 4y ago
Kraken is a cult pretending to be a company. The ATF should be giving them as much scrutiny as the SEC. I had an interview with them not too long ago without knowing much about them other than that they were a crypto exchange. An absolutely insane experience.
- nradov 4y ago
  Are you implying that Kraken or its employees possess illegal weapons or explosives?
  - duped 4y ago
    More that they plan to use them against government and civilians that want to regulate them. I was told by one of their recruiters they train their employees to use weapons in case they get swatted. Never mind the fact that their "culture" document has a bunch of language about resisting government regulation, never mind the paranoia, but the idea of encouraging employees to own and train with weapons in case the police come knocking is in itself deserving of police attention.
    - rnk 4y ago
      That's a pretty serious allegation. You think if the SEC comes by to look at their books, they're going to refuse and use guns to stop them? The leader is certainly full of libertarian foolishness in his comments. It's another step entirely to say they are prepared to resist the police. If that happens that's going to be the end of them, but I don't think that would happen.
    - nradov 4y ago
      Kraken just agreed with a regulator to change their business practices and pay a fine. It's literally right there in the linked article! They didn't shoot anyone. So, while their corporate culture might be stupid I doubt your claims about using weapons.
sdfjkl 4y ago
You put your money into something called "Kraken" (other than rum perhaps) and this surprises you?
rib3ye 4y ago
I thought the consideration for clients staked ETH was fairly generous! What does this mean for existing staking clients in the U.S.? U.S. clients will not be able to stake new assets. Previously staked non-ETH assets will be automatically unstaked. These assets will be returned to the client’s spot wallet and will no longer earn rewards. Kraken will prorate final rewards through February 9. These rewards will not become staked. Kraken will instead pay rewards out in their non-staked form. All staked ETH will become unstaked after the Shanghai upgrade and will continue to earn rewards until then. There are no changes to the payout structure until after the Shanghai upgrade, when ETH will be unstaked.
- joosters 4y ago
  There's not really any other way - there is no way for anyone to unstake ETH right now (and there's not even a certain timeline for when people can get their money back!) - that's not a kraken limitation, it's a problem (feature?) of ethereum. Kraken can't pretend to unstake customers' ETH and stop paying rewards because they have no way of returning the underlying coins to them.
  - sschueller 4y ago
    They can just pay the customers and keep what is stuck as their own asset. From what I understand, kraken can stake their own assets but they can not stake assets for others.
    - Shatnerz 4y ago
      True, but at the moment the funds are locked until next month when Ethereum has a network upgrade (Shanghai). If they credited users ETH directly now, they may not have enough liquid ETH on the books if everyone were to withdraw before the upgrade which would remove all trust in the exchange.
      - captn3m0 4y ago
        If they’re able to pay for a fine out of their pocket, why can’t this be as well?
pavlov 4y ago
The story was broken by CoinDesk: https://www.coindesk.com/policy/2023/02/09/us-securities-and-exchange-commission-sues-kraken-over-crypto-staking-services/ https://www.coindesk.com/policy/2023/02/09/us-securities-and... Kraken is paying a $30M fine to the SEC because this “staking” is an unregistered security. From the initial CoinDesk story: “SEC Chair Gary Gensler has previously said he believes staking through intermediaries – like Kraken – may meet the requirements of the Howey Test, a decades-old U.S. Supreme Court case commonly used as one measure of whether something can be defined as a security under U.S. laws. Staking looks similar to lending, Gensler said at the time. The SEC has brought and settled charges with lending companies before, such as now-bankrupt lender BlockFi.”
- detrites 4y ago
  Where do these multi-millions in fees paid to the SEC go to?
  - pavlov 4y ago
    I believe they end up reducing the federal deficit in a roundabout way. The SEC has a budget of about $2.2 billion from Congress. But the money it collects from registration fees and enforcement activities is normally more than what it received, so it pays back with extra at the end of the fiscal year.
moeadham 4y ago
All this will do is push US customers to self custody, and outside the regulatory perimeter of the SEC. Bravo Gary. ¯\_(ツ)_/¯
