Kraken’s Jesse Powell on SEC Staking Settlement: ‘A Brutal Fight Not Worth Fighting’

The crypto world was recently shaken when Kraken, a major cryptocurrency exchange, announced it would discontinue its staking services for US customers. This decision came after a settlement with the Securities and Exchange Commission (SEC), requiring Kraken to pay a hefty $30 million fine. But why did Kraken choose to settle instead of fighting back? And what does this mean for the future of crypto staking in the United States? Jesse Powell, Kraken’s co-founder and former CEO, has stepped into the spotlight to shed light on the situation, offering a candid perspective on the SEC’s actions and the road ahead for the crypto industry.

Why Did Kraken Decide to Settle with the SEC?

In a series of tweets and public statements on February 9th, Jesse Powell didn’t mince words about Kraken’s decision. He explained that while he hopes someone will eventually challenge the SEC in court to establish a legally sound way to offer custodial staking in the US, Kraken wasn’t going to be that entity.

According to Powell, the core reason for settling was a simple calculation: risk-adjusted return. In plain terms, the potential benefits of fighting the SEC in court simply didn’t outweigh the immense costs and risks involved. He stated:

“I honestly hope that somebody proves, in court, that there is a legal, user-friendly version of custodial staking that can be offered to US consumers…It’ll be a brutal, lengthy, expensive fight … but the industry and the USA will be extremely grateful.”

Essentially, Powell acknowledges that a legal battle could be beneficial for the entire crypto industry and US consumers in the long run. However, for Kraken specifically, the immediate financial burden and the protracted nature of such a legal fight made it an unviable option.

Here’s a breakdown of why Kraken might have opted for settlement:

• High Legal Fees: Fighting the SEC is known to be incredibly expensive, involving extensive legal resources and time.
• Lengthy Legal Process: Court battles with regulatory bodies can drag on for years, creating prolonged uncertainty for the business.
• Bear Market Vulnerability: Powell pointed out the SEC targeted Kraken during a bear market, after the company had already laid off 30% of its staff. This timing, he suggested, gave the SEC significant leverage as they had access to Kraken’s financial information and might have perceived the exchange as being in a weakened state.

What Exactly Did the SEC Say About Kraken’s Staking Services?

The SEC’s issue with Kraken’s staking services, as per their settlement, was that they were considered an unregistered securities offering. This is a crucial point in the ongoing debate about crypto regulation in the US. The SEC’s stance implies that platforms offering staking services, where users deposit crypto assets to earn rewards, might be operating in a regulatory gray area if not explicitly registered with the SEC.

This action against Kraken has sent ripples through the crypto industry, raising concerns about the regulatory landscape for staking and other crypto services in the US.

Powell Defends Coinbase and Criticizes SEC’s ‘Purgatory Strategy’

Jesse Powell’s commentary wasn’t just about Kraken’s situation. He also came to the defense of Coinbase, a competitor exchange whose chief legal officer, Paul Grewal, is currently working to differentiate Coinbase’s staking service from Kraken’s. This suggests that Coinbase, and potentially other exchanges offering staking, are under increased scrutiny from the SEC following the Kraken settlement.

Furthermore, Powell echoed the sentiments of SEC Commissioner Hester Peirce, who publicly criticized her own agency for its lack of clear guidance for crypto firms. Peirce argued that the SEC failed to provide a “compliance roadmap” for Kraken and other crypto companies, leaving them in a state of regulatory uncertainty.

Powell strongly agreed with this, stating:

“The ‘This is wrong but I won’t tell you how to do it right. Want to find out if X works? Try it and see what happens.’ approach does not help the industry nor consumers. We aren’t anti-regulation but we need a clear path to operate.”

This highlights a major frustration within the crypto industry: the lack of clear and proactive regulatory guidelines. Companies feel they are being penalized for operating in a space where the rules are unclear and constantly shifting – a situation Congressman Tom Emmer aptly described as the SEC’s “purgatory strategy.”

The Risk of Crypto Services Moving Offshore

Both Powell and Congressman Emmer have voiced concerns that the SEC’s approach could drive crypto innovation and services overseas. By creating a hostile regulatory environment in the US, the SEC risks pushing crypto businesses to jurisdictions with more favorable or clearer regulations.

Powell emphasized this point, tweeting:

“Congress must act to protect the domestic crypto industry and US consumers who will now be going offshore to obtain services no longer available in the US.”

This potential exodus of crypto businesses and services could have several negative consequences for the US, including:

• Loss of Innovation: Innovation in the crypto space might shift away from the US, hindering the country’s technological advancement.
• Economic Impact: The US could miss out on the economic benefits associated with a thriving crypto industry, including job creation and tax revenue.
• Consumer Protection Concerns: If US consumers are forced to use offshore platforms to access crypto services, they might be exposed to less regulated and potentially riskier environments.

Are There Alternatives to Centralized Staking?

Despite the setback for centralized staking services like Kraken’s in the US, Powell pointed out that alternatives exist. He specifically mentioned decentralized staking on Ethereum as an option, particularly for users who are technically proficient and hold a significant amount of ETH (32 ETH, which is required to become a solo validator on Ethereum’s proof-of-stake network).

Furthermore, Powell referenced demurrage-based staking as a potentially regulator-friendly model. This model, championed by NuCypher CEO MacLane Wilkison, involves reducing or burning unstaked tokens over time, while staked tokens maintain their value. Because this method doesn’t rely on distributing rewards in the traditional sense, it might be less likely to be classified as a security offering by regulators.

Looking Ahead: The Future of Crypto Regulation in the US

The Kraken-SEC settlement and Jesse Powell’s response highlight the ongoing tension between crypto innovation and regulatory oversight in the United States. While the SEC aims to protect investors and ensure market integrity, its current approach is perceived by many in the crypto industry as unclear, restrictive, and potentially harmful to the sector’s growth within the US.

The situation underscores the urgent need for:

• Clear Regulatory Frameworks: The crypto industry needs clear and well-defined rules to operate within, allowing for innovation while ensuring consumer protection.
• Open Dialogue: Ongoing communication and collaboration between regulators and industry players are crucial to developing effective and balanced regulations.
• Congressional Action: Legislative clarity from Congress might be necessary to provide a more definitive legal foundation for the crypto industry in the US.

Jesse Powell’s candid remarks serve as a wake-up call, emphasizing the challenges and uncertainties facing the crypto industry in the US. As the regulatory landscape continues to evolve, the industry and its stakeholders will be closely watching for signs of change and clarity, hoping for a path forward that fosters both innovation and responsible growth.