KRAKEN will pay US$30 million to settle Securities and Exchange Commission (SEC) allegations that it broke the agency’s rules with its crypto asset staking products and will discontinue them in the US as part of the agreement with the regulator.

The SEC on Thursday (Feb 9) alleged that the firm’s staking service was an illegal sale of securities. The settlement with Kraken could have a sweeping impact on the industry because major crypto exchanges including those run by Coinbase Global and Binance Holdings have waded into the products to diversify revenues.

Staking works by letting users generate yields in return for allowing their tokens to be used to facilitate transactions on a blockchain. In the case of the yields offered by Kraken, those could be as high as 21 per cent, according to the SEC’s complaint.

A report from Staked and Kraken estimated the global value of staked assets at US$42 billion as at the end of 2022.

A Kraken representative said in a statement the firm will only end its staking services for US clients. Those customers will be “unstaked”, and customers outside of the US will receive staking services from a separate Kraken subsidiary, Robin van Daalen said in the statement. Kraken didn’t admit or deny the company’s allegations in its settlement.

Over the past year and a half, the SEC chair Gary Gensler has argued that many crypto assets are really just unregistered securities trading on the blockchain. He says firms must follow the agency’s tough trading and investment rules or face the consequences. Gensler has also repeatedly warned trading platforms that he planned to hold them accountable.

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“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,” Gensler said in a statement.

Staking services have gathered steam in recent months after Ethereum — the biggest commercial highway in crypto — switched over to the so-called proof-of-stake method of ordering blockchain transactions in September last year.

Francesco Melpignano, chief executive officer of Kadena Eco which is a unit of a company that built a proof-of-work blockchain, said that the settlement could be “strictly negative in the sense that US residents may be banned from staking, even natively, on a blockchain altogether”.

San Francisco-based Kraken is a top cryptocurrency exchange with daily trading volume of roughly US$650 million globally, according to CoinMarketCap. The IRS, which in a separate filing asked a court to compel Kraken to turn over its books and other data, said the exchange had failed to comply with a previous summons issued in 2021.

Last August, Coinbase disclosed that it was being probed by the SEC over its staking programmes. The exchange is the second-largest depositor of staked Ether, according to tracker Etherscan. The DeFi platform Lido Finance is the largest.

Henry Elder, head of decentralised finance at Wave Financial, said the case was a “huge gift to decentralised staking providers like Lido, RocketPool and StakeWise”. Because apps like Lido and RocketPool are decentralised, meaning that no single company runs then, they might be harder for regulators to control, he said.

Republican SEC Commissioner Hester Peirce disagreed with commission’s Democratic majority, calling for the agency to regulate by issuing guidance on staking, instead of speaking “through an enforcement action”.

“A paternalistic and lazy regulator settles on a solution like the one in this settlement,” Peirce wrote in a dissent. BLOOMBERG