SEC’s Kraken Case Has Crypto Biz Clamoring For Guidance

February 14, 2023 – Media Mention

Maxim Nowak, counsel in Herrick’s Litigation Department, spoke to Law360 about the legal challenges facing the crypto industry following the Securities and Exchange Commission's ("SEC") recent enforcement action targeting staking programs.

The article highlighted that the SEC recently disclosed a $30 million settlement with crypto exchange Kraken over an alleged failure to register its staking program as a security. Although Kraken neither admitted nor denied the allegations, they agreed to pay the settlement and to shut down its 135,000 US accounts. Although the SEC has asserted that they take issue with yield-generating products, they have yet to clarify what characteristics in these programs mandate registration.

The article noted that although staking is generally not a problem for the SEC, the Kraken settlement is indicative of the SEC taking issue with firms that provide staking as a service. The regulator explained, "Depositing assets for the promise of returns designated by an exchange may constitute an investment contract."

Max noted that, "Still, there may be more chances to push back since more enforcement is likely on the horizon."

The article emphasizes that if a legal challenge is mounted against the SEC, it's important that it's by the right player. Max elaborated that he's heard industry concerns that if firms were to challenge an enforcement and lose, case law could be made that may hamper other firms from mounting stronger challenges. 

Some may think private companies have an advantage litigating against the government, but that may not be the case in these circumstances, Max said. Whoever mounts the challenge will face stiff resistance. Not only the cost, but the potential fallout would be significant.

"It's going to take ... one of the big dogs who is truly pushed with their back against the wall, and it is core to their survival as a company, to really go toe to toe with the SEC in an effective manner," Max concluded.

Read the full article in Law360 here. Access may require a subscription.