Go ahead and ban staking. Crypto investors will go elsewhere

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We hear rumors that the SEC would like to get rid of crypto staking in the US for retail customers. I hope it’s not, because I think it would be a terrible path for the United States if allowed.

It was Coinbase CEO Brian Armstrong’s tweet that earlier this month began to worry crypto holders in the US.

The crypto space has long remained a battleground between US authorities, including the Internal Revenue Service, the Securities and Exchange Commission, and the Commodity Futures Trading Commission, due to a lack of final regulatory ownership and clarity as to whether crypto assets are securities, property or otherwise.

Given everything that happened in the past year, with the collapse of centralized exchange FTX and lending platforms such as Celsius, Voyager, BlockFi and more, many thought the SEC would focus on ensuring that US-based crypto exchanges were compliant with local laws and fully creditworthy. .

SEC Chairman Gary Gensler recently said that crypto assets will once again be on agencies’ to-do list in 2023. Watchers of the crypto space didn’t have to wait long. Overnight, Kraken announced that it would shut down its crypto service to US customers and pay a $30 million settlement fine to the SEC. It also comes amid the IRS’ petition to US courts seeking information on Kraken users who failed to file federal income taxes between fiscal years 2016-2020.

This leaves other US-based exchanges, including Coinbase, in the SEC’s crosshairs regarding its staking options available to US customers. Coinbase revealed that $62 million in revenue was attributable to its staking product in the three months ending September 30, 2022, or 10% of its total revenue over the same period.

The move against centralized staking products for US clients was touted as shielding vulnerable clients from the fallout of the FTX collapse. With millions of users affected and billions of dollars vaporized, it’s almost believable.

However, the actions of the SEC in recent days could have the opposite effect, pushing users to offshore exchanges, as has already happened since the collapse of FTX, as well as to decentralized staking platforms.

So where do we go from here, and what is the most likely outcome for crypto investors in the US?

Is the staking ban necessary?

The SEC has often taken a heavy-handed approach to cryptocurrency regulation in the United States, and this latest decision is no exception. While regulators seem genuinely keen to protect retail customers from potential fraud, especially after the collapse of FTX, their current approach may have unintended consequences and lead to US users being even less protected than they are. Currently.

Rather than ban centralized staking providers, regulators should instead address the lack of guidance regarding centralized and decentralized staking options.

Since Ethereum networks transitioned to the proof-of-stake security model, over 16 million ETH, or 13.7% of total supply, has been staked across a range of centralized and decentralized platforms. Clearly, users want to stake their ETH, either with a view to contributing to network security or simply to attract yield on their tokens.

To date, centralized staking providers account for almost a quarter of all ETH staked, with Coinbase (11.4%), Kraken (6.9%) and Binance (5.2%) leading the way.

Given the requirement to hold 32 ETH to become a solo player on the Ethereum mainnet, not to mention the technical difficulties of becoming a validator, many retail users have found the barrier to entry much lower via vendors. centralized staking, including Kraken and Coinbase. .

The devil in the details

Currently, centralized exchanges have a monopoly on payments from staked funds, retaining up to 30-40% of profits. Additionally, clients staking through a centralized exchange can bear all the risk in the event of a hack or loss of funds.

While this is also true for decentralized staking avenues, much of this information is detailed in terms and conditions rather than attractive marketing, which may involve guaranteed return, leaving users unaware of the actual level of risk at which they can be exposed for a yield of 5%. .

The SEC should instead focus on creating greater regulatory clarity in the crypto space. With examples from 2022 of users’ funds being reallocated to generate returns, crypto staking could provide the perfect regulatory opportunity to enable safer custody and storage of crypto rather than imposing bans and penalties.

If centralized staking is prohibited for US-based crypto clients, they will instead turn to offshore exchanges in the same way as they did after the FTX collapse. Meanwhile, other users may turn to decentralized staking platforms such as Lido or RocketPool, relying on smart contracts rather than US-based regulated crypto exchanges.

If offshore exchanges with little to no know-your-customer and anti-money laundering (KYC/AML) compliance end up being a major beneficiary of the SEC’s crackdown on state-based centralized exchanges United and regulated, consumer protection may be the least likely outcome.

Decentralized platforms are not perfect and come with their own risks, such as hacks, compromise of smart contracts, or loss of private keys. However, encouraging users to self-custody instead of staking through centralized exchanges can solidify the longer-term prospects for cryptos as more go back to the roots of what true cypherpunks envisioned in the early days of crypto.

Go ahead and ban centralized staking

So far, US regulators seem to be grappling with how quickly the crypto space continues to grow, doing their best to keep pace. In the midst of the current US tax season and after a year where many in the crypto space are hoping to overlook regulators looking to crack down and ban certain aspects of crypto, they will likely push the issue to others. jurisdictions, which would result in far less protection for the average investor.

Prohibition should be a last resort and only after careful consideration in combination with strong regulatory guidance. It is also unclear whether the bans will have any intended effect on protecting consumers who wish to bet. Nonetheless, under the current circumstances, participants and developers will adapt and find easier ways to continue staking their tokens with or without the SEC.

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