SEC v. Payward Ventures, Inc. (D/B/A Kraken); and Payward Trading, Ltd. (D/B/A Kraken), No. 3:23-cv-00588, Northern District of California (Feb. 13, 2023) — Complaint

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COMPLAINT

David Hirsch ([email protected])
Jorge Tenreiro ([email protected])
James Connor ([email protected])
Eugene Hansen (Trial Counsel) (DC Bar No. 483638)
([email protected])

Attorneys for Plaintiff
SECURITIES AND EXCHANGE COMMISSION
100 F Street, N.E.
Washington, DC 20549-4030
Telephone:  (202) 551-6091 (Hansen)
Facsimile:  (202) 772-9282 (Hansen)

SECURITIES AND EXCHANGE COMMISSION,
                        Plaintiff,
            v.
PAYWARD VENTURES, INC. (D/B/A KRAKEN);
and
PAYWARD TRADING, LTD. (D/B/A KRAKEN),
                        Defendants.

Case No. 23-cv-588

COMPLAINT AND
DEMAND FOR JURY TRIAL

Plaintiff Securities and Exchange Commission (the “SEC” or “Commission”), for its
Complaint against Defendants Payward Ventures, Inc. d/b/a Kraken and Payward Trading,
Ltd. d/b/a Kraken (collectively “Defendants” or “Kraken”), alleges as follows:
SUMMARY
1. This case concerns the illegal unregistered offer and sale of securities
involving the staking of crypto assets.
1
  In particular, Defendants have offered and sold an
investment contract to the general public, including United States investors, whereby

1
  As used in this Complaint, “crypto asset” refers to an asset that is issued and/or
transferred using distributed ledger or blockchain technology—including, but not limited to,
so-called “digital assets,” “virtual currencies,” “cryptocurrencies,” “coins,” and “tokens.”
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN FRANCISCO DIVISION

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investors transfer certain crypto assets to Kraken for “staking” in exchange for advertised
annual investment returns of as much as 21% (the “Kraken Staking Program” or “Program”).
2. “Staking” concerns the “proof of stake” validation protocols that certain
blockchains utilize.  These protocols offer rewards to those who “validate”—or confirm—
transactions on the blockchain.  To become a validator and obtain such rewards, holders of
crypto assets must first “stake”—or commit—crypto assets (typically, the “native” crypto
asset on a particular blockchain such as Ethereum (ETH), Cardano (ADA), Polkadot (DOT),
and Cosmos (ATOM)).  Validators are selected based on the size of their stake, among other
factors, creating an incentive to stake, or commit, greater quantities of crypto assets.  The
protocols incentivize validators to add legitimate transactions to the blockchain because
validators are rewarded if they do and could be penalized if they do not, including by having
the staked crypto assets “slashed” (or destroyed).
3. The Kraken Staking Program is an investment program created by Defendants
that aggregates investors’ crypto assets to enable Kraken to stake these pooled investor assets
and achieve a competitive advantage in the staking marketplace.  Through this pooling of
crypto assets and Defendants’ efforts, the Kraken Staking Program purports to offer investors
benefits that are not available to investors who stake on their own.  Among other things,
Defendants advertise regular investment returns and payouts, no staking minimums, their
technical expertise in staking, and an easy-to-use platform created by Defendants.  In
addition, Defendants offer investors instant rewards accrual and the ability instantly to
unstake (essentially, to take back the assets immediately).
4. Defendants market the Kraken Staking Program by touting specified
investment returns for certain staking-eligible crypto assets on the kraken.com website, on
social media channels, and through advertisement emails.  Defendants determine these
returns, not the underlying blockchain protocols, and the returns are not necessarily dependent
on the actual returns that Kraken receives from staking.  If interested in obtaining these
returns, investors can transfer eligible crypto assets to the Program, including by first
purchasing the tokens from Kraken’s trading platform for the market price of the token plus a

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fee or transferring the eligible crypto assets obtained elsewhere to Kraken.  Defendants pool
these tokens, designating some for staking and some purportedly as a liquidity reserve.
Investors lose possession and control over their crypto assets when they transfer those assets
to Defendants and accordingly take on risks associated with the Kraken platform.
5. Pooling and retaining control over the tokens potentially reduces Defendants’
transaction costs and risks and, in the case of tokens actually staked by Defendants to proof of
stake protocols, increases the likelihood that Defendants will be selected to validate
blockchain transactions and therefore earn rewards, and provides smoother, more reliable
rewards.  Defendants advertise that their significant efforts, discussed in more detail below,
provide investors with constant and regular returns (called “rewards”), more so than investors
could achieve if they tried to implement a staking strategy on their own without the benefit of
Defendants’ scale and expertise.
6. By April 2022, U.S. investors had over $2.7 billion worth of crypto assets
invested in the Kraken Staking Program.  Kraken has earned approximately $147 million in
net revenue from the Program since its commencement, and a substantial portion of this net
revenue—more than $45 million—is attributable to crypto assets obtained from U.S.
investors.  By June 2022, more than 135,000 unique U.S.-based usernames had transferred
crypto assets to participate in the Kraken Staking Program.
7. Through the Kraken Staking Program, Defendants have offered and sold
investment contracts without registering the offer or sales with the SEC as required by the
federal securities laws, and no exemption from the registration requirement applied.  The
absence of any registration statement means that investors have lacked material information
about the Kraken Staking Program.  Missing material information includes, but is not limited
to, the business and financial condition of Defendants, the fees charged by Defendants, the
extent of Defendants’ profits, and specific and detailed risks of the investment, including how
Defendants determine to stake investor tokens or purportedly hold them in reserve and the
extent of these purported liquidity reserves, or whether tokens are put to some other use.
Investors have had no insight into Defendants’ financial condition and whether Defendants

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have the means of paying the marketed returns—and indeed, per the Kraken Terms of
Service, Defendants retain the right not to pay any investor return.  Defendants have disclosed
only the information that they wish, not the information required by law.
8. Defendants continue to offer and sell the Kraken Staking Program without any
registration statement, meaning that, until the illegal offering is enjoined, investors will
continue to bear the substantial risk resulting from Defendants’ violations of the federal
securities laws.
VIOLATIONS
9. By engaging in the conduct set forth in this Complaint, Defendants engaged in
and are currently engaging in the unlawful offer and sale of securities in violation of Sections
5(a) and 5(c) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. §§ 77e(a) and
77e(c)].
10. Unless Defendants are permanently restrained and enjoined, they will continue
to engage in the acts, practices, and courses of business set forth in this Complaint and in acts,
practices, and courses of business of similar type and object.
NATURE OF THE PROCEEDING AND RELIEF SOUGHT
11. The Commission brings this action pursuant to the authority conferred upon it
by Section 20 of the Securities Act [15 U.S.C. § 77t].
12. The Commission seeks a final judgment: (a) permanently enjoining Defendants
from violating Sections 5(a) and 5(c) of the Securities Act; (b) permanently enjoining
Defendants and any entity controlled by them from, directly or indirectly, offering or selling
securities through crypto asset staking services or staking programs; (c) ordering Defendants
to disgorge their ill-gotten gains and to pay prejudgment interest thereon pursuant to Section
21(d)(3), (5) and (7) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C.
§ 78u(d)(3), (5) and (7)]; and (d) imposing civil money penalties on Defendants pursuant to
Section 20(d) of the Securities Act [15 U.S.C § 77t(d)].

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JURISDICTION AND VENUE
13. This Court has jurisdiction over this action pursuant to Section 22(a) of the
Securities Act [15 U.S.C. § 77v(a)].  Defendants, directly or indirectly, have made use of the
means or instruments of transportation or communication in interstate commerce or of the
mails in connection with the transactions, acts, practices, and courses of business alleged
herein.
14. Venue is proper in this District pursuant to Section 22(a) of the Securities Act
[15 U.S.C. § 77v(a)].  Defendants marketed and offered the Kraken Staking Program to
residents of this District, including through the kraken.com website and social media, and,
according to a filing made with the California Secretary of State, Defendant Payward
Ventures, Inc. has its principal address in this District.
INTRADISTRICT ASSIGNMENT
15. Pursuant to Civil Local Rule 3-2(d), the case properly is assigned to the San
Francisco Division because, according to records filed with the California Secretary of State,
Defendant Payward Ventures, Inc. has its principal address in San Francisco, California, and a
substantial part of the events and omissions giving rise to the violations occurred in San
Francisco County.
DEFENDANTS
16. Payward Ventures, Inc., d/b/a Kraken (“Ventures”), is a Delaware
corporation, and, according to records filed with the California Secretary of State, has a
principal address of 237 Kearny St., #102, San Francisco, California, 94108.  Ventures
operates Kraken’s online crypto asset trading platform.  From its inception until October
2021, Ventures also offered and managed the Kraken Staking Program to U.S. investors, per
the Kraken Terms of Service.  Since the Staking Program’s inception, Ventures has
maintained the wallets and private keys associated with the Kraken Staking Program.
17. Payward Trading, Ltd. d/b/a Kraken (“Trading”) is a corporation
registered in the British Virgin Islands.  Trading has offered and managed the Kraken Staking
Program to U.S. investors since October 2021, per the Kraken Terms of Service.  Trading is a

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wholly-owned subsidiary of Seven Cities Pte Ltd., a corporation registered in Singapore;
Seven Cities Pte Ltd., in turn, is a wholly-owned subsidiary of Payward, Inc., which is also
the parent company of Ventures.
RELATED ENTITY
18. Payward, Inc. (“Payward”) is a Delaware corporation, and, according to
records filed with the California Secretary of State, has a principal address of 237 Kearny St.,
#102, San Francisco, California 94108.  Payward is the corporate parent of Ventures and
Trading.
STATUTORY AND LEGAL FRAMEWORK
19. The Securities Act sets forth a regime of full and fair disclosure, in contrast to
traditional commercial principles of caveat emptor.  Congress mandated that persons who
offer and sell securities to the investing public provide sufficient, accurate information to
allow investors to make informed decisions before they invest.
20. The definition of a “security” under the Securities Act includes a wide range of
investment vehicles, including “investment contracts.”  Investment contracts are instruments
through which a person invests money in a common enterprise and reasonably expects profits
or returns derived from the entrepreneurial or managerial efforts of others.  SEC v. W.J.
Howey Co., 328 U.S. 293, 299 (1946).  Courts have found that novel or unique investment
vehicles constitute investment contracts, including interests in orange groves, animal breeding
programs, railroads, mobile phones, and enterprises that exist only on the Internet, including
crypto assets.
21. Sections 5(a) and 5(c) of the Securities Act require that issuers of securities
register the offer or sale of securities with the SEC, unless an exemption applies.  Similarly,
those provisions prohibit engaging in the unregistered offer and sale of such securities.
Registration statements relating to the offer and sale of securities provide public investors
with material information about the issuer and the offering, including financial and
managerial information, how the issuer will use offering proceeds, and the risks and trends
that affect the enterprise and an investment in its securities.

