The future of the United States at stake with crypto-staking? And after?

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This week, a lucrative sector of the cryptocurrency industry that was quickly becoming the backbone of many networks to save on power consumption unlike Bitcoin, received a system shock. Just over six months ago, Ethereum, the second-largest cryptocurrency by market value, led to a resurgence in cryptocurrency prices ahead of a major technology update that would make something called “staking” available for crypto investors around the world.

Abolition of Cryptography by the SEC

The majority of individuals had barely begun to catch on to the idea, but after yesterday’s crypto crackdown by the US SEC, things now look bleak for the majority of crypto staking service providers and investors in the country. After reaching an agreement with trading platform Kraken for $30 million and demanding an agreement from the crypto exchange to end their staking operations, the United States Securities and Exchange Commission (SEC) said Thursday it would start charging platforms that offer rewards to their customers through the staking process.

It is highly likely that other companies, such as the biggest rival exchange Coinbase Global Inc., would feel the pressure and discontinue their staking services in the same way as Kraken. On Wednesday, just the night before Kraken ceased its staking service, Coinbase CEO Brian Armstrong warned his 1.1 million Twitter followers that the securities regulator may wish to end staking for users. retail in the United States.

While talking about the current market sentiment regarding staking, research associate Christine Kim of Galaxy Digital was quoted as saying:

If the recent SEC enforcement action is, as it appears, targeted against all staking-as-a-service companies in the United States, it will have far-reaching impacts. This could cause all US-based, retail-focused staking-as-a-service businesses to shut down.

What is crypto staking?

In recent years, the “proof-of-stake” method of running a network has become a popular choice for developers. This is because it consumes a significantly lower amount of energy than so-called proof-of-work chains like Bitcoin, and it also has the potential to allow more people to share in the rewards. To make their chains work, decentralized apps like Ethereum, Solana, Tezos, Cosmos, and Polygon all rely on some form of staking to some degree. According to Staking Rewards, the total value of all assets that were staked on Friday was $91.8 billion worldwide.

Read more: Rich Dad Poor Dad Author Predicts ‘Valentine’s Day Massacre,’ Another Crypto Crash?

When a person makes an investment with a reasonable expectation of gains that would be generated by the work or efforts of others, the SEC generally considers this a red signal. However, the SEC has not issued any explicit guidelines regarding the crypto assets it considers securities. According to research by Oppenheimer, Coinbase currently controls around 15% of the market share of Ethereum assets. The current rate of retail staking participation in the industry is 13.7% and it continues to grow.

Is the United States lagging behind in the Web3 race?

Cathie Wood, CEO of ARK Invest, blasted the incompetence of US authorities in a comment she made as speculation about a possible staking ban for retail clients continues to grow. On February 11, Wood posted his thoughts on Twitter regarding the potential ban on staking services provided by centralized regulated entities in the United States. She pointed out that this would hurt the country’s competitiveness in the rapidly developing Web3 technology sector.

So is the activity shifting to offshore trading or to self-custody, self-sovereignty and self-control? Decentralization wins. Great! Given the regulatory arbitrage, however, US exchanges are losing to foreign exchanges, which is not so good for US competitiveness in crypto revolutions, in my opinion. https://t.co/1Lv4IqVsmn

— Cathie Wood (@CathieDWood) February 11, 2023

One wonders whether or not the SEC will go after other exchanges similar to Coinbase that provide staking as a service to its consumers. Scrupulous analysts, lawyers and policy experts mulled over SEC Chairman Gary Gensler’s comments on Thursday and essentially came to the conclusion that the problem to be solved is not the practice of staking itself. , but rather how Kraken announced its staking.

Specifically, the SEC claimed that Kraken’s terms of service give the exchange full control of all staked tokens and give it the ability to “determine those returns, not the underlying blockchain protocols” at its end. own discretion. The SEC made this claim in its lawsuit against Kraken. On top of that, he didn’t provide his clients with any information regarding the general financial health of the company, which would have helped them make informed decisions about the likelihood of Kraken providing above-market returns. cryptography.

Will DeFi become the saviour?

In response to recent SEC action, Kraken said it will continue to offer the crypto staking service to its users located in other countries, but will do so through a separate company. or a new Kraken subsidiary. This is touted as the safest way for exchanges to continue participating in the staking market, however, retail users would still be banned. The only option left for them would be to switch to decentralized exchanges (DEX) and self-custody.

DEXs and auto-custodians are considered resistant to regulation because they operate on the blockchain with no central authority or direction. It can be very difficult for the SEC to take direct action or track down users using the service. Although outright banning a particular web domain might do the trick – similar to most torrent-based websites or portals selling illegal substances and copyrighted material are prohibited from public access – a simple VPN configuration will disrupt the restriction imposed. And since it’s on the blockchain, where identities are pseudo or completely anonymous, it will be quite a task for the agency to catch users unlike accessing other banned sites hosted on a centralized server.

Proponents of decentralization, meanwhile, are at an impasse. While they see this development as benefiting the broader DeFi market, the lack of risk awareness, widespread security vulnerabilities, and simple learning curve could deter some users while leaving others with a sour taste.

Also Read: Check Out the 10 Best DeFi Lending Platforms of 2023

Pratik has been a crypto evangelist since 2016 and has covered almost everything crypto has to offer. Whether it’s the ICO boom, the bear markets of 2018, the Bitcoin halving so far – he’s seen it all.

The content presented may include the personal opinion of the author and is subject to market conditions. Do your market research before investing in cryptocurrencies. The author or publication assumes no responsibility for your personal financial loss.

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