- idontpost 4y ago
  [dead]
- the_gastropod 4y ago
  I doubt it will push a significant chunk of these users to self-custody. Self-custody is significantly more complicated than leaving assets on an exchange—which is why most people don't do self-custody. I'm sure this will drive some to self-custody. But I don't imagine it'll be a very large percentage.
  - rhodorhoades 4y ago
    Is it tho? A MetaMask wallet staking directly with the protocols/ yield aggregators is easier than creating a kraken account and doing KYC verification.
    - tick_tock_tick 4y ago
      > A MetaMask wallet staking directly with the protocols/ yield aggregators is easier than creating a kraken account and doing KYC verification. It's not easier at all which is why people don't do it....
      - deleted 4y ago
        [deleted]
      - rhodorhoades 4y ago
        self custody vs. centralized exchange data would be relevant here. Instead of just saying “people don’t do it”. Because people do… and I would venture to say more people do it than keep their coins on a centralized exchange.
MacsHeadroom 4y ago
This seems obvious and not remotely over reaching. The SEC press release[0] makes a clear distinction between decentralized staking and centralized promising to stake on behalf of a customer. Promising to use funds in a specific way to generate a specific return sounds like the most obvious security. Nobody should be surprised. [0] https://www.sec.gov/news/press-release/2023-25 https://www.sec.gov/news/press-release/2023-25
- beaned 4y ago
  Is it a "promise" if it's a guaranteed algorithmic result?
  - altairprime 4y ago
    Yes. “Lend us your money and we’ll invest in a guaranteed return from an algorithm” has been said many times, long before cryptocoins.
  - saurik 4y ago
    It is still a promise if you can't be sure they actually did the staking correctly or even at all.
    - beaned 4y ago
      That seems like a traditional contract between provider and consumer more than a security. If I own a dividend-bearing stock on Charles Schwab and they don't pay me the dividend, it's not because Charles Schwab offered a security, they're just being fraudulent. ChatGPT (for what it's worth): When people talk about "securities," they usually mean financial instruments such as stocks, bonds, and derivatives, rather than specific types of payments made to shareholders. In this broader sense, dividends are not considered securities themselves, but they are closely related to the securities that represent ownership in a company.
      - JumpCrisscross 4y ago
        > own a dividend-bearing stock on Charles Schwab and they don't pay me the dividend, it's not because Charles Schwab offered a security, they're just being fraudulent When you buy a dividend-bearing stock on Charles Schwab, you're given access to shareholder documents describing what you are owed under what conditions. There is no analog for crypto. The investor's interface is with Kraken, not with the chain. This isn't an insurmountable problem! But every staking product I've seen mimics a high-yield savings account more than the FX-linked security that it is.
Animats 4y ago
By "staking" do they mean Etherium proof of stake staking, or do they mean loans?
- zoklet-enjoyer 4y ago
  Proof of stake staking with Ethereum, Cosmos, Polkadot, Tezos, Solana, Kava, etc
- ETH_start 4y ago
  Calling it "Etherium" to mock blockchain advocates is extremely immature and not appropriate for Hackernews, no matter how deserving of ridicule blockchain advocates are.
  - eldenwrong 4y ago
    It's just a spelling mistake.
    - ETH_start 4y ago
      Nope, this individual has been commenting for years on Ethereum stories, and been corrected multiple times.
woah 4y ago
This is healthy for proof of stake. Exchange validators tend to be slow to upgrade software, and do not engage with the community or participate in on chain governance votes. They are not accountable to delegators because the funds that they stake come from low-knowledge speculators, and they also are not exposed to the token's price movements much. Kraken was one of the best as far as exchange validators go though.
beaned 4y ago
Will be interesting to see what impact this has on validators adhering to ofac rules. It's much easier to control blocks when they're processed centrally. https://www.mevwatch.info/ https://www.mevwatch.info/
Octokiddie 4y ago
Coindesk offers some context: > Kraken’s staking service offered a 20% APY, promising to send customers staking rewards twice per week, according to its website. https://www.coindesk.com/policy/2023/02/09/kraken-agreed-to-shutter-crypto-staking-operations-to-settle-sec-charges-source/ https://www.coindesk.com/policy/2023/02/09/kraken-agreed-to-... Simple question: how is that guaranteed yield sustainable if not through a Ponzi scheme?