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BACKGROUND ON CRYPTO ASSETS AND STAKING
22. The term “crypto asset” generally refers to an asset issued and/or transferred
using distributed ledger or blockchain technology, including assets sometimes referred to as
“cryptocurrencies,” digital “coins,” and digital “tokens.”
23. A blockchain or distributed ledger is a peer-to-peer database spread across a
network of computers that records all transactions in theoretically unchangeable, digitally-
recorded data packages.  The system relies on cryptographic techniques for secure recording
of transactions.
24. People can own crypto assets and hold them at a blockchain address under
their control.  Typically, someone controls an address—and the crypto assets held at that
address—with a private cryptographic key for that address.  Anyone with that private key can
sign and submit a transaction to the blockchain that will transfer the crypto assets at that
address to another address.  Typically, in a single blockchain address, people can hold
multiple types of crypto assets.
25. Individuals often control multiple blockchain addresses and store their private
keys for those addresses in software called a “wallet.”  A “wallet” allows them to manage
their crypto assets and key information and to communicate with a blockchain.  People also
can own crypto assets by opening an account on a trading platform (like the Kraken trading
platform) and then transferring their crypto assets from their own blockchain address to an
address controlled by the trading platform.
26. Crypto assets may be traded on crypto asset trading platforms in exchange for
other crypto assets or fiat currency (legal tender issued by a country), at times by being
allocated to investors’ accounts in the records of the platform (i.e., “off-chain”), without
necessarily being transferred from one blockchain address to another (i.e., “on-chain”).
Crypto asset trading platforms typically receive a fee for facilitating such trades.
27. Blockchains typically employ a consensus mechanism to “validate” crypto
asset transactions.  A consensus mechanism describes the particular protocol used by a
blockchain to agree on which transactions are valid, to update the blockchain, and to

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compensate certain participants with additional crypto assets.  There can be multiple sources
for the compensation, including from fees charged to those transacting on the blockchain or
from new crypto assets created or “mined” by the validation of transactions, under the terms
of the blockchain protocol.  Compensation in the form of newly issued crypto assets may
dilute the value of the existing tokens.
28. Validators who participate in confirming transactions on blockchains may
collect fees to participate in the validation of transactions.
29. The consensus mechanism typically is a set of rules followed by the validator
nodes, or computers on a blockchain’s network running the blockchain protocol that are able
to validate transactions.  “Proof of work” and “proof of stake” describe the two major
“consensus mechanisms” used by blockchains.
30.  Proof of work, such as in the protocol used by the Bitcoin blockchain,
involves computers, or validator nodes, attempting to “mine” a “block” of transactions, in
part, by guessing a pre-determined number.  The first miner to successfully guess this number
earns the right to update the blockchain and to be rewarded with crypto assets.  This mining
process typically requires a large amount of computing power and energy.
31. Proof of stake, used by blockchains such as the Cardano (ADA), Ethereum
(ETH), Polkadot (DOT), and Cosmos (ATOM) blockchains, involves the protocol selecting
from crypto asset holders who have committed or “staked” a minimum number of tokens to
validate transactions.  Typically, users can stake their own crypto assets, or they can delegate
their crypto assets to a particular node for that node to use them in staking.  Nodes often act as
“staking pools” when others designate their crypto assets to that node for staking of their
tokens.  A person or entity operating a node is called a “node operator.”
32. In general, the greater portion of crypto assets staked by an individual or group
relative to all the staked tokens, the more likely that holder is to be selected as a validator and
earn the ability to receive the staking rewards.  Thus, the most successful staking operations
are those that maximize the chances of being selected by the protocol, and thus being
rewarded with more crypto assets—typically by staking a large number of tokens and

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minimizing server downtime.   In addition, for some crypto assets, the probability of being
selected as validator increases when a node operator delegates its own tokens for staking
alongside its customers.
33. Typically, crypto assets are unavailable for trading or other purposes when
staked, while protocols will automatically distribute a portion of the crypto asset rewards to
the successful node operator.  To encourage more nodes to participate in validation, protocols
typically cap rewards once the nodes reach a certain size.  As the cap is approached, node
operators can start an additional node.
34. The “staking” of crypto assets is meant to incentivize good faith and honest
validation of transactions, as staked tokens may be “slashed” (or destroyed), and no rewards
will be paid, if transactions are not validated appropriately.  Typically, the protocol rewards
the selected validator with additional crypto assets only if the validator successfully and
correctly validates a new block on the chain.
35. Another component of certain proof of stake protocols is known as the
“bonding”/“unbonding” period.  The bonding period is a length of time set by the protocol for
a crypto asset to be staked by a validator in order to begin earning rewards.  The unbonding
period is a length of time set by the protocol to release staked crypto assets back to the
validator.  In certain cases, a bonding period may mean that it can take weeks before a crypto
asset validator can begin earning rewards.  The unbonding period can mean it can take weeks
for a crypto asset validator to unbond tokens (release them from staking) and potentially do
something else with them, such as trade them for other crypto assets or exchange them for
fiat.  During the time the crypto assets are bonded, the crypto asset owners are unable to
transact in them, for example, to react to market price fluctuations of the tokens.
36. Certain protocols charge crypto asset validators fees to stake and unstake
tokens, require an upfront refundable deposit in addition to the tokens staked, and/or require
the delegation of a minimum amount of tokens to participate in staking.

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FACTS
I. THE KRAKEN STAKING PROGRAM
37. In December 2019, Kraken launched its Staking Program as a means to
participate in, and profit from, the “proof of stake” consensus mechanism of certain
blockchains, by obtaining investors’ crypto assets, pooling those assets, and then staking some
portion of those assets in order to obtain rewards, a portion of which Kraken distributes to the
investors and a portion of which Kraken retains.
38. Kraken advertises that the Program offers investors worldwide, including most
U.S. investors, an investment opportunity to participate in proof of stake consensus and
receive benefits that may not be available to those investors if they staked on their own.  For
example, Defendants’ Program offers to investors no staking minimums, no upfront fees or
deposits, purported industry-leading cybersecurity protections, a simplified and easy-to-use
one-stop-shop trading platform, and the ability, through Kraken’s efforts, to obtain returns
based on Kraken’s participation in proof of stake activities for different types of tokens.  In
addition, for most of the Kraken Staking Program’s staking-eligible crypto assets, the
Program also offers investors instant reward accrual, the ability to instantly “unstake” (i.e., to
demand the immediate return of crypto assets and not have to comply with unbonding periods
that would apply if the investor participated directly), automatic weekly or twice-weekly
payout dates, and custom and steady returns with promised minimum returns.
A. Defendants’ Efforts Result In Unique Benefits To Investors In The
Kraken Staking Program
39. The Kraken Staking Program has several features that differentiate it from
staking and earning rewards on your own.
Passive Investment Opportunity
40. The Kraken Staking Program is a passive investment opportunity.  To
participate, investors need only establish an account at kraken.com and purchase staking-
eligible tokens from the kraken.com trading platform (for a fee), or transfer their existing

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staking-eligible tokens to a kraken.com account.  Investors then sign-up for the Kraken
Staking Program and transfer their crypto assets to the possession and control of Defendants.
2

41. Defendants then perform all of the efforts necessary and expected by the
investors to obtain the advertised and promised investment return.  These efforts include:
 Determining how many tokens to actually stake (see infra, ¶¶ 51-54);
 Determining how many tokens to reserve in order to provide “instant
unstaking” and liquidity for investors (see infra, ¶¶ 49-52);
 Staking investor tokens, operating the nodes, and validating blockchain
transactions in order to obtain rewards;
 Determining the pro rata investor return (see infra, ¶¶ 44-48);
 Distributing those investor returns;
 Providing a user-friendly, one-stop-shop investor interface  (see infra, ¶ 58);
and
 Taking further steps as detailed below.
Pooling of Crypto Assets
42. Defendants control and pool crypto assets invested in the Kraken Staking
Program together with their own proprietary tokens in wallets controlled by Defendants.
They then determine when and how many of these pooled tokens to stake in the underlying
protocol.
43. The pooling of tokens, and the correspondingly larger number of tokens to be
staked in the proof of stake protocols, increases the probability that the blockchain protocol
will select Defendants to validate transactions and earn rewards and provides smoother, more
reliable rewards.  According to a Kraken Blog Post dated December 8, 2020:  “As staking via
Kraken pools client tokens together, it improves the chances that they will be selected to
verify transactions, thereby increasing potential payouts.”

2
  Investors do not have to be “accredited investors” as defined by Rule 501 of
Regulation D of the Securities Act.

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Kraken-Determined Investment Returns
44. The returns that investors receive from the Kraken Staking Program differ
from the returns that an investor could expect if the investor staked directly (assuming the
investor even had the technological capability and sufficient tokens to stake and obtain
rewards).  Investors in the Kraken Staking Program receive a reward determined by
Defendants, not the reward determined by the underlying blockchain protocol.
45. In general, staking services can offer set or discretionary reward amounts.
Here, Defendants retain the discretion to determine the reward amounts while marketing
specific returns (e.g., 4-7% for Ethereum, 9-12% for Polkadot, and 12-15% for Cosmos).  In
other words, Defendants reserve the right not to pay this advertised return—or indeed any
reward.  The Kraken Terms of Service states that the marketed return is “an estimate only and
not guaranteed” and “may change at any time in Payward Trading’s sole discretion.”
3

46. The marketed return does not account for all staking rewards.  Defendants
retain for themselves those rewards that exceed the marketed range and do not generally
disclose to investors the amount of rewards Defendants retain for themselves.  In other words,
Defendants do not disclose sufficient information for investors to determine if they are
receiving their fair share of the staking rewards.

3
  Defendants have complete control over the amount and distribution of staking rewards
to investors.  The Terms of Service states:

By opting-in a portion or your entire balance of Supported Tokens, Payward
Trading shall remit to you the applicable percentage of staking rewards
received from the Supported Token protocol attributable to your staked
Supported Tokens (“Staking Rewards”) as detailed in your Kraken Account.
The applicable percentage and timing of such remittances will: (i) be
determined by Payward Trading in its sole discretion; (ii) be subject to
Payward Trading’s staking fee; (iii) vary by the Supported Token protocol; and
(iv) be further detailed in your Kraken Account.  You agree and understand
that neither Payward Trading nor Kraken guarantees that you will
receive Staking Rewards and that the applicable percentage (i) is an
estimate only and not guaranteed, (ii) may change at any time in Payward
Trading’s sole discretion, and (iii) may be more or less than the actual
staking rewards Payward Trading receives from the Supported Token
protocol.
(emphasis in original).

