Two subsidiaries of the crypto exchange Kraken ended their staking-as-a-service platform for U.S. investors Thursday, and the exchange entered a $30 million agreement with the Securities and Exchange Commission to settle charges that it offered unregistered securities.

Staking is the process by which investors lock up their crypto tokens for a set period of time to support the operations of a blockchain. It’s a way to earn passive income on crypto investments without having to sell.

However, when investors offer their crypto to staking-as-a-service providers, they “lose control of those tokens and take on risks associated with those platforms, with very little protection,” the SEC said in a statement. “The complaint alleges that Kraken touts that its staking investment program offers an easy-to-use platform and benefits that derive from Kraken’s efforts on behalf of investors, including Kraken’s strategies to obtain regular investment returns and payouts.”

On Kraken subsidiaries Payward Ventures Inc. and Payward Trading Ltd., investors transfer crypto assets to Kraken for staking in exchange for investment returns of as much as 24% annually, with an average of 21%. The program launched in 2019.

“In case after case, we’ve seen the consequences when individuals and businesses tout and offer crypto investments outside of the protections provided by the federal securities laws: investors lack the disclosures they deserve and are harmed when they don’t receive them,” said Gurbir Grewal, director of the SEC’s Division of Enforcement.

“Today, we take another step in protecting retail investors by shutting down this unregistered crypto staking program, through which Kraken not only offered investors outsized returns untethered to any economic realities, but also retained the right to pay them no returns at all,” Grewal said. “All the while, it provided them zero insight into, among other things, its financial condition and whether it even had the means of paying the marketed returns in the first place.”

In addition to ending the staking program and paying the $30 million penalty, Payward Ventures and Payward Trading consented to a final judgment, subject to court approval, that would permanently prohibit them and any entity they control from offering crypto staking services or staking programs.

On its blog Thursday, Kraken said it will automatically unstake all U.S. client assets enrolled in the on-chain staking program with the exception of staked Ether (ETH), which will be unstaked after a planned mid-March upgrade on the Ethereum blockchain known as the Shanghai upgrade. However, U.S. clients will not be able to stake any additional assets, including ETH.

The change doesn’t affect customers outside of the U.S.

Further crackdown coming?

Kraken’s penalty aligns with predictions made publicly by Coinbase CEO Brian Armstrong on Wednesday. Armstrong said via Twitter that he was “hearing rumors that the SEC would like to get rid of crypto staking in the U.S. for retail customers.”

“I hope that's not the case as I believe it would be a terrible path for the U.S. if that was allowed to happen,” he tweeted. “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.”

According to Paradigm, a crypto-focused investment firm, staking does not qualify as an “investment contract” when put through the Howey test because “there is no ‘common enterprise’ and validators are never relying on the ‘efforts of others.’”

The test, which determines what is subject to U.S. securities laws, takes its name from a 1946 U.S. Supreme Court case that established what qualifies as “investment contract.”

Not every SEC commissioner, however, was in lock-step over staking. Republican SEC Commissioner Hester Peirce published her dissent from the agency’s position, calling it something a “paternalistic and lazy regulator” would do.

“Instead of taking the path of thinking through staking programs and issuing guidance, [the SEC] again chose to speak through an enforcement action,” which, in an emerging industry, “is not an efficient or fair way of regulating,” she said.

“Most concerning, though, is that our solution to a registration violation is to shut down entirely a program that has served people well. The program will no longer be available in the United States, and Kraken is enjoined from ever offering a staking service in the United States, registered or not,” Peirce said. “A paternalistic and lazy regulator settles on a solution like the one in this settlement: do not initiate a public process to develop a workable registration process that provides valuable information to investors, just shut it down.”

Kraken founder Jesse Powell responded to Peirce’s dissension via Twitter.

“The ‘this is wrong but I won’t tell you how to do it right. Want to find out if X works? Try it and see what happens.’ approach does not help the industry nor consumers,” he said.

“We aren’t anti-regulation, but we need a clear path to operate,” Powell said of Kraken.