SEC Crackdown on Staking Sparks Controversy

United States Securities and Exchange Commission (SEC) Commissioner Hester Pierce criticizes regulator over the closure of Kraken's cryptocurrency staking program in the US, calling it "lazy and paternalistic" and a "misguided move."

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Much interest is being generated by the SEC’s attempt to stop the staking of cryptocurrencies by centralized entities. But what can it achieve, how much this move may affect the industry and what is the role of decentralized protocols.

The insider controversy

United States Securities and Exchange Commission (SEC) Commissioner Hester Pierce publicly chided the SEC over the closure of Kraken’s cryptocurrency staking program in the United States.

The commissioner criticized the SEC in a statement on February 9, titled “Kraken Down,” arguing that regulation through enforcement “is not an effective or fair way to regulate” an emerging industry.

She specifically wrote:

“Today, the SEC closed the Kraken staking program and viewed it as a victory for investors. I disagree.”

In her statement, Peirce also criticized the regulator for ending a program that she said “has served people well” and added:

“Using enforcement measures to tell people what the law is in an emerging industry is not an effective or fair way to regulate. Moreover, staking services are not uniform, so one-off enforcement actions and cookie-cutter analysis don’t stop it.”

Peirce called the SEC “lazy and paternalistic” and noted that it normally should have initiated a “public process to develop a workable registration process that provides valuable information to investors.”

SEC Crackdown on Staking Sparks Controversy
United States Securities and Exchange Commission (SEC) Commissioner Hester Pierce

Armstrong agrees

Coinbase CEO and co-founder Brian Armstrong agreed with Pearce’s comments, highlighting that requiring firms to register their staking services is a “disingenuous suggestion” as there is no clear path to registration.

However, earlier this week, Armstrong had stated that he had heard “rumours that the SEC would like to get rid of cryptocurrency staking in the US for retail investors” and at the same time stressed that this would be a misguided move by the SEC as it would result in these companies being driven out of the US.

Recall that Coinbase is the subject of an SEC investigation into a similar issue regarding staking, namely the one that led to Kraken’s settlement with the SEC.

On February 9, the SEC announced that it had reached a $30 million settlement with Kraken, noting that the exchange failed “to register as a service the offer and sale of cryptocurrency asset staking program.”

However, Kraken for its part made it clear that it will continue to offer staking services to customers outside the US through its subsidiary. We note that according to the SEC notice, Kraken is prohibited from providing staking services to US residents, even if it seeks to register under the SEC.

What is staking

Staking is the process of locking tokens on a blockchain to ensure network security and to receive rewards. Also, staking is also a business tactic for central exchanges to diversify their revenue streams beyond transaction fees.

Who will benefit?

However, the SEC’s move to ban staking on centralized exchanges is expected to be beneficial for decentralized protocols such as Lido and RocketPool. Moreover, the SEC cannot prevent users from staking 32 ETH to become validators on the Ethereum network or pledge coins to other decentralized providers.

This seems to be the reason why Lido’s token appreciated significantly in price after the news of the ban on staking in centralized entities.

As Sam Reynolds famously said:

“As a decentralized protocol, it is unlikely that Lido will have the same compliance with securities rules as a US-based centralized entity like Coinbase.”

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