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47. While information about fees, margin, and node success rates are generally
available via the underlying protocol itself (or from third-parties), Defendants do not disclose
their fees or operating costs for the Kraken Staking Program.  Defendants tell investors that
their “fee can vary based on the rewards that we earn on behalf of our clients each month.
The important point to remember is that our fixed rewards are net of any fees that we charge.”
Frequent, Regular Payouts
48. Defendants also promise regular investment payouts for most staked tokens—
typically weekly or twice per week—that deviate from the way rewards are distributed by the
underlying staking protocol.  In this regard, Defendants advertise that they have “taken the
initiative to smooth this revenue stream for our clients by enabling predictable pay-outs as
part of our staking services.”  For example, regarding staking for certain crypto assets,
Kraken’s blog states, “Payouts happen twice a week – every Monday and Thursday at 14:00
UTC [...] among the fastest in the industry.”
Liquidity and Immediate Rewards
49. Defendants emphasize that investors in the Kraken Staking Program, with
limited exceptions, are not subject to bonding and unbonding periods as they would be if they
staked these crypto assets directly with most underlying staking protocols.  In other words,
unlike staking-on-your-own, investors in the Kraken Staking Program are promised enhanced
liquidity and immediate rewards.  A 2020 Kraken blog post states: “Unlike other staking
services, you start earning rewards within minutes of staking your funds,” highlighting an
investor’s “flexibility to instantly unstake and trade your funds [on Kraken’s trading
platform].”  Kraken’s website provides:
Unlike other staking services, at Kraken there is no minimum
On-chain staking time needed to earn rewards.  You start earning
pro-rated rewards for On-chain staking as soon as your
instructions to stake are processed by Kraken (which may be
within minutes of you staking your funds).

For example, if you utilized On-chain staking for a few hours
and then un-staked your funds, you would still be credited pro-
rated rewards on the next payout day.  In contrast, on other
services you would not receive anything.  Unlike other staking

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services we also have no bonding and unbonding period for On-
chain staking (other than ETH2).
50. In effect, Defendants are advertising that they will pay rewards to investors
during the period between when the investor transfers his or her assets to the Kraken Staking
Program and when the investor demands to receive his or her crypto assets back from the
Program.  Defendants promise that the Staking Program will begin paying rewards (returns)
when investors transfer their crypto assets to the Program, regardless of a blockchain
protocol’s bonding period, and promise immediately to return investors’ crypto assets even if
the tokens used by Defendants and staked with a protocol actually remain locked and
unavailable for the unbonding period.
Not All Tokens Staked
51. Defendants claim that they are able to offer instant liquidity (regardless of the
unbonding period) because the pooled tokens are fungible and, according to them, Defendants
do not actually stake every investor token transferred to them.  For many of these crypto
assets, Defendants state that they hold back a subset of tokens as a “liquidity reserve.”
52. However, Defendants do not disclose the extent of these “unstaked” tokens and
how they are used.  Investors accordingly have no way of analyzing whether Kraken actually
can meet all requests for instant liquidity through these reserves or otherwise.  In other words,
given the limited disclosure regarding the Kraken Staking Program, Defendants do not
provide sufficient information to demonstrate that they, at all times, maintain a token reserve
that is adequate to honor the Program’s “no unbonding period” and “instant unstaking”
representations should multiple investors with large staking positions seek to redeem those
positions at the same time.
53. Defendants are under no obligation to segregate the crypto assets that investors
transfer to them in exchange for the advertised return (marketed as being from proof of stake
activities).  Defendants can account for these transfers by rebalancing their internal ledger.
54. Moreover, Defendants do not disclose the extent to which Defendants
commingle “unstaked” tokens with Defendants’ other assets or business endeavors.  Nor do

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Defendants disclose the true source of the returns paid to investors to the extent rewards are
paid with respect to “unstaked” tokens.
Not Directly Subject To Transaction And
 Deposit Fees, Or Minimum Staking Thresholds
55. Certain underlying staking protocols impose upfront transaction fees for
staking and unstaking, as well as require a refundable deposit above the amount of staked
tokens.
56. Investors in the Kraken Staking Program are not directly subject to these fees
as they do not actually participate in the staking protocols directly, and no initial deposits are
required.  However, the amount of return that investors receive may be reduced by
Defendants based on these and other fees and expenses.  Defendants are not required to verify
the amount of rewards received, nor verify the amount of any fees charged to Defendants
when participating in the staking protocols, or otherwise.
57. In addition, staking protocols generally require a certain threshold number of
tokens to be able to participate in staking.  The Kraken Staking Program does not require that
investors commit any minimum threshold of tokens to participate in the Program.
Purportedly Safe, Easy-To-Use Platform
58. Kraken offers a simplified user interface.  Kraken’s blog states: “Token
holders have previously had little choice other than to stake tokens themselves, something that
requires technical understanding.”  The FAQs state: “Couldn’t I Stake Myself for Free?
While you are certainly able to stake yourself, that process can be complex[.]”  Another blog
entry states: “Instead of needing to purchase special equipment to compete for newly minted
network tokens, users are instead able to stake their funds in Kraken’s stake pool.”
59. Kraken also advertises the supposed security of the platform.  It touts that its
“team of experts have built in a number of sophisticated measures to prevent theft of funds,
NFTs or information.  Theft isn’t the only threat of course.  As a professional exchange we
offer financial stability, with full reserves, healthy banking relationships and the highest
standards of legal compliance.”

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60. Kraken further states that it has “assembled a global team of top security
professionals who take a risk-based approach to ensuring our clients’ assets are protected at
the highest levels while maintaining exceptional performance and an unparalleled client
experience.  Our team has decades of experience building security programs for the world’s
top brands, investigating the largest consumer data breaches, developing security technology
trusted by millions of businesses and discovering vulnerabilities in the technology used by
billions of people every day.”
61. Defendants also tout that they are trustworthy.  A November 10, 2022 blog
post on Kraken.com titled, “How Kraken Continues to Lead the way in Transparency and
Trust” states, in part:
[W]e are proud to say that Kraken has long taken the lead when it
comes to transparency.  In fact, we pioneered the use of regular asset
audits in 2014 and hired [an accounting firm] to produce two Proof of
Reserve audits over the past year alone.  These cryptographic audits are
more precise and immutable than any other form of financial statement
and we are one of the first exchanges to perform them regularly.

Proof of Reserve audits cryptographically prove that we hold the assets
we say we hold on your behalf.  While this process is almost
impossible for traditional financial institutions to conduct, the open and
transparent properties of cryptocurrencies enable us to produce these
precise audits regularly.
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62. A November 18, 2022 blog post on Kraken.com similarly states: “Kraken
offers a comprehensive approach to Proof of Reserves that verifies not just reserves, but also
liabilities.  Cryptographically proving that we hold our clients’ covered assets in reserve at the
time of an audit is only half the battle.  Kraken’s Proof of Reserves also includes covered
liabilities (i.e., tokens in client accounts).”  However, Defendants also describe the limitations
of the purported audit, including that it “cannot identify any hidden encumbrances or prove

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  Proof of reserves is a term crypto asset participants use to describe a voluntary method
for offering evidence that shows, in the aggregate, an entity has sufficient reserve assets to
cover what is held for customers and/or accounts at a given point in time.  A proof of reserves
engagement is not as rigorous as, as comprehensive as, or equivalent to a financial statement
audit and may not provide any level of assurance to investors other than a snapshot of reserve
assets at a specific point in time.

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that funds had not been borrowed for purposes of passing the audit.”  In other words, the
“proof of reserves” audit is akin to a balance sheet that lists assets but not every liability;
proof of reserves may not offer investor protection in this scenario.
B. Defendants Market The Kraken Staking Program As An Investment
Opportunity
63. Defendants tout the Kraken Staking Program as an investment opportunity on
the kraken.com website, in social media, and in mass emails to existing customers.
64. For example, Defendants market the possibility of profits through an expected
rate of investment return.  The kraken.com website, imaged below, states that investors can
“Earn up to 21% yearly on your crypto”:

65. Defendants historically have put forward marketing materials advertising the
investor return from the Kraken Staking Program, including:
 “At 6% compounded annually, we offer the highest fixed-rate returns in the
industry.”
 “Enjoy one of the highest returns in the industry (12% for DOT and 7% for
ATOM).”
 “Last year, we paid out over $27 million in token staking rewards ... Want to
earn up to 20% a year staking crypto assets?”

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 “Staking is a great way to maximize your holdings in staking coins and fiat
that would otherwise be sitting in your Kraken account. Once you have staked
your assets you can earn staking rewards on top of your holdings and grow
them further by compounding those future rewards.”
 “Your rewards will be compounded with the Grow Rewards feature, which
adds your earned rewards every week back into On-chain staking. This means
if you continue to leave your funds staked you may earn more than the RPY
percent.”
C. The Kraken Staking Program Has Generated Tens Of Millions Of Dollars
In Investment Returns
66. Throughout the relevant period, Defendants have offered the Kraken Staking
Program to all U.S. residents except New York and Washington State residents.  These U.S.
residents have been able to “stake” fifteen different crypto assets through the Kraken Staking
Program, summarized in the table below:

Protocol Name Token Name
Approximate Date Available
for Kraken Staking Program
Cardano ADA May 4, 2021
Algorand                   ALGO                    October                   22,                   2021
Cosmos ATOM August 17, 2020
Polkadot DOT August 17, 2020
Ethereum ETH December 3, 2020
Flow                          FLOW                          October                          18,                          2021
Kava KAVA December 14, 2020
Kusama KSM November 23, 2020
Luna LUNA March 8, 2022 – May 28, 2022
Mina                          MINA                          January                          18,                          2022
Secret SCRT March 29, 2022
Solana SOL July 1, 2021
Tron                           TRX                           January                           28,                           2022
Tezos XTZ December 11, 2019
Polygon MATIC June 29, 2022
Supported Crypto Assets for U.S. Investors
67. As of June 2022, there were more than 135,000 unique U.S.-based usernames
investing in the Kraken Staking Program.

