When compared to proof-of-work blockchains, proof-of-stake networks typically use a lot less power. There is concern among some in the crypto industry that the SEC’s action against cryptocurrency exchange Kraken will result in a blanket prohibition of staking.
This past Thursday, the SEC filed charges against Kraken for failing to register its staking programme as a security. Kraken has ceased its U.S. staking programme and has agreed to pay $30 million to settle the charges, according to a statement released on Thursday. The company neither admitted nor denied the allegations.
Except for staked ether, all U.S. client assets enrolled in the on-chain staking programme are now automatically unstaked and no longer earn staking rewards as of today. “And further, U.S. customers will not be able to stake additional assets, including ETH,” a Kraken representative said in an email.
Many blockchains, including Ethereum ETHUSD, +0.07%, Solana SOLUSD, -2.20%, Cardano ADAUSD, -1.31%, Polygon MATICUSD, -2.85%, and Cosmos, use a proof-of-stake consensus mechanism that includes staking, whereby token holders can earn rewards by using their token holdings to verify transactions. In contrast, Bitcoin BTCUSD, +0.37% uses a proof-of-work system, in which “miners” secure the blockchain by solving difficult mathematical puzzles in exchange for financial rewards.
Binance and Coinbase (COIN, -4.26%) are just two of the many major cryptocurrency exchanges that offer staking services, wherein they act as custodians and stake their users’ cryptocurrencies. Lido Finance is one decentralised staking service that allows users to keep their own cryptocurrency safe.
Investors are keeping their powder dry as they await further actions from regulators, specifically the SEC, on whether or not they will only target centralised staking service providers like Kraken or whether or not they will ban staking in the U.S.
Francesco Melpignano, CEO at Kadena Eco, has speculated that if the SEC goes after centralised staking providers, users will flock to decentralised staking services.
According to Melpignano’s call with MarketWatch, if regulators issue a blanket ban on staking, it could be “a huge hit” for proof-of-stake blockchains, especially if a large percentage of their users are located in the United States.
Bitcoin’s proof-of-work system could attract the attention of those who are looking for an alternative. Melpignano argued that Bitcoin has historically been on the “safe side of regulation.” Chairman of the SEC Gary Gensler has stated that bitcoin is the only cryptocurrency he is willing to publicly label as a commodity.
Bitcoin, the largest cryptocurrency, still dropped more than 5% Thursday, hitting a three-week low.
Many cryptocurrency markets may find that providing staking services is a lucrative revenue stream. For the quarter ending September 30, 2022, “blockchain rewards” contributed $62 million in revenue to Coinbase, representing more than 10% of total revenue. Users can expect to pay a commision fee of up to 35% on the rewards they earn by staking their cryptocurrency on the exchange. A representative for Coinbase stated that the percentage of revenue generated from staking was less than 3% in the first three quarters of 2022.
The CEO of Coinbase, Brian Armstrong, tweeted on Wednesday that it would be a “terrible path for the U.S.” if the SEC banned crypto staking for retail customers.
Paul Grewal, Coinbase’s chief legal officer, said in an email Thursday that the company’s staking programme would continue as planned regardless of the recent developments. According to today’s news, Kraken was essentially peddling a yield product. Grewal argued that Coinbase’s staking services are “fundamentally different” and not securities. According to Dow Jones Market Data, Coinbase’s stock price dropped by more than 14% on Thursday, closing at about $59.63.