- tbruckner 4y ago
  It is a Ponzi scheme. The only way it wouldn't be is if it was paying dividends through revenue it generated and crypto generates zero revenue.
  - coolestguy 4y ago
    Ethereum's chain is profitable. The networks fees outweights the supply given to validators to secure the chain.
    - lottin 4y ago
      Source?
      - yokem55 4y ago
        https://ultrasound.money https://ultrasound.money tracks this. You can play with the sliders projecting things out depending on how much ether is staked vs what the sustained transaction fees are.
        lottin 4y ago
        It's unclear to me by looking at these numbers that the network is profitable. Profit is the difference between revenue and cost, so we need to know the amount of fees earned and the operating expenses.
saurik 4y ago
Many of these APYs are being measured in the token staked, not in the "value" of that token as might be expressed in (say) dollars. The payment is then made via inflation, which devalues everyone's tokens to give the people who staled more token. (Yes: this means that the value of your money might go down even if you legitimately have 20% more of it; the market for the token at that point is a separate--yet related--issue.)
- tppiotrowski 4y ago
  Right. Some people in crypto will be baffled that eternal inflation is a built-in feature of some cryptocurrencies since one of the motivators of Bitcoin was to stop inflation caused by the fed printing money at will.
  - dboreham 4y ago
    It's actually deflation. Everyone calls it inflation though presumably because in the beginning someone didn't understand economics terms.
    - saurik 4y ago
      Bitcoin, FWIW, currently (it will slow down and eventually supposedly stop) prints money every block to pay for mining. It does this to fund a public good, which is network security, under the assumption that people who store large amounts of money would be willing to pay more to protect that money than people who store small amounts of money, and in the early years (which we apparently are still a part of) it is considered that fees for transfers aren't where most of the payment could be derived. (Personally, it isn't clear to me that the network makes sense to be paid for entirely by fees. Ironically, AFAIK on Ethereum the percentage of the block reward paid for by fees is much higher than Bitcoin and their minted block reward will continue on forever.) This, to me, seems definitely like "inflation", caused by an increase in the money supply by a shared governance structure. It certainly isn't "deflation". Bitcoin does describe it not as printing money but as unlocking money that was already set aside, but what matters today (as opposed to whenever the rewards stop in the future... I don't remember off-hand when that will be) is the circulating money supply, not the theoretically existing / allocated supply (which is why if you lose money forever it is the same as destroying it; and which can also be seen because, if the US Fed merely had pre-printed giant fat stacks of cash that they've been dipping into for all these years, you wouldn't know the difference between that and it printing bills).
kevdragon6 4y ago
SEC also put out this video explaining staking as a service and those offering staking as a service. https://www.youtube.com/watch?v=hmPpIjfC9DY https://www.youtube.com/watch?v=hmPpIjfC9DY
- I_am_tiberius 4y ago
  Thanks for posting. Summarized the problem for the SEC is that they want to protect investors by adding regulatory overhead to the services of the vendor. In the end the service provided by the vendor won't be attractive for investors anymore. I wonder why I, as an investor, can't choose to opt out from these protections.
PretzelPirate 4y ago
A statement from SEC Comissioner Hester Peirce: https://www.sec.gov/news/statement/peirce-statement-kraken-020923 https://www.sec.gov/news/statement/peirce-statement-kraken-0...
- kranke155 4y ago
  Mrs. Hester Pierce has my respect. Absolutely bizarre decision by the SEC.
- rabf 4y ago
  The one sane voice at the SEC.
  - rekoil 4y ago
    What? Isn't she the one most fervently working against increased stock market transparency? I'd say apart from this little quote she's by far the least sane voice at the SEC from what I've seen.
- codetrotter 4y ago
