On February 9, 2023, the US Securities and Exchange Commission (SEC) charged cryptocurrency exchange Kraken for failing to register its crypto staking program, forcing the platform to shut down staking services for American users and pay a $30 million settlement. The news sent shockwaves through the crypto community. If you were one of the millions of users earning passive income through exchange-based staking, you might have been wondering: what happens to my staked assets, and is staking even legal anymore? With Bitcoin at $24,641 and Ethereum at $1,691.82 as the market digested the implications, understanding the nuances of staking regulation became essential knowledge for every crypto holder.
The Basics
Staking is the process of locking up cryptocurrency to support the operations of a proof-of-stake blockchain network. In exchange for helping validate transactions and secure the network, stakers earn rewards — typically paid in the same cryptocurrency they staked. Think of it like earning interest on a savings account, except the “interest” comes from participating in network security rather than lending your money to a bank.
Ethereum’s transition to proof-of-stake in September 2022 made staking accessible to a much broader audience. Before “The Merge,” securing the Ethereum network required expensive mining hardware and significant electricity costs. After the transition, anyone with 32 ETH could run a validator node and earn staking rewards. For those with smaller holdings, exchanges like Kraken offered “staking as a service” — they would pool user funds, run the validators, and distribute rewards proportionally.
The SEC’s problem was not with staking itself but with how Kraken offered it. The regulator argued that Kraken’s staking program constituted an unregistered securities offering because investors were pooling their assets with the expectation of earning profits from Kraken’s efforts. This distinction — between staking directly on a blockchain versus using an intermediary service — is the key to understanding the regulatory landscape.
Why It Matters
The SEC’s action against Kraken matters for several reasons. First, it signaled that the regulator views exchange-based staking programs as potential securities offerings, meaning other exchanges offering similar services could face enforcement action. Indeed, several major exchanges preemptively modified or suspended their US staking products in the weeks following the Kraken settlement.
Second, it highlighted the counterparty risk inherent in exchange-based staking. When you stake through an exchange, you do not control the validator keys — the exchange does. This means the exchange controls your staked assets, and you must trust them to act in your best interest. If the exchange faces regulatory action, insolvency, or a security breach, your staked funds could be at risk. The collapse of FTX in November 2022 was a fresh memory for many crypto users, and the Kraken staking shutdown reinforced the lesson: not your keys, not your coins.
Third, it created confusion among everyday crypto users about whether staking was still viable. The answer is yes — but the method matters. Staking directly on a blockchain network or through decentralized protocols remains available to US users. What changed was the availability of centralized, exchange-based staking services.
Getting Started Guide
If you want to continue earning staking rewards without relying on centralized exchanges, here are the main options available as of February 2023:
Option 1: Solo Staking on Ethereum. If you have exactly 32 ETH (approximately $54,136 at February 2023 prices), you can run your own validator node. This gives you full control over your staked assets and the maximum reward rate. However, it requires technical knowledge to set up and maintain a validator, and your ETH is locked until Ethereum enables withdrawals (expected in the Shanghai/Capella upgrade in April 2023).
Option 2: Liquid Staking Protocols. Platforms like Lido and Rocket Pool allow you to stake any amount of ETH and receive a liquid staking token (stETH or rETH) in return. These tokens represent your staked ETH plus accumulated rewards and can be used in DeFi applications while your underlying ETH continues to earn staking rewards. Lido DAO’s token (LDO) was trading around $3 in February 2023, reflecting the growing popularity of this approach.
Option 3: Staking Through Hardware Wallets. Some hardware wallet manufacturers integrate staking functionality directly into their devices, allowing you to stake supported cryptocurrencies while maintaining custody of your private keys. This approach combines the convenience of one-click staking with the security of self-custody.
Common Pitfalls
The most common mistake new stakers make is confusing custodial staking with self-custody staking. If you are staking through an exchange, you are using a custodial service. The exchange holds your keys, controls your validator, and can be forced by regulators to shut down the service — exactly what happened to Kraken.
Another pitfall is underestimating the lock-up periods. Ethereum staking originally locked funds indefinitely until the Shanghai upgrade enabled withdrawals. Other proof-of-stake networks have unbonding periods ranging from a few hours to 28 days. Make sure you understand the liquidity constraints before staking.
Tax implications are frequently overlooked. In many jurisdictions, staking rewards are taxable income at the time they are received, even if you have not sold them. The IRS had begun increasing scrutiny of crypto tax compliance, and the February 2023 environment suggested this trend would continue.
Next Steps
The SEC’s crackdown on Kraken’s staking program was a wake-up call for the crypto community, but it was not the end of staking. Instead, it accelerated the shift toward decentralized, self-custody staking solutions that align with the original ethos of cryptocurrency: financial sovereignty without intermediaries. If you are currently staking through a centralized exchange, explore liquid staking protocols or solo staking options. If you are new to staking, start with a small amount on a liquid staking platform to learn the mechanics before committing larger sums. The tools and infrastructure for self-custody staking are maturing rapidly, and the regulatory pressure on centralized services is likely to drive even more innovation in this space.
Disclaimer: This article is for informational purposes only and does not constitute financial, legal, or tax advice. Always conduct your own research and consult with qualified professionals regarding regulatory compliance and tax obligations.
30 million dollar settlement and they didnt even admit wrongdoing. the sec strategy is clear – regulate by enforcement and collect fines
30M settlement for a staking program that generated yield for users. the SEC really argued that earning rewards on your own tokens is an unregistered securities offering. wild times
stake_bag_ the real damage was forcing americans off exchange staking entirely. everyone had to learn self custody the hard way. accidentally bullish
got my eth unstaked from kraken the same day. moved everything to ledger, should have done it months ago
Been staking independently since the merge. The returns are slightly lower without exchange pooling but at least I know my keys are mine.
The guidance on self-custody staking is actually pretty clear here. Nice to see someone explain it without the fearmongering for once.
ETH at 1691 and the SEC is busy killing the easiest onramp to staking for retail. priorities were completely backwards
gary gensler really said ‘come in and register’ then penalized the ones who did lol what a joke
gensler literally told exchanges to come in and register, then punished kraken for doing exactly that. you cant make this up
gensler telling kraken to come in and register then punishing them for doing it. you literally cannot make this stuff up
self custody staking returns being slightly lower than exchange pooling is a small price for not trusting the exchange with your keys. ask celcius users how that worked out
Mira Anand the 4% solo vs 5% exchange difference is nothing compared to losing 100% when the exchange goes bankrupt. self custody math is simple
ETH at $1691 when this dropped. self custody staking was the obvious move then and still is now. exchanges proved they cant be trusted with staking pools