SEC under fire for regulation by enforcement in Kraken staking action

The post-mortum on Kraken’s staking enforcement by the SEC has begun.

On Feb. 9, Kraken said it would end its staking service in the U.S. and disclosed paying a $30 million fine to settle allegations of failing to register its staking service as a security offering.

Kraken’s staking services will continue uninterrupted outside the U.S., according to a company statement following the settlement.

SEC Commissioner Pierce wades in

Crypto-friendly SEC Commissioner Pierce said in a statement that she disagreed with the regulator’s take that the action was a “win for investors.”

The Commissioner questioned whether registering a securities staking product with the SEC was even possible. Expanding on this, she said regulating a staking product opens up several questions, such as:

“Whether the staking program as a whole would be registered or whether each token’s staking program would be separately registered, what the important disclosures what be, and what the accounting implications would be for Kraken.”

Further, Commissioner Pierce blasted the agency’s regulation by enforcement approach, saying the use of enforcement action to tell lay down the law “is not an efficient or fair way of regulating.” She also pointed out that a “cookie-cutter” approach is incorrect, considering the wide variations in staking products.

What now for staking in the U.S.?

Input Output CEO Charles Hoskinson verified Commissioner Pierce’s point, saying:

“There is no canonical definition of what delegation, staking, liquidity, custodianship really means.”

Further, he also mentioned that although Tezos, Cardano, Ethereum, Avalanche, etc., are all “staking systems,” they have very different staking mechanics which can lead to “regulatory overhit” by treating them as the same.

“Some are custodial and non-liquid, others are liquid and non-custodial. Some involve a bonding or slashing mechanism. Others involve no bonding, no slashing mechanism.”

Nonetheless, decentralized services are expected to benefit hugely from the SEC clampdown for now.

Wave Financial’s head of DeFi Henry Elder said the clampdown is a gift to DeFi staking protocols such as Lido, Rocket Pool, and StakeWise.

“Their competitive advantage is an innate resistance to regulatory action — something that mattered little in the absence of such action.”

Similarly, Columbia Business School’s Professor Austin Campbell said people who wish to stake will turn to DeFi options, which will likely lead to a spike in DeFi staking activity in the short term.