Liquid staking protocols soared Thursday after crypto exchange Kraken settled a lawsuit with the United States’ top financial markets regulator.
Governance tokens for Lido, Rocket Pool and Frax jumped as high as 11% before tapering off in overnight trading, according to data from CoinGecko. Lido, which is now the No. 1 DeFi protocol with $8B in TVL, has soared 39% in the last 30 days. And its rival Rocket Pool has surged 22% in the last seven days.
The tokens for the decentralized players rallied after Kraken, one of the top centralized crypto exchanges, agreed to shutter its staking-as-a-service operations under the terms of a settlement with the U.S. Securities and Exchange Commission.
The agency sued Kraken for failing to register the sale of its staking-as-a-service program before offering it to retail customers. Kraken’s program enabled U.S. users to earn up to 21% returns by providing their tokens to blockchain validators who use them to tend networks.
It’s become a burgeoning business in the wake of The Merge, Ethereum’s shift to a Proof of Stake consensus system, last September. Other major networks such as Solana, Polkadot, and Avalanche,also use staking to manage their blockchains.
To settle the suit, Kraken agreed to immediately end its staking program in the U.S. and pay the SEC a $30M fine. Kraken will continue to offer that program to customers outside the U.S.
The settlement came less than a day after Brian Armstrong, the CEO of rival crypto exchange Coinbase, lamented on Twitter he had heard “rumors” the SEC would attempt to “get rid of crypto staking in the U.S. for retail customers.”
“Staking is a really important innovation in crypto,” Armstrong wrote. “It allows users to participate directly in running open crypto networks. Staking brings many positive improvements to the space, including scalability, increased security, and reduced carbon footprints.”
Stake From Home
Staking is essential to the operation of blockchains using Proof of Stake technology to confirm and order transactions, such as Solana and Ethereum. To contribute to the security of PoS blockchains, users can lock up, or stake, the chains’ native token and earn a modest annual reward in return.
With a lot of money and technical know-how, individuals can stake from home. But services have sprung up in the past two years that make it easy for anyone, no matter the amount of ETH they hold, to stake. Those include staking programs run by centralized exchanges such as Coinbase and Kraken, as well as decentralized alternatives, like Lido, Rocket Pool and Frax.
Investors seem to be betting those decentralized staking services will be spared by the SEC’s campaign against staking-as-a-service.
“Important not to conflate self-staking with staking-as-a-service,” TuongVy Le, a partner at Bain Capital’s crypto arm, wrote on Twitter in response to Armstrong’s warning. “I think @SECGov will only go after the latter, though IMO there are strong arguments that neither is a security.” Le did not respond to a request for comment Wednesday.
Gabriel Shapiro, general counsel at Delphi Labs, took to Twitter to argue staking-as-a-service is not, in itself, a security or investment contract. But Kraken may have made it more security-like by offering a specific return on customers’ stake, rather than the amount it should have distributed based on Ethereum network activity.
“I think if they marketed it a little differently and made sure payouts track actual network performance, they would have a better defense,” he wrote.
Coinbase Chief Legal Officer Paul Grewal suggested that distinction could protect Coinbase from any potential SEC lawsuit.
“These products are basically yield products,” he wrote of Kraken’s staking service. “True on-chain staking services like ours are fundamentally different. … Our customers’ rewards are tethered to realities. They depend on the rewards paid by the protocol and commissions that we disclose. We don’t play games.”
In a whimsical, three-minute video shared on social media, SEC Chairman Gary Gensler explained the commission’s rationale in pursuing staking-as-a-service.
“Here’s the rub: when a company or a platform offers you these kinds of returns … that relationship should come with the protections of federal securities laws,” he said. “That means you, the investor, should receive important disclosures.”