  > Most concerning, though, is that our solution to a failure to register violation is to shut down entirely a program that has served people well. The program will no longer be available in the United States, and Kraken is enjoined from ever offering a staking service, registered or not. A paternalistic and lazy regulator settles on a solution like the one in this settlement: do not initiate a public process to develop a workable registration process that provides valuable information to investors, just shut it down. Well said by SEC Commissioner Hester M. Peirce
  - powera 4y ago
    A program "that has served people well" ... yet is both optically and legally the same as "Gemini Earn", which has currently lost everybody's money. When dealing with creative villains, the lazy approach is sometimes best. If Kraken can't manage the bare minimum on compliance on their own, there is no reason the government should help them; better to be "lazy" and shut it down.
1attice 4y ago
I'm out of the loop. Does this affect ETH's new proof-of-stake model? Is the SEC effectively saying, "this is close enough to a pyramid scheme for us to ban"?
- PretzelPirate 4y ago
  This isn't about staking being a problem, it's about 3rd parties staking on behalf of users being a problem. Users aren't being banned from staking for themselves at home on Ethereum or any other networks. Edit: there's no reason to think that staking is a Ponzi scheme. It doesn't rely on new money coming in to pay previous investors since the protocol creates new assets. Every participant can sell their holdings and systems such as Ethereum's proof of stake will continue to pay the validator.
miniwark 4y ago
Kraken have two options for staking on some cryptos assets like ATOM or DOT: - "flexible" who is more easy to unstack and rewards around once a week - "bonded" with the staking locked until the end of a period (up to 28 days) If i have understood correctly, in the first case, it's a sort of fake staking done by Kraken as an intermediary. And in the second case it use the real staking mechanism of the asset. So did kraken stop both way of staking in the US, or only the "flexible" one whe he is an intermediary ?
asasidh 4y ago
Finally SEC is getting its act together. Probably triggered by FTX fiasco. Good to see SEC go after the larger players for a change rather than no name exchanges.
propogandist 4y ago
Isn’t staking just a scam to sustain the ponzi?
- anonkogudhyfhhf 4y ago
  Yes. A way to prop up the price by locking in coins
Animats 4y ago
> The SEC’s characterization of Kraken’s staking setup highlighted the “risks” investors take on when staking their tokens with “staking-as-a-service” providers, which give them “very little protection,” a press release said. Right. The SEC has apparently had it with uninsured, unregulated exchanges. After FTX, tolerance for that sort of thing is over. They want to stop this before somebody dips into customer funds, instead of after. Kraken claims to be "regulated by FinCen."[1] This is deceptive. FinCen, the Financial Crimes Enforcement Network, is not a regulator of organizations which hold the assets of others. It's the anti-money-laundering coordination center, the "know your customer" part of enforcement. Anybody can file the form to be listed with FinCen; that just says you might need to report transactions in future and want a login. It's nothing like getting a banking or brokerage or exchange license, where auditors check up on what you're doing with the customers' money. [1] https://support.kraken.com/hc/en-us/articles/360031282351-Is-Kraken-licensed-or-regulated- https://support.kraken.com/hc/en-us/articles/360031282351-Is...
- anonkogudhyfhhf 4y ago
  Does any current regulation stop a FTX situation? Bernie Madoff was able to run a Ponzi fine
- riffraff 4y ago
  I don't think this is the same as FTX, the issue at hand is that staking is presented as unregulated investments. Functioning as an exchange is still allowed. I believe Gemini is the one that was already punished for this, and of course Coinbase tried to do this but was stopped on the blocks.
1vuio0pswjnm7 4y ago
Did not see a link to the complaint. Perhaps I missed it. SEC v Payward Ventures, Inc. (d/b/a Kraken) and Payward Trading, Ltd. (d/b/a Kraken) https://storage.courtlistener.com/recap/gov.uscourts.cand.408202/gov.uscourts.cand.408202.1.0.pdf https://storage.courtlistener.com/recap/gov.uscourts.cand.40...
I_am_tiberius 4y ago
Can someone translate what the actual problem with that service was? I mean what I can do centrally via kraken I can also do directly via the blockchain.
dmantis 4y ago
Hope when they are done with US, they will switch to non-OFAC compliant block producers in Ethereum.
LatteLazy 4y ago
There is a line in the bible about "straining out a knat and swallowing a camel" and that is the SEC all over. They refuse to let Kraken register an above board program then shut it down for not registering. But FTX waltzes right though.

