According to the SEC’s complaint, Kraken offered and sold its staking[1] services to the general public in which participants could transfer crypto assets to Kraken in exchange for “advertised annual investment returns of as much as 21%” (the Kraken Staking Program). The SEC alleges that this Kraken Staking Program enabled Kraken to achieve a competitive advantage in the staking marketplace because Kraken pooled various participants’ crypto assets and staked them on behalf of the participants, thus earning higher returns than if the participants staked the same crypto assets on their own. By pooling and controlling the tokens, Kraken is alleged to have reduced its transaction costs and risks and, in the case of tokens actually staked by Kraken, increased the likelihood that Kraken itself would be selected to validate blockchain transactions, for which they would earn rewards. Accordingly, the SEC’s complaint alleges that investors lost control of the staked tokens and were provided “very little protection” in exchange for the outsized returns.

Read the full alert here.