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68. Since launching the Kraken Staking Program in December 2019 and through
mid-2022, U.S. investors had staked over $2.7 billion worth of crypto assets in the Kraken
Staking Program.  Kraken has earned at least $147 million as net revenue throughout the life
of the Program, of which at least $45.2 million is attributable to U.S. investors.  Defendants’
net income attributable to U.S. investors in the Staking Program is $14.95 million.  According
to Kraken’s 2021 Annual Shareholder Update, “Staking was Kraken’s fastest growing product
in 2021 and accounted for more than one-third of Kraken’s gross revenue growth.”  As also
stated in the same Update: “As we continue to support new staking assets and offer highly
attractive rewards, clients are incentivized to keep more assets on platform, increasing the
amount of capital available for clients to exchange between assets, driving volume growth and
promoting client stickiness.”
II. THE KRAKEN STAKING PROGRAM IS OFFERED AND SOLD AS A
SECURITY
69. At all relevant times, the Kraken Staking Program was offered and sold as an
investment contract and therefore a security whose offers and sales were subject to the
registration requirements of the federal securities laws.
A. Participants In The Kraken Staking Program Invest Money
70. Defendants’ offer and sale of the Kraken Staking Program involves an
investment of money.  Under the Howey framework, an investment of “money” may but need
not take the form of fiat currency.  Here, investors purchase crypto assets from Defendants
(with fiat or crypto assets) and then transfer them to the Defendants’ Kraken Staking
Program; alternatively, investors transfer their own crypto assets to Defendants for staking.
71. Investors put their crypto assets at risk as part of the Kraken Staking Program.
Defendants have control over all the crypto assets invested in the Kraken Staking Program
and choose when and how to use them.  (As explained above, Defendants do not actually
stake all crypto assets received from investors.)  Moreover, according to the Kraken Terms of
Service, these crypto assets may be encumbered by Kraken’s creditors.  In addition, to the

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extent that an investor’s crypto assets actually are staked to the underlying blockchain
protocol, those assets are at risk of being slashed.
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72. Investors also have liquidity and market risk.  Defendants market the Kraken
Staking Program’s advantage of “instant unbonding” and instant return of “staked” crypto
assets.  But, as noted above, Defendants do not disclose the extent of their crypto-asset
reserves and whether these reserves are sufficient to meet all redemption demands.  If these
reserves are insufficient, Kraken may be unable to honor a redemption request in a timely
fashion, if at all.  Investors could suffer market losses if the value of their crypto assets
declines while waiting for redemption.
B. Investors And Defendants Participate In A Common Enterprise
73. Investors in the Kraken Staking Program participate in a common enterprise
with other investors and with Defendants.
74. Investor tokens are transferred and pooled in wallets for the purposes of the
Kraken Staking Program, and Defendants determine when and how many of these pooled
tokens to stake.  During this time, and for as long as the investor chooses to stake his or her
tokens, investors receive a pre-calculated payout from Defendants.  Defendants market that
these payouts are distributed pro rata to investors depending on the amount of tokens they
have staked (i.e., Defendants advertise a fixed return for all investors).  Defendants do not
segregate or separately manage an individual investor’s crypto assets as part of the Kraken
Staking Program.
75. The fortunes of investors and Defendants also are tied together in this common
enterprise.  For example, as explained above, the larger the pool of assets for staking, the
higher the likelihood of obtaining rewards, which inures to the benefit of all investors and
Defendants.

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  Per Kraken’s Terms of Service, Defendants will compensate investors for some, but
not all, “slashing penalties.”  For example, Defendants disclaim any obligation to compensate
investors for slashed tokens if the tokens are slashed because of protocol “maintenance, bugs,
or errors,” acts by a hacker or other malicious actor, or force majeure events.

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76. In addition, the revenues and profits that Defendants stand to receive (i.e., the
portion of the staking rewards that Defendants keep for themselves and use to fund their
operations) grow as more investors participate in the Kraken Staking Program and purchase
tokens on Kraken’s trading platform to stake.  All rewards generated from the Kraken Staking
Program also flow directly to Defendants, who determine whether and how many tokens in
the pool to stake, and how often (and how much in rewards) to pay investors.  If the pools are
more successful in generating returns than Kraken’s advertised reward rates, Defendants
retain the difference.  Further, Defendants contribute their own tokens to the pool of tokens
contributed by investors to the Kraken Staking Program when they engage in proof of stake
activities.
C. Investors Reasonably Expect To Profit From The Efforts Of Defendants
77. Investors in the Kraken Staking Program reasonably expect to profit from
Defendants’ efforts.
78. From its inception, Defendants have marketed the Kraken Staking Program as
an investment opportunity.  As detailed above, through the kraken.com website, a Kraken
blog, and social media channels, Defendants have promoted the Kraken Staking Program as a
way for investors to earn a high investment return—“the highest fixed-rate returns in the
industry.”
79. Defendants also market the advantages of the Kraken Staking Program over
staking independently.  According to Defendants, these advantages include simplifying a
complex staking process with an easy-to-use interface in a secure and trustworthy
environment operated by technical experts.
80. Investors are led to expect that Defendants will expend efforts to generate the
investment returns.  For example, Defendants advertise that they have the technical ability and
expertise to stake crypto assets, to undertake strategies about when and how to stake crypto
assets, and to obtain and manage the regular and frequent reward payouts.  Defendants’
efforts are essential to the success or failure of the enterprise.

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81. Moreover, because Defendants advertise that Defendants will retain a portion
of the staking rewards, investors are reasonably led to expect that Defendants have strong
financial incentives to engage in the efforts required to make the enterprise successful.
82. Defendants’ statements and actions, and the economic reality of the
arrangements with respect to the Kraken Staking Program, have led and will continue to lead
reasonable investors to expect Defendants to undertake significant and essential technical,
managerial, and entrepreneurial efforts.
III. DEFENDANTS HAVE FAILED TO REGISTER THE OFFERS AND SALES
OF THE KRAKEN STAKING PROGRAM WITH THE COMMISSION
83. Defendants have used interstate commerce to offer and sell the Kraken Staking
Program by, among other things, engaging in general solicitation through the kraken.com
website and other promotional materials, including emails and social media.
84. Defendants have never had a registration statement filed or in effect with the
SEC for their offers and sales of the Kraken Staking Program.  No exemption from
registration applied or applies.
85. Defendants’ public disclosures have contained selective or no information
about Defendants’ financial history, audited financial statements, management discussion and
analysis of financial condition and results of operations, and ability to generate profits.
Investors in the Kraken Staking Program also have not received information about
Defendants’ operations, financial condition, liabilities, or other factors relevant in considering
whether to invest in the Kraken Staking Program.  Investors further have lacked full and
detailed information regarding how Defendants use reserves to meet redemptive requests
(including whether there are segregated reserves and the extent of those reserves) and have
been deprived of information about the staking rewards that Defendants keep for themselves.
For example, Defendants do not disclose fees and expenses related to the Kraken Staking
Program.  Nor do Defendants disclose what they do with “unstaked” tokens, the extent to
which Defendants are staking investor tokens, whether Defendants are lending, borrowing,
trading, or otherwise alienating investor tokens into some enterprise other than staking

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protocols, whether and to what extent Defendants are commingling “unstaked” tokens with
other assets, the source of rewards paid to investors particularly with respect to “unstaked”
tokens, and sufficient information for investors to otherwise determine whether they are
receiving a fair share of staking rewards from Defendants.
CLAIM FOR RELIEF
Violations of Sections 5(a) and 5(c) of the Securities Act
86. The Commission realleges and incorporates by reference herein the allegations
in paragraphs 1 through 85.
87. By virtue of the foregoing, Defendants, directly and indirectly: (a) without a
registration statement in effect as to that security, made use of the means and instruments of
transportation or communications in interstate commerce or of the mails to sell securities
through the use or medium of any prospectus or otherwise, (b) without a registration
statement in effect as to that security, carried or caused to be carried through the mails or in
interstate commerce, by any means or instruments of transportation, any such security for the
purpose of sale or for delivery after sale, and (c) made use of the means and instruments of
transportation or communication in interstate commerce or of the mails to offer to sell through
the use or medium of a prospectus or otherwise, securities as to which no registration
statement had been filed.
88. By reason of the conduct described above, Defendants, directly or indirectly,
violated, are violating, and, unless enjoined, will continue to violate Securities Act Sections
5(a) and 5(c) [15 U.S.C. §§ 77e(a), (c)].
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that the Court enter a Final
Judgment:
I.
Permanently enjoining Defendants, and each of their respective agents, servants,
employees, attorneys and other persons in active concert or participation with each of them,

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from violating, directly or indirectly, Sections 5(a) and 5(c) of the Securities Act
[15 U.S.C. § 77e(a), 77e(c)];
II.
Permanently enjoining Defendants and any entity controlled by them from, directly or
indirectly, offering or selling securities through crypto asset staking services or staking
programs, pursuant to Section 21(d)(5) of the Exchange Act [15 U.S.C. § 78u(d)(5)];
III.
Ordering Defendants to disgorge all ill-gotten gains, with prejudgment interest
thereon, pursuant to Section 21(d)(3), (5) and (7) of the Exchange Act [15 U.S.C. § 78u(d)(3),
(5) and (7)];
IV.
Ordering Defendants to pay civil money penalties pursuant to Section 20(d) of the
Securities Act [15 U.S.C. § 77t(d)]; and
V.
 Granting any other and further relief this Court may deem just and proper for the
benefit of investors.

JURY DEMAND
 The Commission demands a trial by jury.

Dated:    February 9, 2023   By: /s/ Eugene N. Hansen
David Hirsch
Jorge Tenreiro
James Connor
Eugene Hansen
SECURITIES AND EXCHANGE
COMMISSION
100 F Street NE
Washington, DC 20549
(202) 551-6091 (Hansen)
Email: [email protected]

Attorneys for Plaintiff

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Of counsel:

Paul Kim
Laura D’Allaird
Elizabeth Goody

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COMPLAINT   

 
 
David Hirsch ([email protected])  
Jorge Tenreiro ([email protected]) 
James Connor ([email protected]) 
Eugene Hansen (Trial Counsel) (DC Bar No. 483638) 
([email protected]) 
 
Attorneys for Plaintiff 
SECURITIES AND EXCHANGE COMMISSION 
100 F Street, N.E. 
Washington, DC 20549-4030 
Telephone:  (202) 551-6091 (Hansen) 
Facsimile:  (202) 772-9282 (Hansen) 
 

SECURITIES AND EXCHANGE COMMISSION, 

  Plaintiff, 

 v. 

PAYWARD VENTURES, INC. (D/B/A KRAKEN); 

and  

PAYWARD TRADING, LTD. (D/B/A KRAKEN), 

  Defendants. 
 