206 points by rib3ye 4y ago

Kraken is a cult pretending to be a company. The ATF should be giving them as much scrutiny as the SEC. I had an interview with them not too long ago without knowing much about them other than that they were a crypto exchange. An absolutely insane experience.

nradov 4y ago
Are you implying that Kraken or its employees possess illegal weapons or explosives?
- duped 4y ago
  More that they plan to use them against government and civilians that want to regulate them. I was told by one of their recruiters they train their employees to use weapons in case they get swatted. Never mind the fact that their "culture" document has a bunch of language about resisting government regulation, never mind the paranoia, but the idea of encouraging employees to own and train with weapons in case the police come knocking is in itself deserving of police attention.
  - rnk 4y ago
    That's a pretty serious allegation. You think if the SEC comes by to look at their books, they're going to refuse and use guns to stop them? The leader is certainly full of libertarian foolishness in his comments. It's another step entirely to say they are prepared to resist the police. If that happens that's going to be the end of them, but I don't think that would happen.
  - nradov 4y ago
    Kraken just agreed with a regulator to change their business practices and pay a fine. It's literally right there in the linked article! They didn't shoot anyone. So, while their corporate culture might be stupid I doubt your claims about using weapons.

sdfjkl 4y ago

You put your money into something called "Kraken" (other than rum perhaps) and this surprises you?

rib3ye 4y ago

I thought the consideration for clients staked ETH was fairly generous! What does this mean for existing staking clients in the U.S.? U.S. clients will not be able to stake new assets. Previously staked non-ETH assets will be automatically unstaked. These assets will be returned to the client’s spot wallet and will no longer earn rewards. Kraken will prorate final rewards through February 9. These rewards will not become staked. Kraken will instead pay rewards out in their non-staked form. All staked ETH will become unstaked after the Shanghai upgrade and will continue to earn rewards until then. There are no changes to the payout structure until after the Shanghai upgrade, when ETH will be unstaked.

joosters 4y ago
There's not really any other way - there is no way for anyone to unstake ETH right now (and there's not even a certain timeline for when people can get their money back!) - that's not a kraken limitation, it's a problem (feature?) of ethereum. Kraken can't pretend to unstake customers' ETH and stop paying rewards because they have no way of returning the underlying coins to them.
- sschueller 4y ago
  They can just pay the customers and keep what is stuck as their own asset. From what I understand, kraken can stake their own assets but they can not stake assets for others.
  - Shatnerz 4y ago
    True, but at the moment the funds are locked until next month when Ethereum has a network upgrade (Shanghai). If they credited users ETH directly now, they may not have enough liquid ETH on the books if everyone were to withdraw before the upgrade which would remove all trust in the exchange.
    - captn3m0 4y ago
      If they’re able to pay for a fine out of their pocket, why can’t this be as well?

pavlov 4y ago

The story was broken by CoinDesk: https://www.coindesk.com/policy/2023/02/09/us-securities-and-exchange-commission-sues-kraken-over-crypto-staking-services/ https://www.coindesk.com/policy/2023/02/09/us-securities-and... Kraken is paying a $30M fine to the SEC because this “staking” is an unregistered security. From the initial CoinDesk story: “SEC Chair Gary Gensler has previously said he believes staking through intermediaries – like Kraken – may meet the requirements of the Howey Test, a decades-old U.S. Supreme Court case commonly used as one measure of whether something can be defined as a security under U.S. laws. Staking looks similar to lending, Gensler said at the time. The SEC has brought and settled charges with lending companies before, such as now-bankrupt lender BlockFi.”

detrites 4y ago
Where do these multi-millions in fees paid to the SEC go to?
- pavlov 4y ago
  I believe they end up reducing the federal deficit in a roundabout way. The SEC has a budget of about $2.2 billion from Congress. But the money it collects from registration fees and enforcement activities is normally more than what it received, so it pays back with extra at the end of the fiscal year.

