The CEO of Coinbase, Brian Armstrong, has heard rumors that the securities watchdog would pursue services that use proof-of-stake. Open protocols should endure, even if it hurts his financial situation.
- The CEO of Coinbase stated that the SEC is attempting to “get rid of” retail-oriented cryptocurrency staking services.
- Recent rumors about staking appear to be a part of a larger campaign against the cryptocurrency sector.
SEC’s Crackdown on Staking
On Wednesday, Coinbase CEO Brian Armstrong made “rumors” regarding the SEC’s efforts to “get rid of” retail-oriented cryptocurrency staking offerings public. The rumor is not new if it is alarming: To build a boundary around the whole token market, SEC Chair Gary Gensler used Ethereum’s historic “Merge” to a proof-of-stake system as an opportunity to question the yield-generating process. The securities regulator was explicitly looking into Coinbase for its staking services, it was revealed in August.
For centralized exchanges aiming to diversify their revenue sources away from transaction fees, staking, the process of locking native blockchain tokens to safeguard the network and get incentives, has grown into a critical economic segment. Despite the entry of rivals like Kraken and Binance, Coinbase remains the second-largest stake in Ethereum. Decentralized alternatives like Lido and RocketPool, the largest and third-largest Ethereum-based platforms by value, will gain in many ways if the SEC successfully outlaws staking programs.
Even while the regulator has the power to impose stringent limitations on the activities for entry points into the cryptocurrency system like Coinbase, it cannot prevent users from contributing 32 ether (ETH) to become an Ethereum validator or from pledging funds to other hosts. The market responded to that message because Lido’s governance token has increased due to tweets from Armstong and Coinbase. “As a decentralized system, it’s unlikely [Lido] will have the same compliance with securities rules as a U.S.-domiciled centralized business like Coinbase,” said Sam Reynolds.
Analyst’s Stance on the Matter
The cryptocurrency sector will mount a significant legal fight if the SEC decides to restrict staking, much as how many parties banded together to stop the administration of U.S. President Donald Trump’s last-minute ban on “unhosted wallets.” Staking has transformed from a hypothetical security mechanism to the foundation of several highly valuable blockchains in just a few years, accounting for nearly a quarter of the market capitalization of the cryptocurrency sector. Although Armstrong’s claim that staking is a “national security” priority may be a bit dramatic, companies like JPMorgan regularly monitor this expanding economic activity.
According to the SEC, staking, which encourages users to protect a cryptocurrency network through payments, satisfies the “Howey Test,” which establishes whether an asset is a security. However, the SEC should take that decision with others. Staking differs from “crypto lending,” which necessitates exchanges to seek income to pay depositors, as the defunct Gemini “Earn” platform or Coinbase’s DOA offering that the SEC shut down, in that it does not require exchanges to seek a return. Staking has risks—protocols might be hijacked, and businesses could cheat—but it’s an open-source mechanism built into a blockchain’s security, making it much less dangerous than yield schemes that rely on rehypothecation.
Despite all this, the current staking rumors are part of a more extensive campaign against the cryptocurrency sector. According to venture entrepreneur Nic Carter, almost all financial watchdogs are striving to isolate cryptocurrencies from the economy, particularly by using the private banking industry as a mallet. If this rumor is accurate, then cryptocurrency faces much more severe issues. Even if Coinbase is unavailable, staking should continue.