 
 
 
Case No. 23-cv-588 
 
 
 
COMPLAINT AND 
DEMAND FOR JURY TRIAL 
 

 
 
  

 

 

Plaintiff Securities and Exchange Commission (the “SEC” or “Commission”), for its 

Complaint against Defendants Payward Ventures, Inc. d/b/a Kraken and Payward Trading, 

Ltd. d/b/a Kraken (collectively “Defendants” or “Kraken”), alleges as follows:  

SUMMARY 

1. This case concerns the illegal unregistered offer and sale of securities 

involving the staking of crypto assets.1  In particular, Defendants have offered and sold an 

investment contract to the general public, including United States investors, whereby 
                     
1  As used in this Complaint, “crypto asset” refers to an asset that is issued and/or 
transferred using distributed ledger or blockchain technology—including, but not limited to, 
so-called “digital assets,” “virtual currencies,” “cryptocurrencies,” “coins,” and “tokens.” 

UNITED STATES DISTRICT COURT 

NORTHERN DISTRICT OF CALIFORNIA 

SAN FRANCISCO DIVISION 
 

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investors transfer certain crypto assets to Kraken for “staking” in exchange for advertised 

annual investment returns of as much as 21% (the “Kraken Staking Program” or “Program”).   

2. “Staking” concerns the “proof of stake” validation protocols that certain 

blockchains utilize.  These protocols offer rewards to those who “validate”—or confirm— 

transactions on the blockchain.  To become a validator and obtain such rewards, holders of 

crypto assets must first “stake”—or commit—crypto assets (typically, the “native” crypto 

asset on a particular blockchain such as Ethereum (ETH), Cardano (ADA), Polkadot (DOT), 

and Cosmos (ATOM)).  Validators are selected based on the size of their stake, among other 

factors, creating an incentive to stake, or commit, greater quantities of crypto assets.  The 

protocols incentivize validators to add legitimate transactions to the blockchain because 

validators are rewarded if they do and could be penalized if they do not, including by having 

the staked crypto assets “slashed” (or destroyed).   

3. The Kraken Staking Program is an investment program created by Defendants 

that aggregates investors’ crypto assets to enable Kraken to stake these pooled investor assets 

and achieve a competitive advantage in the staking marketplace.  Through this pooling of 

crypto assets and Defendants’ efforts, the Kraken Staking Program purports to offer investors 

benefits that are not available to investors who stake on their own.  Among other things, 

Defendants advertise regular investment returns and payouts, no staking minimums, their 

technical expertise in staking, and an easy-to-use platform created by Defendants.  In 

addition, Defendants offer investors instant rewards accrual and the ability instantly to 

unstake (essentially, to take back the assets immediately). 

4. Defendants market the Kraken Staking Program by touting specified 

investment returns for certain staking-eligible crypto assets on the kraken.com website, on 

social media channels, and through advertisement emails.  Defendants determine these 

returns, not the underlying blockchain protocols, and the returns are not necessarily dependent 

on the actual returns that Kraken receives from staking.  If interested in obtaining these 

returns, investors can transfer eligible crypto assets to the Program, including by first 

purchasing the tokens from Kraken’s trading platform for the market price of the token plus a 

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fee or transferring the eligible crypto assets obtained elsewhere to Kraken.  Defendants pool 

these tokens, designating some for staking and some purportedly as a liquidity reserve.  

Investors lose possession and control over their crypto assets when they transfer those assets 

to Defendants and accordingly take on risks associated with the Kraken platform. 

5. Pooling and retaining control over the tokens potentially reduces Defendants’ 

transaction costs and risks and, in the case of tokens actually staked by Defendants to proof of 

stake protocols, increases the likelihood that Defendants will be selected to validate 

blockchain transactions and therefore earn rewards, and provides smoother, more reliable 

rewards.  Defendants advertise that their significant efforts, discussed in more detail below, 

provide investors with constant and regular returns (called “rewards”), more so than investors 

could achieve if they tried to implement a staking strategy on their own without the benefit of 

Defendants’ scale and expertise. 

6. By April 2022, U.S. investors had over $2.7 billion worth of crypto assets 

invested in the Kraken Staking Program.  Kraken has earned approximately $147 million in 

net revenue from the Program since its commencement, and a substantial portion of this net 

revenue—more than $45 million—is attributable to crypto assets obtained from U.S. 

investors.  By June 2022, more than 135,000 unique U.S.-based usernames had transferred 

crypto assets to participate in the Kraken Staking Program.   

7. Through the Kraken Staking Program, Defendants have offered and sold 

investment contracts without registering the offer or sales with the SEC as required by the 

federal securities laws, and no exemption from the registration requirement applied.  The 

absence of any registration statement means that investors have lacked material information 

about the Kraken Staking Program.  Missing material information includes, but is not limited 

to, the business and financial condition of Defendants, the fees charged by Defendants, the 

extent of Defendants’ profits, and specific and detailed risks of the investment, including how 

Defendants determine to stake investor tokens or purportedly hold them in reserve and the 

extent of these purported liquidity reserves, or whether tokens are put to some other use.  

Investors have had no insight into Defendants’ financial condition and whether Defendants 

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have the means of paying the marketed returns—and indeed, per the Kraken Terms of 

Service, Defendants retain the right not to pay any investor return.  Defendants have disclosed 

only the information that they wish, not the information required by law.   

8. Defendants continue to offer and sell the Kraken Staking Program without any 

registration statement, meaning that, until the illegal offering is enjoined, investors will 

continue to bear the substantial risk resulting from Defendants’ violations of the federal 

securities laws. 

VIOLATIONS 

9. By engaging in the conduct set forth in this Complaint, Defendants engaged in 

and are currently engaging in the unlawful offer and sale of securities in violation of Sections 

5(a) and 5(c) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. §§ 77e(a) and 

77e(c)]. 

10. Unless Defendants are permanently restrained and enjoined, they will continue 

to engage in the acts, practices, and courses of business set forth in this Complaint and in acts, 

practices, and courses of business of similar type and object. 

NATURE OF THE PROCEEDING AND RELIEF SOUGHT 

11. The Commission brings this action pursuant to the authority conferred upon it 

by Section 20 of the Securities Act [15 U.S.C. § 77t]. 

12. The Commission seeks a final judgment: (a) permanently enjoining Defendants 

from violating Sections 5(a) and 5(c) of the Securities Act; (b) permanently enjoining 

Defendants and any entity controlled by them from, directly or indirectly, offering or selling 

securities through crypto asset staking services or staking programs; (c) ordering Defendants 

to disgorge their ill-gotten gains and to pay prejudgment interest thereon pursuant to Section 

21(d)(3), (5) and (7) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C.  

§ 78u(d)(3), (5) and (7)]; and (d) imposing civil money penalties on Defendants pursuant to 

Section 20(d) of the Securities Act [15 U.S.C § 77t(d)].   

 

 

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JURISDICTION AND VENUE 

13. This Court has jurisdiction over this action pursuant to Section 22(a) of the 

Securities Act [15 U.S.C. § 77v(a)].  Defendants, directly or indirectly, have made use of the 

means or instruments of transportation or communication in interstate commerce or of the 

mails in connection with the transactions, acts, practices, and courses of business alleged 

herein.   

14. Venue is proper in this District pursuant to Section 22(a) of the Securities Act 

[15 U.S.C. § 77v(a)].  Defendants marketed and offered the Kraken Staking Program to 

residents of this District, including through the kraken.com website and social media, and, 

according to a filing made with the California Secretary of State, Defendant Payward 

Ventures, Inc. has its principal address in this District.   

INTRADISTRICT ASSIGNMENT 

15. Pursuant to Civil Local Rule 3-2(d), the case properly is assigned to the San 

Francisco Division because, according to records filed with the California Secretary of State, 

Defendant Payward Ventures, Inc. has its principal address in San Francisco, California, and a 

substantial part of the events and omissions giving rise to the violations occurred in San 

Francisco County. 

DEFENDANTS 

16. Payward Ventures, Inc., d/b/a Kraken (“Ventures”), is a Delaware 

corporation, and, according to records filed with the California Secretary of State, has a 

principal address of 237 Kearny St., #102, San Francisco, California, 94108.  Ventures 

operates Kraken’s online crypto asset trading platform.  From its inception until October 

2021, Ventures also offered and managed the Kraken Staking Program to U.S. investors, per 

the Kraken Terms of Service.  Since the Staking Program’s inception, Ventures has 

maintained the wallets and private keys associated with the Kraken Staking Program.    

17. Payward Trading, Ltd. d/b/a Kraken (“Trading”) is a corporation 

registered in the British Virgin Islands.  Trading has offered and managed the Kraken Staking 

Program to U.S. investors since October 2021, per the Kraken Terms of Service.  Trading is a 

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wholly-owned subsidiary of Seven Cities Pte Ltd., a corporation registered in Singapore; 

Seven Cities Pte Ltd., in turn, is a wholly-owned subsidiary of Payward, Inc., which is also 

the parent company of Ventures. 

RELATED ENTITY 

18. Payward, Inc. (“Payward”) is a Delaware corporation, and, according to 

records filed with the California Secretary of State, has a principal address of 237 Kearny St., 

#102, San Francisco, California 94108.  Payward is the corporate parent of Ventures and 

Trading.   

STATUTORY AND LEGAL FRAMEWORK 

19. The Securities Act sets forth a regime of full and fair disclosure, in contrast to 

traditional commercial principles of caveat emptor.  Congress mandated that persons who 

offer and sell securities to the investing public provide sufficient, accurate information to 

allow investors to make informed decisions before they invest.   

20. The definition of a “security” under the Securities Act includes a wide range of 

investment vehicles, including “investment contracts.”  Investment contracts are instruments 

through which a person invests money in a common enterprise and reasonably expects profits 

or returns derived from the entrepreneurial or managerial efforts of others.  SEC v. W.J. 

Howey Co., 328 U.S. 293, 299 (1946).  Courts have found that novel or unique investment 

vehicles constitute investment contracts, including interests in orange groves, animal breeding 

programs, railroads, mobile phones, and enterprises that exist only on the Internet, including 

crypto assets.   

21. Sections 5(a) and 5(c) of the Securities Act require that issuers of securities 

register the offer or sale of securities with the SEC, unless an exemption applies.  Similarly, 

those provisions prohibit engaging in the unregistered offer and sale of such securities. 

Registration statements relating to the offer and sale of securities provide public investors 

with material information about the issuer and the offering, including financial and 

managerial information, how the issuer will use offering proceeds, and the risks and trends 

that affect the enterprise and an investment in its securities.  

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BACKGROUND ON CRYPTO ASSETS AND STAKING 

22. The term “crypto asset” generally refers to an asset issued and/or transferred 

using distributed ledger or blockchain technology, including assets sometimes referred to as 

“cryptocurrencies,” digital “coins,” and digital “tokens.”   