moeadham 4y ago

All this will do is push US customers to self custody, and outside the regulatory perimeter of the SEC. Bravo Gary. ¯\_(ツ)_/¯

idontpost 4y ago
[dead]
the_gastropod 4y ago
I doubt it will push a significant chunk of these users to self-custody. Self-custody is significantly more complicated than leaving assets on an exchange—which is why most people don't do self-custody. I'm sure this will drive some to self-custody. But I don't imagine it'll be a very large percentage.
- rhodorhoades 4y ago
  Is it tho? A MetaMask wallet staking directly with the protocols/ yield aggregators is easier than creating a kraken account and doing KYC verification.
  - tick_tock_tick 4y ago
    > A MetaMask wallet staking directly with the protocols/ yield aggregators is easier than creating a kraken account and doing KYC verification. It's not easier at all which is why people don't do it....
    - deleted 4y ago
      [deleted]
    - rhodorhoades 4y ago
      self custody vs. centralized exchange data would be relevant here. Instead of just saying “people don’t do it”. Because people do… and I would venture to say more people do it than keep their coins on a centralized exchange.

MacsHeadroom 4y ago

This seems obvious and not remotely over reaching. The SEC press release[0] makes a clear distinction between decentralized staking and centralized promising to stake on behalf of a customer. Promising to use funds in a specific way to generate a specific return sounds like the most obvious security. Nobody should be surprised. [0] https://www.sec.gov/news/press-release/2023-25 https://www.sec.gov/news/press-release/2023-25

beaned 4y ago
Is it a "promise" if it's a guaranteed algorithmic result?
- altairprime 4y ago
  Yes. “Lend us your money and we’ll invest in a guaranteed return from an algorithm” has been said many times, long before cryptocoins.
- saurik 4y ago
  It is still a promise if you can't be sure they actually did the staking correctly or even at all.
  - beaned 4y ago
    That seems like a traditional contract between provider and consumer more than a security. If I own a dividend-bearing stock on Charles Schwab and they don't pay me the dividend, it's not because Charles Schwab offered a security, they're just being fraudulent. ChatGPT (for what it's worth): When people talk about "securities," they usually mean financial instruments such as stocks, bonds, and derivatives, rather than specific types of payments made to shareholders. In this broader sense, dividends are not considered securities themselves, but they are closely related to the securities that represent ownership in a company.
    - JumpCrisscross 4y ago
      > own a dividend-bearing stock on Charles Schwab and they don't pay me the dividend, it's not because Charles Schwab offered a security, they're just being fraudulent When you buy a dividend-bearing stock on Charles Schwab, you're given access to shareholder documents describing what you are owed under what conditions. There is no analog for crypto. The investor's interface is with Kraken, not with the chain. This isn't an insurmountable problem! But every staking product I've seen mimics a high-yield savings account more than the FX-linked security that it is.

Animats 4y ago

By "staking" do they mean Etherium proof of stake staking, or do they mean loans?

zoklet-enjoyer 4y ago
Proof of stake staking with Ethereum, Cosmos, Polkadot, Tezos, Solana, Kava, etc
ETH_start 4y ago
Calling it "Etherium" to mock blockchain advocates is extremely immature and not appropriate for Hackernews, no matter how deserving of ridicule blockchain advocates are.
- eldenwrong 4y ago
  It's just a spelling mistake.
  - ETH_start 4y ago
    Nope, this individual has been commenting for years on Ethereum stories, and been corrected multiple times.

woah 4y ago

This is healthy for proof of stake. Exchange validators tend to be slow to upgrade software, and do not engage with the community or participate in on chain governance votes. They are not accountable to delegators because the funds that they stake come from low-knowledge speculators, and they also are not exposed to the token's price movements much. Kraken was one of the best as far as exchange validators go though.

beaned 4y ago

Will be interesting to see what impact this has on validators adhering to ofac rules. It's much easier to control blocks when they're processed centrally. https://www.mevwatch.info/ https://www.mevwatch.info/

Octokiddie 4y ago

Coindesk offers some context: > Kraken’s staking service offered a 20% APY, promising to send customers staking rewards twice per week, according to its website. https://www.coindesk.com/policy/2023/02/09/kraken-agreed-to-shutter-crypto-staking-operations-to-settle-sec-charges-source/ https://www.coindesk.com/policy/2023/02/09/kraken-agreed-to-... Simple question: how is that guaranteed yield sustainable if not through a Ponzi scheme?

