On February 9, 2023, the United States Securities and Exchange Commission delivered a seismic shock to the cryptocurrency industry by charging Kraken, one of the world’s largest crypto exchanges, for failing to register its crypto staking program as a securities offering. The exchange agreed to pay $30 million in penalties and immediately cease offering staking services to US customers. For millions of crypto holders who rely on staking to earn passive income, the announcement raised urgent questions about what staking actually is, what risks it carries, and how to navigate an increasingly uncertain regulatory landscape.
The Basics
Staking is the process of participating in the validation of transactions on a proof-of-stake blockchain network by locking up — or “staking” — your cryptocurrency. In return for helping secure the network, stakers earn rewards, typically paid in the same cryptocurrency they have staked. Think of it as the crypto equivalent of putting money in a savings account and earning interest, though the mechanics and risks are fundamentally different.
Ethereum, the second-largest cryptocurrency by market capitalization, transitioned from proof-of-work to proof-of-stake in September 2022 through an event known as “The Merge.” This transition meant that ETH holders could now stake their tokens to earn rewards, with annual yields typically ranging from 4% to 7% at the time. With Ethereum trading at approximately $1,556 in mid-February 2023, staking rewards represented a meaningful income stream for holders.
There are several ways to stake cryptocurrency. You can run your own validator node, which requires technical expertise and a minimum stake of 32 ETH for Ethereum. You can join a staking pool, which combines multiple holders’ tokens to reach the minimum threshold. Or you can use a centralized exchange like Kraken, Coinbase, or Binance, which handles all the technical complexity in exchange for a fee.
Why It Matters
The SEC’s action against Kraken matters because it fundamentally challenges the legal status of staking services offered by centralized platforms. The SEC’s position is that when an exchange offers staking-as-a-service, it is essentially offering an investment contract — investors are pooling their assets with the expectation of profits derived from the efforts of others, which meets the definition of a security under the Howey Test.
This interpretation has far-reaching implications. If staking services are securities, they must be registered with the SEC or qualify for an exemption. Registration brings compliance costs, disclosure requirements, and operational restrictions that could fundamentally reshape how staking services operate in the United States.
For individual stakers, the immediate impact was practical: Kraken users in the US had to unstake their assets, losing access to staking rewards. With Bitcoin at approximately $22,220 and the broader market showing tentative signs of recovery, the forced liquidation of staked positions created downward pressure on affected assets.
The case also impacts other major crypto exchanges operating staking programs. Coinbase, which publicly pushed back against the SEC’s interpretation, continued offering staking services but faced increasing regulatory pressure. The uncertainty created by the enforcement action cast a shadow over the entire staking industry.
Getting Started Guide
For those who want to continue earning staking rewards despite the regulatory uncertainty, there are several approaches. First, self-custody staking eliminates the intermediary that the SEC targeted. By running your own validator node or using non-custodial staking services, you maintain control of your private keys and are not relying on a third party to manage your stake.
For Ethereum stakers who cannot afford the 32 ETH required for a full validator node, decentralized liquid staking protocols offer an alternative. Platforms like Lido and Rocket Pool allow users to stake any amount of ETH and receive a liquid staking token in return — such as stETH or rETH — that represents their staked position plus accrued rewards. These liquid tokens can be used in DeFi protocols for additional yield, though they carry their own smart contract risks.
To get started with non-custodial staking, you will need a compatible wallet such as MetaMask or a hardware wallet like Ledger. Transfer your tokens to your wallet, choose a staking protocol or validator, and follow the platform’s instructions to delegate your stake. Always verify that you are interacting with the legitimate protocol by checking official documentation and contract addresses.
Research each staking option thoroughly before committing funds. Consider factors including lock-up periods, minimum stake requirements, commission rates, historical uptime and performance of validators, and the protocol’s security track record.
Common Pitfalls
The most common mistake new stakers make is confusing custodial and non-custodial staking. When you stake through an exchange, you do not control your private keys — the exchange does. This means the exchange can freeze your assets, change terms, or be forced to halt services by regulators, as the Kraken case demonstrated.
Another pitfall is underestimating slashing risk. On proof-of-stake networks, validators can lose a portion of their staked tokens — a process called slashing — if they behave improperly, such as signing conflicting transactions or going offline for extended periods. When you delegate to a validator through a pool or protocol, you share in this risk.
Liquidity risk is also frequently overlooked. Many staking arrangements involve lock-up periods during which you cannot access your staked tokens. If the market crashes or you need your funds urgently, you may be unable to unstake quickly enough to avoid losses. Liquid staking tokens partially address this by providing a tradeable representation of your stake, but these tokens can trade at a discount to the underlying asset during periods of market stress.
Finally, tax obligations are often misunderstood. Staking rewards are generally taxable as income at their fair market value when received. Failing to track and report staking income can result in penalties and interest from tax authorities.
Next Steps
The regulatory landscape for crypto staking is evolving rapidly, and staying informed is your best defense. Follow SEC announcements and enforcement actions, monitor your exchange’s terms of service for changes, and consider transitioning to non-custodial staking solutions to reduce your exposure to centralized platform risk. The Kraken settlement was a wake-up call for the industry — those who adapt quickly will be best positioned to continue earning staking rewards while staying on the right side of regulators.
Disclaimer: This article is for informational purposes only and does not constitute financial or legal advice. Always consult with a qualified financial advisor and tax professional before making investment decisions.
the 30M penalty is nothing for Kraken but the precedent is terrifying. if staking is a security then basically all PoS rewards are securities
Greg is right. The issue isnt Kraken specifically, its that Gensler seems to think every crypto yield product falls under Howey. Self-custody staking is the way forward.
if kraken staking is a security then literally every ethereum validator is running an unregistered securities operation. the implications go way beyond one exchange
the sec argument is that kraken controlled the staked assets and promised returns, which is how they shoehorned it into howey. self custody staking is a different story but they havent clarified that yet
the howey test requires investment of money in a common enterprise with expectation of profits from others efforts. kraken controlling the keys and promising yield fits all four prongs. self custody changes the last two
been staking ETH since the merge and now im supposed to worry about the SEC too? can we just get clear rules for once
clear rules would require congress to actually pass something. until then we get regulation by enforcement and everyone guesses