23. A blockchain or distributed ledger is a peer-to-peer database spread across a 

network of computers that records all transactions in theoretically unchangeable, digitally-

recorded data packages.  The system relies on cryptographic techniques for secure recording 

of transactions. 

24. People can own crypto assets and hold them at a blockchain address under 

their control.  Typically, someone controls an address—and the crypto assets held at that 

address—with a private cryptographic key for that address.  Anyone with that private key can 

sign and submit a transaction to the blockchain that will transfer the crypto assets at that 

address to another address.  Typically, in a single blockchain address, people can hold 

multiple types of crypto assets.   

25. Individuals often control multiple blockchain addresses and store their private 

keys for those addresses in software called a “wallet.”  A “wallet” allows them to manage 

their crypto assets and key information and to communicate with a blockchain.  People also 

can own crypto assets by opening an account on a trading platform (like the Kraken trading 

platform) and then transferring their crypto assets from their own blockchain address to an 

address controlled by the trading platform. 

26. Crypto assets may be traded on crypto asset trading platforms in exchange for 

other crypto assets or fiat currency (legal tender issued by a country), at times by being 

allocated to investors’ accounts in the records of the platform (i.e., “off-chain”), without 

necessarily being transferred from one blockchain address to another (i.e., “on-chain”).  

Crypto asset trading platforms typically receive a fee for facilitating such trades.   

27. Blockchains typically employ a consensus mechanism to “validate” crypto 

asset transactions.  A consensus mechanism describes the particular protocol used by a 

blockchain to agree on which transactions are valid, to update the blockchain, and to 

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compensate certain participants with additional crypto assets.  There can be multiple sources 

for the compensation, including from fees charged to those transacting on the blockchain or 

from new crypto assets created or “mined” by the validation of transactions, under the terms 

of the blockchain protocol.  Compensation in the form of newly issued crypto assets may 

dilute the value of the existing tokens. 

28. Validators who participate in confirming transactions on blockchains may 

collect fees to participate in the validation of transactions. 

29. The consensus mechanism typically is a set of rules followed by the validator 

nodes, or computers on a blockchain’s network running the blockchain protocol that are able 

to validate transactions.  “Proof of work” and “proof of stake” describe the two major 

“consensus mechanisms” used by blockchains.     

30.  Proof of work, such as in the protocol used by the Bitcoin blockchain, 

involves computers, or validator nodes, attempting to “mine” a “block” of transactions, in 

part, by guessing a pre-determined number.  The first miner to successfully guess this number 

earns the right to update the blockchain and to be rewarded with crypto assets.  This mining 

process typically requires a large amount of computing power and energy.   

31. Proof of stake, used by blockchains such as the Cardano (ADA), Ethereum 

(ETH), Polkadot (DOT), and Cosmos (ATOM) blockchains, involves the protocol selecting 

from crypto asset holders who have committed or “staked” a minimum number of tokens to 

validate transactions.  Typically, users can stake their own crypto assets, or they can delegate 

their crypto assets to a particular node for that node to use them in staking.  Nodes often act as 

“staking pools” when others designate their crypto assets to that node for staking of their 

tokens.  A person or entity operating a node is called a “node operator.”   

32. In general, the greater portion of crypto assets staked by an individual or group 

relative to all the staked tokens, the more likely that holder is to be selected as a validator and 

earn the ability to receive the staking rewards.  Thus, the most successful staking operations 

are those that maximize the chances of being selected by the protocol, and thus being 

rewarded with more crypto assets—typically by staking a large number of tokens and 

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minimizing server downtime.   In addition, for some crypto assets, the probability of being 

selected as validator increases when a node operator delegates its own tokens for staking 

alongside its customers.   

33. Typically, crypto assets are unavailable for trading or other purposes when 

staked, while protocols will automatically distribute a portion of the crypto asset rewards to 

the successful node operator.  To encourage more nodes to participate in validation, protocols 

typically cap rewards once the nodes reach a certain size.  As the cap is approached, node 

operators can start an additional node. 

34. The “staking” of crypto assets is meant to incentivize good faith and honest 

validation of transactions, as staked tokens may be “slashed” (or destroyed), and no rewards 

will be paid, if transactions are not validated appropriately.  Typically, the protocol rewards 

the selected validator with additional crypto assets only if the validator successfully and 

correctly validates a new block on the chain.   

35. Another component of certain proof of stake protocols is known as the 

“bonding”/“unbonding” period.  The bonding period is a length of time set by the protocol for 

a crypto asset to be staked by a validator in order to begin earning rewards.  The unbonding 

period is a length of time set by the protocol to release staked crypto assets back to the 

validator.  In certain cases, a bonding period may mean that it can take weeks before a crypto 

asset validator can begin earning rewards.  The unbonding period can mean it can take weeks 

for a crypto asset validator to unbond tokens (release them from staking) and potentially do 

something else with them, such as trade them for other crypto assets or exchange them for 

fiat.  During the time the crypto assets are bonded, the crypto asset owners are unable to 

transact in them, for example, to react to market price fluctuations of the tokens. 

36. Certain protocols charge crypto asset validators fees to stake and unstake 

tokens, require an upfront refundable deposit in addition to the tokens staked, and/or require 

the delegation of a minimum amount of tokens to participate in staking. 

 

 

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FACTS 

I. THE KRAKEN STAKING PROGRAM   

37. In December 2019, Kraken launched its Staking Program as a means to 

participate in, and profit from, the “proof of stake” consensus mechanism of certain 

blockchains, by obtaining investors’ crypto assets, pooling those assets, and then staking some 

portion of those assets in order to obtain rewards, a portion of which Kraken distributes to the 

investors and a portion of which Kraken retains.     

38. Kraken advertises that the Program offers investors worldwide, including most 

U.S. investors, an investment opportunity to participate in proof of stake consensus and 

receive benefits that may not be available to those investors if they staked on their own.  For 

example, Defendants’ Program offers to investors no staking minimums, no upfront fees or 

deposits, purported industry-leading cybersecurity protections, a simplified and easy-to-use 

one-stop-shop trading platform, and the ability, through Kraken’s efforts, to obtain returns 

based on Kraken’s participation in proof of stake activities for different types of tokens.  In 

addition, for most of the Kraken Staking Program’s staking-eligible crypto assets, the 

Program also offers investors instant reward accrual, the ability to instantly “unstake” (i.e., to 

demand the immediate return of crypto assets and not have to comply with unbonding periods 

that would apply if the investor participated directly), automatic weekly or twice-weekly 

payout dates, and custom and steady returns with promised minimum returns. 

A. Defendants’ Efforts Result In Unique Benefits To Investors In The 

Kraken Staking Program 

39. The Kraken Staking Program has several features that differentiate it from 

staking and earning rewards on your own. 

Passive Investment Opportunity 

40. The Kraken Staking Program is a passive investment opportunity.  To 

participate, investors need only establish an account at kraken.com and purchase staking-

eligible tokens from the kraken.com trading platform (for a fee), or transfer their existing 

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staking-eligible tokens to a kraken.com account.  Investors then sign-up for the Kraken 

Staking Program and transfer their crypto assets to the possession and control of Defendants.2     

41. Defendants then perform all of the efforts necessary and expected by the 

investors to obtain the advertised and promised investment return.  These efforts include: 

 Determining how many tokens to actually stake (see infra, ¶¶ 51-54); 

 Determining how many tokens to reserve in order to provide “instant 

unstaking” and liquidity for investors (see infra, ¶¶ 49-52); 

 Staking investor tokens, operating the nodes, and validating blockchain 

transactions in order to obtain rewards;   

 Determining the pro rata investor return (see infra, ¶¶ 44-48); 

 Distributing those investor returns; 

 Providing a user-friendly, one-stop-shop investor interface  (see infra, ¶ 58); 

and 

 Taking further steps as detailed below. 

Pooling of Crypto Assets 

42. Defendants control and pool crypto assets invested in the Kraken Staking 

Program together with their own proprietary tokens in wallets controlled by Defendants.  

They then determine when and how many of these pooled tokens to stake in the underlying 

protocol.       

43. The pooling of tokens, and the correspondingly larger number of tokens to be 

staked in the proof of stake protocols, increases the probability that the blockchain protocol 

will select Defendants to validate transactions and earn rewards and provides smoother, more 

reliable rewards.  According to a Kraken Blog Post dated December 8, 2020:  “As staking via 

Kraken pools client tokens together, it improves the chances that they will be selected to 

verify transactions, thereby increasing potential payouts.”  

                     
2  Investors do not have to be “accredited investors” as defined by Rule 501 of 
Regulation D of the Securities Act. 

 

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Kraken-Determined Investment Returns 

44. The returns that investors receive from the Kraken Staking Program differ 

from the returns that an investor could expect if the investor staked directly (assuming the 

investor even had the technological capability and sufficient tokens to stake and obtain 

rewards).  Investors in the Kraken Staking Program receive a reward determined by 

Defendants, not the reward determined by the underlying blockchain protocol. 

45. In general, staking services can offer set or discretionary reward amounts.  

Here, Defendants retain the discretion to determine the reward amounts while marketing 

specific returns (e.g., 4-7% for Ethereum, 9-12% for Polkadot, and 12-15% for Cosmos).  In 

other words, Defendants reserve the right not to pay this advertised return—or indeed any 

reward.  The Kraken Terms of Service states that the marketed return is “an estimate only and 

not guaranteed” and “may change at any time in Payward Trading’s sole discretion.”3 

46. The marketed return does not account for all staking rewards.  Defendants 

retain for themselves those rewards that exceed the marketed range and do not generally 

disclose to investors the amount of rewards Defendants retain for themselves.  In other words, 

Defendants do not disclose sufficient information for investors to determine if they are 

receiving their fair share of the staking rewards. 

                     
3  Defendants have complete control over the amount and distribution of staking rewards 
to investors.  The Terms of Service states: 
 

By opting-in a portion or your entire balance of Supported Tokens, Payward 
Trading shall remit to you the applicable percentage of staking rewards 
received from the Supported Token protocol attributable to your staked 
Supported Tokens (“Staking Rewards”) as detailed in your Kraken Account. 
The applicable percentage and timing of such remittances will: (i) be 
determined by Payward Trading in its sole discretion; (ii) be subject to 
Payward Trading’s staking fee; (iii) vary by the Supported Token protocol; and 
(iv) be further detailed in your Kraken Account.  You agree and understand 
that neither Payward Trading nor Kraken guarantees that you will 
receive Staking Rewards and that the applicable percentage (i) is an 
estimate only and not guaranteed, (ii) may change at any time in Payward 
Trading’s sole discretion, and (iii) may be more or less than the actual 
staking rewards Payward Trading receives from the Supported Token 
protocol. 