tbruckner 4y ago
It is a Ponzi scheme. The only way it wouldn't be is if it was paying dividends through revenue it generated and crypto generates zero revenue.
- coolestguy 4y ago
  Ethereum's chain is profitable. The networks fees outweights the supply given to validators to secure the chain.
  - lottin 4y ago
    Source?
    - yokem55 4y ago
      https://ultrasound.money https://ultrasound.money tracks this. You can play with the sliders projecting things out depending on how much ether is staked vs what the sustained transaction fees are.
      - lottin 4y ago
        It's unclear to me by looking at these numbers that the network is profitable. Profit is the difference between revenue and cost, so we need to know the amount of fees earned and the operating expenses.

saurik 4y ago

Many of these APYs are being measured in the token staked, not in the "value" of that token as might be expressed in (say) dollars. The payment is then made via inflation, which devalues everyone's tokens to give the people who staled more token. (Yes: this means that the value of your money might go down even if you legitimately have 20% more of it; the market for the token at that point is a separate--yet related--issue.)

tppiotrowski 4y ago
Right. Some people in crypto will be baffled that eternal inflation is a built-in feature of some cryptocurrencies since one of the motivators of Bitcoin was to stop inflation caused by the fed printing money at will.
- dboreham 4y ago
  It's actually deflation. Everyone calls it inflation though presumably because in the beginning someone didn't understand economics terms.
  - saurik 4y ago
    Bitcoin, FWIW, currently (it will slow down and eventually supposedly stop) prints money every block to pay for mining. It does this to fund a public good, which is network security, under the assumption that people who store large amounts of money would be willing to pay more to protect that money than people who store small amounts of money, and in the early years (which we apparently are still a part of) it is considered that fees for transfers aren't where most of the payment could be derived. (Personally, it isn't clear to me that the network makes sense to be paid for entirely by fees. Ironically, AFAIK on Ethereum the percentage of the block reward paid for by fees is much higher than Bitcoin and their minted block reward will continue on forever.) This, to me, seems definitely like "inflation", caused by an increase in the money supply by a shared governance structure. It certainly isn't "deflation". Bitcoin does describe it not as printing money but as unlocking money that was already set aside, but what matters today (as opposed to whenever the rewards stop in the future... I don't remember off-hand when that will be) is the circulating money supply, not the theoretically existing / allocated supply (which is why if you lose money forever it is the same as destroying it; and which can also be seen because, if the US Fed merely had pre-printed giant fat stacks of cash that they've been dipping into for all these years, you wouldn't know the difference between that and it printing bills).

kevdragon6 4y ago

SEC also put out this video explaining staking as a service and those offering staking as a service. https://www.youtube.com/watch?v=hmPpIjfC9DY https://www.youtube.com/watch?v=hmPpIjfC9DY

I_am_tiberius 4y ago
Thanks for posting. Summarized the problem for the SEC is that they want to protect investors by adding regulatory overhead to the services of the vendor. In the end the service provided by the vendor won't be attractive for investors anymore. I wonder why I, as an investor, can't choose to opt out from these protections.

PretzelPirate 4y ago

A statement from SEC Comissioner Hester Peirce: https://www.sec.gov/news/statement/peirce-statement-kraken-020923 https://www.sec.gov/news/statement/peirce-statement-kraken-0...

kranke155 4y ago
Mrs. Hester Pierce has my respect. Absolutely bizarre decision by the SEC.
rabf 4y ago
The one sane voice at the SEC.
- rekoil 4y ago
  What? Isn't she the one most fervently working against increased stock market transparency? I'd say apart from this little quote she's by far the least sane voice at the SEC from what I've seen.
codetrotter 4y ago
> Most concerning, though, is that our solution to a failure to register violation is to shut down entirely a program that has served people well. The program will no longer be available in the United States, and Kraken is enjoined from ever offering a staking service, registered or not. A paternalistic and lazy regulator settles on a solution like the one in this settlement: do not initiate a public process to develop a workable registration process that provides valuable information to investors, just shut it down. Well said by SEC Commissioner Hester M. Peirce
- powera 4y ago
  A program "that has served people well" ... yet is both optically and legally the same as "Gemini Earn", which has currently lost everybody's money. When dealing with creative villains, the lazy approach is sometimes best. If Kraken can't manage the bare minimum on compliance on their own, there is no reason the government should help them; better to be "lazy" and shut it down.

