Kraken Charge by the SEC: Is Rule 506(c) an Alternative for Crypto Staking?

What’s in the news:

Something happened in the crypto world recently regarding Kraken. Let’s take a deeper look at it. Kraken, a top cryptocurrency exchange, has informed its users that it will cease its unregistered staking-as-a-service program for crypto assets. For those who do not understand what “staking” is, “staking is a process in which investors lock up – or “stake” – their crypto tokens with a blockchain validator with the goal of being rewarded with new tokens when their staked crypto tokens become part of the process for validating data for the blockchain.” This decision was made following charges filed by the Securities and Exchange Commission (SEC). Kraken has also agreed to pay a $30 million settlement to resolve the allegations brought against it.

Kraken's agreement with the SEC regarding its staking-as-a-service program is not unexpected given the regulatory agency's stance on cryptocurrencies and tokens as securities. The SEC has maintained that digital assets can qualify as securities if they satisfy specific requirements, such as being sold with the expectation of profit and being linked to a third party's work. The SEC contended that Kraken's staking program met these requirements and was an unregistered securities offering.

SEC Chair Gary Gensler stated: “Today’s action should make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection.”

This staking-as-a-service program permitted customers to obtain rewards by holding and staking particular cryptocurrencies on the platform. The SEC believed this program constituted an investment contract and thus a security, as customers were acquiring the tokens with the anticipation of gaining a return on their investment. As per the agreement's conditions, Kraken will terminate its unregistered offering and sale of the staking-as-a-service program, as well as pay a $30 million fine to the SEC. Kraken has further agreed to provide additional disclosures to clients about the program's risks and nature and enlist an independent consultant to ensure compliance with securities laws.

Is Rule 506(c) an alternative?

What caught our interest about Kraken's statement, however, is the firm, or other firms like it, could provide staking as an unregistered exempt Rule 506(c) offering. By utilizing Rule 506(c), issuers can raise capital without registering their securities but must take “reasonable steps” to verify accredited investors. It further proves that there is a value provided by some forms of cryptocurrency-related offerings to comply with security laws.

The Key Takeaways:

This resolution with Kraken underscores the importance of cryptocurrency firms following federal securities laws. Although the sector has generally operated in a regulatory grey zone, the SEC has been intensifying its scrutiny of transactions and offerings in the crypto space. Companies not adhering to securities laws could encounter substantial fines and legal obstacles.

While staking is not approved by the SEC in a registered offering right now, an alternative to staking is to treat it as an unregistered exempt Rule 506(c) offering. VerifyInvestor.com is the golden standard in the industry for Rule 506(c) accredited investor verification. With our best-in-class verification services backed by stellar support, we are here to service issuers from facing potential liabilities at a reasonable cost. Do not take any chances and get your investor’s accreditation status verified by our easy-to-use online platform supported by attorney-signed letters.