(emphasis in original). 

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47. While information about fees, margin, and node success rates are generally 

available via the underlying protocol itself (or from third-parties), Defendants do not disclose 

their fees or operating costs for the Kraken Staking Program.  Defendants tell investors that 

their “fee can vary based on the rewards that we earn on behalf of our clients each month.  

The important point to remember is that our fixed rewards are net of any fees that we charge.” 

Frequent, Regular Payouts 

48. Defendants also promise regular investment payouts for most staked tokens—

typically weekly or twice per week—that deviate from the way rewards are distributed by the 

underlying staking protocol.  In this regard, Defendants advertise that they have “taken the 

initiative to smooth this revenue stream for our clients by enabling predictable pay-outs as 

part of our staking services.”  For example, regarding staking for certain crypto assets, 

Kraken’s blog states, “Payouts happen twice a week – every Monday and Thursday at 14:00 

UTC […] among the fastest in the industry.”   

Liquidity and Immediate Rewards 

49. Defendants emphasize that investors in the Kraken Staking Program, with 

limited exceptions, are not subject to bonding and unbonding periods as they would be if they 

staked these crypto assets directly with most underlying staking protocols.  In other words, 

unlike staking-on-your-own, investors in the Kraken Staking Program are promised enhanced 

liquidity and immediate rewards.  A 2020 Kraken blog post states: “Unlike other staking 

services, you start earning rewards within minutes of staking your funds,” highlighting an 

investor’s “flexibility to instantly unstake and trade your funds [on Kraken’s trading 

platform].”  Kraken’s website provides: 

Unlike other staking services, at Kraken there is no minimum 
On-chain staking time needed to earn rewards.  You start earning 
pro-rated rewards for On-chain staking as soon as your 
instructions to stake are processed by Kraken (which may be 
within minutes of you staking your funds). 
 
For example, if you utilized On-chain staking for a few hours 
and then un-staked your funds, you would still be credited pro-
rated rewards on the next payout day.  In contrast, on other 
services you would not receive anything.  Unlike other staking 
 

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services we also have no bonding and unbonding period for On-
chain staking (other than ETH2).   

50. In effect, Defendants are advertising that they will pay rewards to investors 

during the period between when the investor transfers his or her assets to the Kraken Staking 

Program and when the investor demands to receive his or her crypto assets back from the 

Program.  Defendants promise that the Staking Program will begin paying rewards (returns) 

when investors transfer their crypto assets to the Program, regardless of a blockchain 

protocol’s bonding period, and promise immediately to return investors’ crypto assets even if 

the tokens used by Defendants and staked with a protocol actually remain locked and 

unavailable for the unbonding period. 

Not All Tokens Staked 

51. Defendants claim that they are able to offer instant liquidity (regardless of the 

unbonding period) because the pooled tokens are fungible and, according to them, Defendants 

do not actually stake every investor token transferred to them.  For many of these crypto 

assets, Defendants state that they hold back a subset of tokens as a “liquidity reserve.”   

52. However, Defendants do not disclose the extent of these “unstaked” tokens and 

how they are used.  Investors accordingly have no way of analyzing whether Kraken actually 

can meet all requests for instant liquidity through these reserves or otherwise.  In other words, 

given the limited disclosure regarding the Kraken Staking Program, Defendants do not 

provide sufficient information to demonstrate that they, at all times, maintain a token reserve 

that is adequate to honor the Program’s “no unbonding period” and “instant unstaking” 

representations should multiple investors with large staking positions seek to redeem those 

positions at the same time.   

53. Defendants are under no obligation to segregate the crypto assets that investors 

transfer to them in exchange for the advertised return (marketed as being from proof of stake 

activities).  Defendants can account for these transfers by rebalancing their internal ledger.   

54. Moreover, Defendants do not disclose the extent to which Defendants 

commingle “unstaked” tokens with Defendants’ other assets or business endeavors.  Nor do 

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Defendants disclose the true source of the returns paid to investors to the extent rewards are 

paid with respect to “unstaked” tokens. 

Not Directly Subject To Transaction And 

 Deposit Fees, Or Minimum Staking Thresholds 

55. Certain underlying staking protocols impose upfront transaction fees for 

staking and unstaking, as well as require a refundable deposit above the amount of staked 

tokens.     

56. Investors in the Kraken Staking Program are not directly subject to these fees 

as they do not actually participate in the staking protocols directly, and no initial deposits are 

required.  However, the amount of return that investors receive may be reduced by 

Defendants based on these and other fees and expenses.  Defendants are not required to verify 

the amount of rewards received, nor verify the amount of any fees charged to Defendants 

when participating in the staking protocols, or otherwise.   

57. In addition, staking protocols generally require a certain threshold number of 

tokens to be able to participate in staking.  The Kraken Staking Program does not require that 

investors commit any minimum threshold of tokens to participate in the Program.  

Purportedly Safe, Easy-To-Use Platform 

58. Kraken offers a simplified user interface.  Kraken’s blog states: “Token 

holders have previously had little choice other than to stake tokens themselves, something that 

requires technical understanding.”  The FAQs state: “Couldn’t I Stake Myself for Free?  

While you are certainly able to stake yourself, that process can be complex[.]”  Another blog 

entry states: “Instead of needing to purchase special equipment to compete for newly minted 

network tokens, users are instead able to stake their funds in Kraken’s stake pool.”   

59. Kraken also advertises the supposed security of the platform.  It touts that its 

“team of experts have built in a number of sophisticated measures to prevent theft of funds, 

NFTs or information.  Theft isn’t the only threat of course.  As a professional exchange we 

offer financial stability, with full reserves, healthy banking relationships and the highest 

standards of legal compliance.” 

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60. Kraken further states that it has “assembled a global team of top security 

professionals who take a risk-based approach to ensuring our clients’ assets are protected at 

the highest levels while maintaining exceptional performance and an unparalleled client 

experience.  Our team has decades of experience building security programs for the world’s 

top brands, investigating the largest consumer data breaches, developing security technology 

trusted by millions of businesses and discovering vulnerabilities in the technology used by 

billions of people every day.” 

61. Defendants also tout that they are trustworthy.  A November 10, 2022 blog 

post on Kraken.com titled, “How Kraken Continues to Lead the way in Transparency and 

Trust” states, in part: 

[W]e are proud to say that Kraken has long taken the lead when it 
comes to transparency.  In fact, we pioneered the use of regular asset 
audits in 2014 and hired [an accounting firm] to produce two Proof of 
Reserve audits over the past year alone.  These cryptographic audits are 
more precise and immutable than any other form of financial statement 
and we are one of the first exchanges to perform them regularly.   

 
Proof of Reserve audits cryptographically prove that we hold the assets 
we say we hold on your behalf.  While this process is almost 
impossible for traditional financial institutions to conduct, the open and 
transparent properties of cryptocurrencies enable us to produce these 
precise audits regularly.4 

62. A November 18, 2022 blog post on Kraken.com similarly states: “Kraken 

offers a comprehensive approach to Proof of Reserves that verifies not just reserves, but also 

liabilities.  Cryptographically proving that we hold our clients’ covered assets in reserve at the 

time of an audit is only half the battle.  Kraken’s Proof of Reserves also includes covered 

liabilities (i.e., tokens in client accounts).”  However, Defendants also describe the limitations 

of the purported audit, including that it “cannot identify any hidden encumbrances or prove 

                     
4  Proof of reserves is a term crypto asset participants use to describe a voluntary method 
for offering evidence that shows, in the aggregate, an entity has sufficient reserve assets to 
cover what is held for customers and/or accounts at a given point in time.  A proof of reserves 
engagement is not as rigorous as, as comprehensive as, or equivalent to a financial statement 
audit and may not provide any level of assurance to investors other than a snapshot of reserve 
assets at a specific point in time. 

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that funds had not been borrowed for purposes of passing the audit.”  In other words, the 

“proof of reserves” audit is akin to a balance sheet that lists assets but not every liability; 

proof of reserves may not offer investor protection in this scenario. 

B. Defendants Market The Kraken Staking Program As An Investment 

Opportunity 

63. Defendants tout the Kraken Staking Program as an investment opportunity on 

the kraken.com website, in social media, and in mass emails to existing customers.    

64. For example, Defendants market the possibility of profits through an expected 

rate of investment return.  The kraken.com website, imaged below, states that investors can 

“Earn up to 21% yearly on your crypto”: 

 

 

65. Defendants historically have put forward marketing materials advertising the 

investor return from the Kraken Staking Program, including: 

 “At 6% compounded annually, we offer the highest fixed-rate returns in the 

industry.” 

 “Enjoy one of the highest returns in the industry (12% for DOT and 7% for 

ATOM).” 

 “Last year, we paid out over $27 million in token staking rewards … Want to 

earn up to 20% a year staking crypto assets?” 

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 “Staking is a great way to maximize your holdings in staking coins and fiat 

that would otherwise be sitting in your Kraken account. Once you have staked 

your assets you can earn staking rewards on top of your holdings and grow 

them further by compounding those future rewards.” 

 “Your rewards will be compounded with the Grow Rewards feature, which 

adds your earned rewards every week back into On-chain staking. This means 

if you continue to leave your funds staked you may earn more than the RPY 

percent.” 

C. The Kraken Staking Program Has Generated Tens Of Millions Of Dollars 

In Investment Returns  

66. Throughout the relevant period, Defendants have offered the Kraken Staking 

Program to all U.S. residents except New York and Washington State residents.  These U.S. 

residents have been able to “stake” fifteen different crypto assets through the Kraken Staking 

Program, summarized in the table below: 

 

Protocol Name Token Name 
Approximate Date Available 
for Kraken Staking Program 

Cardano ADA May 4, 2021 
Algorand ALGO October 22, 2021 
Cosmos ATOM August 17, 2020 
Polkadot DOT August 17, 2020 
Ethereum ETH December 3, 2020 
Flow FLOW October 18, 2021 
Kava KAVA December 14, 2020 
Kusama KSM November 23, 2020 
Luna LUNA March 8, 2022 – May 28, 2022 
Mina MINA January 18, 2022 
Secret SCRT March 29, 2022 
Solana SOL July 1, 2021 
Tron TRX January 28, 2022 
Tezos XTZ December 11, 2019 
Polygon MATIC June 29, 2022 

Supported Crypto Assets for U.S. Investors 

67. As of June 2022, there were more than 135,000 unique U.S.-based usernames 

investing in the Kraken Staking Program.   