1attice 4y ago

I'm out of the loop. Does this affect ETH's new proof-of-stake model? Is the SEC effectively saying, "this is close enough to a pyramid scheme for us to ban"?

PretzelPirate 4y ago
This isn't about staking being a problem, it's about 3rd parties staking on behalf of users being a problem. Users aren't being banned from staking for themselves at home on Ethereum or any other networks. Edit: there's no reason to think that staking is a Ponzi scheme. It doesn't rely on new money coming in to pay previous investors since the protocol creates new assets. Every participant can sell their holdings and systems such as Ethereum's proof of stake will continue to pay the validator.

miniwark 4y ago

Kraken have two options for staking on some cryptos assets like ATOM or DOT: - "flexible" who is more easy to unstack and rewards around once a week - "bonded" with the staking locked until the end of a period (up to 28 days) If i have understood correctly, in the first case, it's a sort of fake staking done by Kraken as an intermediary. And in the second case it use the real staking mechanism of the asset. So did kraken stop both way of staking in the US, or only the "flexible" one whe he is an intermediary ?

asasidh 4y ago

Finally SEC is getting its act together. Probably triggered by FTX fiasco. Good to see SEC go after the larger players for a change rather than no name exchanges.

propogandist 4y ago

Isn’t staking just a scam to sustain the ponzi?

anonkogudhyfhhf 4y ago
Yes. A way to prop up the price by locking in coins

Animats 4y ago

> The SEC’s characterization of Kraken’s staking setup highlighted the “risks” investors take on when staking their tokens with “staking-as-a-service” providers, which give them “very little protection,” a press release said. Right. The SEC has apparently had it with uninsured, unregulated exchanges. After FTX, tolerance for that sort of thing is over. They want to stop this before somebody dips into customer funds, instead of after. Kraken claims to be "regulated by FinCen."[1] This is deceptive. FinCen, the Financial Crimes Enforcement Network, is not a regulator of organizations which hold the assets of others. It's the anti-money-laundering coordination center, the "know your customer" part of enforcement. Anybody can file the form to be listed with FinCen; that just says you might need to report transactions in future and want a login. It's nothing like getting a banking or brokerage or exchange license, where auditors check up on what you're doing with the customers' money. [1] https://support.kraken.com/hc/en-us/articles/360031282351-Is-Kraken-licensed-or-regulated- https://support.kraken.com/hc/en-us/articles/360031282351-Is...

anonkogudhyfhhf 4y ago
Does any current regulation stop a FTX situation? Bernie Madoff was able to run a Ponzi fine
riffraff 4y ago
I don't think this is the same as FTX, the issue at hand is that staking is presented as unregulated investments. Functioning as an exchange is still allowed. I believe Gemini is the one that was already punished for this, and of course Coinbase tried to do this but was stopped on the blocks.

1vuio0pswjnm7 4y ago

Did not see a link to the complaint. Perhaps I missed it. SEC v Payward Ventures, Inc. (d/b/a Kraken) and Payward Trading, Ltd. (d/b/a Kraken) https://storage.courtlistener.com/recap/gov.uscourts.cand.408202/gov.uscourts.cand.408202.1.0.pdf https://storage.courtlistener.com/recap/gov.uscourts.cand.40...

I_am_tiberius 4y ago

Can someone translate what the actual problem with that service was? I mean what I can do centrally via kraken I can also do directly via the blockchain.

dmantis 4y ago

Hope when they are done with US, they will switch to non-OFAC compliant block producers in Ethereum.

LatteLazy 4y ago

There is a line in the bible about "straining out a knat and swallowing a camel" and that is the SEC all over. They refuse to let Kraken register an above board program then shut it down for not registering. But FTX waltzes right though.