SEC had justified concerns about Kraken staking

Input Output (IO) CEO Charles Hoskinson argued that the SEC was right to go after Kraken over its Staking Program.

During a live stream broadcast on Feb. 14, Hoskinson spoke in detail about the SEC-Kraken enforcement action. Informing his comments was the actual complaint filed by the regulator with the District Court.

Based on his interpretation of the document, he understood that the regulator has no problem with staking. However, this is not the case for in-house exchange staking programs.

Kraken staking is not protocol staking

The SEC posted a press release on Feb. 9 giving notice of settlement with Kraken over allegations it had failed to register its Staking Program as a security offering.

The settlement deal required the exchange to end its Staking Program for U.S. customers and pay a $30 million fine. In response, some in the crypto community interpreted this as a crackdown on staking and an attack on the crypto industry.

However, Hoskinson pointed out that the SEC complaint focused on Kraken’s “protocol deviation” and not staking as such. Furthermore, Hoskinson argued that the issues raised have justified cause for complaint.

“If you actually read the document, the complaint, they’re actually saying what you’ve done is a protocol deviation, and you’ve constructed a proprietary in-house product.”

Hoskinson clarifies

Explaining what this means, the IO CEO said staking directly with Cardano requires delegators to pledge their ADA tokens with a Stake Pool Operator (SPO) of their choice under a non-custodial, liquid model.

This model enables delegators to retain access to tokens, ensures SPOs do not control the funds, and allows users to leave the SPO at any time. However, staking Cardano through Kraken means users give up their ADA custody, their right to make decisions, and are left in the dark regarding what is happening with their funds.

“What they are saying here is, you don’t make any decisions; Kraken is making all those decisions. They’re doing all the work, they control all the money, and you’ll get a passive return from that.”

The SEC determined that staking on your own and staking with Kraken are different things, with the latter deemed disadvantageous because of third-party custodial risk, management risk, and failure to adequately disclose the mechanics of the reserve pool/liquidity system.

“They’re saying you have liquidity, but the protocol doesn’t give you liquidity meaning in practice, you need to chop up the pie, and you need to take a collection of the pie and produce a reserve pool. How you’re doing that under the hood is not disclosed.”

Summing up, the court filing did not (explicitly) raise issues with direct protocol staking. Instead, it was clear that the regulator was focused on Kraken’s in-house staking product — which introduced additional risk to users via protocol deviations, Hoskinson said.