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68. Since launching the Kraken Staking Program in December 2019 and through 

mid-2022, U.S. investors had staked over $2.7 billion worth of crypto assets in the Kraken 

Staking Program.  Kraken has earned at least $147 million as net revenue throughout the life 

of the Program, of which at least $45.2 million is attributable to U.S. investors.  Defendants’ 

net income attributable to U.S. investors in the Staking Program is $14.95 million.  According 

to Kraken’s 2021 Annual Shareholder Update, “Staking was Kraken’s fastest growing product 

in 2021 and accounted for more than one-third of Kraken’s gross revenue growth.”  As also 

stated in the same Update: “As we continue to support new staking assets and offer highly 

attractive rewards, clients are incentivized to keep more assets on platform, increasing the 

amount of capital available for clients to exchange between assets, driving volume growth and 

promoting client stickiness.” 

II. THE KRAKEN STAKING PROGRAM IS OFFERED AND SOLD AS A 

SECURITY 

69. At all relevant times, the Kraken Staking Program was offered and sold as an 

investment contract and therefore a security whose offers and sales were subject to the 

registration requirements of the federal securities laws.  

A. Participants In The Kraken Staking Program Invest Money  

70. Defendants’ offer and sale of the Kraken Staking Program involves an 

investment of money.  Under the Howey framework, an investment of “money” may but need 

not take the form of fiat currency.  Here, investors purchase crypto assets from Defendants 

(with fiat or crypto assets) and then transfer them to the Defendants’ Kraken Staking 

Program; alternatively, investors transfer their own crypto assets to Defendants for staking. 

71. Investors put their crypto assets at risk as part of the Kraken Staking Program.  

Defendants have control over all the crypto assets invested in the Kraken Staking Program 

and choose when and how to use them.  (As explained above, Defendants do not actually 

stake all crypto assets received from investors.)  Moreover, according to the Kraken Terms of 

Service, these crypto assets may be encumbered by Kraken’s creditors.  In addition, to the 

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extent that an investor’s crypto assets actually are staked to the underlying blockchain 

protocol, those assets are at risk of being slashed.5   

72. Investors also have liquidity and market risk.  Defendants market the Kraken 

Staking Program’s advantage of “instant unbonding” and instant return of “staked” crypto 

assets.  But, as noted above, Defendants do not disclose the extent of their crypto-asset 

reserves and whether these reserves are sufficient to meet all redemption demands.  If these 

reserves are insufficient, Kraken may be unable to honor a redemption request in a timely 

fashion, if at all.  Investors could suffer market losses if the value of their crypto assets 

declines while waiting for redemption.   

B. Investors And Defendants Participate In A Common Enterprise 

73. Investors in the Kraken Staking Program participate in a common enterprise 

with other investors and with Defendants. 

74. Investor tokens are transferred and pooled in wallets for the purposes of the 

Kraken Staking Program, and Defendants determine when and how many of these pooled 

tokens to stake.  During this time, and for as long as the investor chooses to stake his or her 

tokens, investors receive a pre-calculated payout from Defendants.  Defendants market that 

these payouts are distributed pro rata to investors depending on the amount of tokens they 

have staked (i.e., Defendants advertise a fixed return for all investors).  Defendants do not 

segregate or separately manage an individual investor’s crypto assets as part of the Kraken 

Staking Program.  

75. The fortunes of investors and Defendants also are tied together in this common 

enterprise.  For example, as explained above, the larger the pool of assets for staking, the 

higher the likelihood of obtaining rewards, which inures to the benefit of all investors and 

Defendants.  

                     
5  Per Kraken’s Terms of Service, Defendants will compensate investors for some, but 
not all, “slashing penalties.”  For example, Defendants disclaim any obligation to compensate 
investors for slashed tokens if the tokens are slashed because of protocol “maintenance, bugs, 
or errors,” acts by a hacker or other malicious actor, or force majeure events.  

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76. In addition, the revenues and profits that Defendants stand to receive (i.e., the 

portion of the staking rewards that Defendants keep for themselves and use to fund their 

operations) grow as more investors participate in the Kraken Staking Program and purchase 

tokens on Kraken’s trading platform to stake.  All rewards generated from the Kraken Staking 

Program also flow directly to Defendants, who determine whether and how many tokens in 

the pool to stake, and how often (and how much in rewards) to pay investors.  If the pools are 

more successful in generating returns than Kraken’s advertised reward rates, Defendants 

retain the difference.  Further, Defendants contribute their own tokens to the pool of tokens 

contributed by investors to the Kraken Staking Program when they engage in proof of stake 

activities. 

C. Investors Reasonably Expect To Profit From The Efforts Of Defendants 

77. Investors in the Kraken Staking Program reasonably expect to profit from 

Defendants’ efforts.   

78. From its inception, Defendants have marketed the Kraken Staking Program as 

an investment opportunity.  As detailed above, through the kraken.com website, a Kraken 

blog, and social media channels, Defendants have promoted the Kraken Staking Program as a 

way for investors to earn a high investment return—“the highest fixed-rate returns in the 

industry.”      

79. Defendants also market the advantages of the Kraken Staking Program over 

staking independently.  According to Defendants, these advantages include simplifying a 

complex staking process with an easy-to-use interface in a secure and trustworthy 

environment operated by technical experts.   

80. Investors are led to expect that Defendants will expend efforts to generate the 

investment returns.  For example, Defendants advertise that they have the technical ability and 

expertise to stake crypto assets, to undertake strategies about when and how to stake crypto 

assets, and to obtain and manage the regular and frequent reward payouts.  Defendants’ 

efforts are essential to the success or failure of the enterprise.   

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81. Moreover, because Defendants advertise that Defendants will retain a portion 

of the staking rewards, investors are reasonably led to expect that Defendants have strong 

financial incentives to engage in the efforts required to make the enterprise successful. 

82. Defendants’ statements and actions, and the economic reality of the 

arrangements with respect to the Kraken Staking Program, have led and will continue to lead 

reasonable investors to expect Defendants to undertake significant and essential technical, 

managerial, and entrepreneurial efforts. 

III. DEFENDANTS HAVE FAILED TO REGISTER THE OFFERS AND SALES 

OF THE KRAKEN STAKING PROGRAM WITH THE COMMISSION  

83. Defendants have used interstate commerce to offer and sell the Kraken Staking 

Program by, among other things, engaging in general solicitation through the kraken.com 

website and other promotional materials, including emails and social media.   

84. Defendants have never had a registration statement filed or in effect with the 

SEC for their offers and sales of the Kraken Staking Program.  No exemption from 

registration applied or applies. 

85. Defendants’ public disclosures have contained selective or no information 

about Defendants’ financial history, audited financial statements, management discussion and 

analysis of financial condition and results of operations, and ability to generate profits.  

Investors in the Kraken Staking Program also have not received information about 

Defendants’ operations, financial condition, liabilities, or other factors relevant in considering 

whether to invest in the Kraken Staking Program.  Investors further have lacked full and 

detailed information regarding how Defendants use reserves to meet redemptive requests 

(including whether there are segregated reserves and the extent of those reserves) and have 

been deprived of information about the staking rewards that Defendants keep for themselves.  

For example, Defendants do not disclose fees and expenses related to the Kraken Staking 

Program.  Nor do Defendants disclose what they do with “unstaked” tokens, the extent to 

which Defendants are staking investor tokens, whether Defendants are lending, borrowing, 

trading, or otherwise alienating investor tokens into some enterprise other than staking 

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protocols, whether and to what extent Defendants are commingling “unstaked” tokens with 

other assets, the source of rewards paid to investors particularly with respect to “unstaked” 

tokens, and sufficient information for investors to otherwise determine whether they are 

receiving a fair share of staking rewards from Defendants. 

CLAIM FOR RELIEF 

Violations of Sections 5(a) and 5(c) of the Securities Act 

86. The Commission realleges and incorporates by reference herein the allegations 

in paragraphs 1 through 85. 

87. By virtue of the foregoing, Defendants, directly and indirectly: (a) without a 

registration statement in effect as to that security, made use of the means and instruments of 

transportation or communications in interstate commerce or of the mails to sell securities 

through the use or medium of any prospectus or otherwise, (b) without a registration 

statement in effect as to that security, carried or caused to be carried through the mails or in 

interstate commerce, by any means or instruments of transportation, any such security for the 

purpose of sale or for delivery after sale, and (c) made use of the means and instruments of 

transportation or communication in interstate commerce or of the mails to offer to sell through 

the use or medium of a prospectus or otherwise, securities as to which no registration 

statement had been filed. 

88. By reason of the conduct described above, Defendants, directly or indirectly, 

violated, are violating, and, unless enjoined, will continue to violate Securities Act Sections 

5(a) and 5(c) [15 U.S.C. §§ 77e(a), (c)]. 

PRAYER FOR RELIEF 

WHEREFORE, the Commission respectfully requests that the Court enter a Final 

Judgment:   

I. 

Permanently enjoining Defendants, and each of their respective agents, servants, 

employees, attorneys and other persons in active concert or participation with each of them, 

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from violating, directly or indirectly, Sections 5(a) and 5(c) of the Securities Act  

[15 U.S.C. § 77e(a), 77e(c)]; 

II. 

Permanently enjoining Defendants and any entity controlled by them from, directly or 

indirectly, offering or selling securities through crypto asset staking services or staking 

programs, pursuant to Section 21(d)(5) of the Exchange Act [15 U.S.C. § 78u(d)(5)]; 

III. 

Ordering Defendants to disgorge all ill-gotten gains, with prejudgment interest 

thereon, pursuant to Section 21(d)(3), (5) and (7) of the Exchange Act [15 U.S.C. § 78u(d)(3), 

(5) and (7)]; 

IV. 

Ordering Defendants to pay civil money penalties pursuant to Section 20(d) of the 

Securities Act [15 U.S.C. § 77t(d)]; and 

V. 

 Granting any other and further relief this Court may deem just and proper for the 

benefit of investors. 

 

JURY DEMAND 

 The Commission demands a trial by jury. 
 
 
Dated:    February 9, 2023   By: /s/ Eugene N. Hansen    

David Hirsch 
Jorge Tenreiro 
James Connor 
Eugene Hansen  
SECURITIES AND EXCHANGE 
COMMISSION 
100 F Street NE 
Washington, DC 20549 
(202) 551-6091 (Hansen)  
Email: [email protected] 
 
Attorneys for Plaintiff 
  
 
 
 

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Of counsel: 
 
Paul Kim 
Laura D’Allaird 
Elizabeth Goody 
  

  

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