Kraken Down 🧑‍⚖️

Hey fam!

We hope everyone has recovered from Sunday’s festivities –whether you were watching to witness Rihanna’s musical comeback or the actual Super Bowl game. This time last year, we were recapping all of the crypto related Superbowl ads in our Blockchain/Crypto 101 post. This year, these ads were pretty much nonexistent. And honestly, we can understand why. Crypto hasn’t gotten a great rep over the past few months, so the NFL likely wanted to limit their association with the space for football’s biggest moment. 

But even though crypto wasn’t front and center at the Super Bowl, the web3 streets were still talking about one of the largest cryptocurrency exchanges being reprimanded by the government. This week, we’re exploring what happened and why it matters to us. 

Release the Kraken!

Kraken, not the scary looking octopus kind of thing, is a US-based cryptocurrency exchange where users can buy / sell over 200 different cryptocurrencies, and even purchase crypto using fiat currencies. As of 2023, Kraken is the third largest cryptocurrency exchange in the world with a daily trading volume of $333M and a $10.8B market cap. Kraken, with Coinbase, were selected to provide market data on bitcoin trading to Bloomberg Terminal.

Isn’t this a cryptocurrency exchange like FTX?

Sigh… yes. Kraken is the same type of business as FTX. The primary difference was FTX was much much bigger (once valued at over $30B - 3 times what Kraken is now), with more featured products, cryptocurrencies, and sketchier business practices. Kraken has proven to have stood the test of time and competes with the likes of Coinbase and other international exchanges, even as a US player. 

What is Staking?

In the world of crypto, every transaction on the blockchain needs to be validated to make sure things are legit - the math needs to math. And right now, there’s two ways of doing it - crypto mining, and crypto staking. We’ve talked about staking around this time last year in our Crypto Staking 101 edition, but to explain staking again it’s the act of putting your crypto out to forge blocks in the blockchain (valid transactions). The more you stake the more likely you are to be chosen to forge a block. If you are chosen to forge a block you will receive a reward in extra coins.

Staking 🤝 Kraken

Since 2019, Kraken has offered staking as a feature for customers on its platform. It was advertised as a service that could easily provide rewards twice a week, and you could stop staking without penalties. In the crypto world, Kraken was even believed to be one of the top staking services in the world. To put some context to this, Kraken and Coinbase accounted for 20% of staking of Ethereum, the world’s second largest cryptocurrency and the largest cryptocurrency with a Proof of Stake protocol. 

🚨 “Slow your roll” - Gary Gensler, Chairman of the SEC

However, on February 9th, the SEC said the fun time was over. Kraken was charged with “failing to register the offer and sale of their crypto asset staking-as-a-service program” and also fined $30M. While Kraken advertised their staking option as an easy to use service, the SEC alleged that Kraken had lost control of its tokens by offering the staking program and offered little protection for users. 

Effective basically immediately ceased its staking services in the US. But non-US customers can continue to stake cryptocurrency with Kraken through one of its subsidiaries. 

Are all crypto exchanges going to come crashing down?! 

No, not quite. Obviously this is serious because it’s led to rumors about an impending crypto ban by the SEC, but ultimately web3 is about decentralization and this case may accelerate us towards a world where centralized government entities no longer have the power to call the shots. Some crypto aficionados believe that this may actually be the catalyst people need to encourage more people to move toward options for decentralization beyond the SEC’s reach. 

So, what does this mean for us?

A few days before the SEC announced that Kraken would have to pay the $30M fine, Brian Armstrong, CEO of centralized exchange Coinbase, tweeted his concerns. 

In the thread, he states that “Staking is a really important innovation in crypto. 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.” If the U.S. were to ban staking, this would likely mean that other countries would move to the forefront in innovation of crypto, which could have long term implications depending on where the industry heads. 

Jesse Powell, the founder of Kraken, shares his two cents on what he hopes for moving forward:

Ultimately, we’re playing a dance right now between the role of centralized institutions in the decentralized world of web3. It’s starting to come to a head, and we predict that by the end of 2023 we’ll see a lot more unraveling as they figure out the regulation required to get us to mass adoption.

As always, thanks for reading!

– Kendall & Chad