SEC’s Attack on Kraken’s Staking Service Sends Shockwaves Through Cryptocurrency Market: How Coinbase and LIDO Are Responding

The recent crackdown on Kraken's staking service by the SEC has created uncertainty in the cryptocurrency market. As Coinbase and LIDO, two major players in the staking sector, continue to operate, they prepare for any potential regulatory challenges ahead.

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It’s been about ten days since the SEC essentially forced Kraken to end the staking service it was offering and the cryptocurrency market seems to have calmed down from the initial shock and continues to function normally.

In particular, the other major “players” in the staking sector are currently showing confidence in the legality of their operations while preparing for any new “strike” by the SEC.

The problem

The recent “attack” by the US SEC on Kraken’s staking services has caused uncertainty in the cryptocurrency market.

Essentially, the SEC’s unexpected move has now set a precedent, as no one can be sure that it will not follow the same path as other “big players” in the industry that offer similar staking services. So far these services continue to operate as normal.

The same applies to Ethereum, which offers direct staking.

In general, all staking services in the cryptocurrency market follow a similar philosophy to Kraken, i.e. for example they accept ETH from ordinary users and then bundle it into portions of 32 ETH to directly stake in Ethereum.

As a reminder, in order to stake in Ethereum one has to deposit at least 32 ETH, an amount that does not allow ordinary users to participate directly and therefore they seek the solution with bundling services as explained above.

These services, once they receive their income from this staking, will offer the proceeds among their users in the proportion that they have contributed.

The SEC considers this entire scheme to be an offer to market a secure product with guaranteed income.

The big players

Ten days after the developments with Kraken, the two biggest staking players are still the decentralized liquidity platform, LIDO and the centralized exchange, Coinbase.

However, the SEC did not decide – at least for now – to attack these and other big “players” in the market, but started with Kraken, which is third in value as far as staking services are concerned, behind LIDO and Coinbase.

SEC's Attack on Kraken's Staking Service Sends Shockwaves Through Cryptocurrency Market: How Coinbase and LIDO Are Responding

The reaction of LIDO

The community of LIDO, the largest independent staking provider, is structured differently than Coinbase and Kraken.

This is because it does not have a legal entity to control and manage it, but operates as a DAO (self-governing autonomous organization based on smart contracts).

In such a decentralized network organisation it is the community that decides on all issues, through voting.

So, in this context it put votes on how to proceed regarding staking on Ethereum. However, whatever the outcome of the vote, any actions will be taken after Ethereum’s Shanghai upgrade – which is estimated to be completed in March – when unstaking on the Ethereum network will be possible.

LDO, which is the governance token used in LIDO, has risen in value by 30% in a month and also saw a rally in price late last week following the news about Kraken.

Lido currently holds 20304 ETH. Its total assets amount to $350 million. The funds are held in the Aragon project contract. Lido’s TVL stands at around $8 billion, according to the measurement platform, DeFiLlama.

Coinbase’s reaction

According to reports, Coinbase is considered the next target of the SEC, should the US Securities and Exchange Commission decide to continue its pursuit of staking services.

This seems to be the main reason why the company’s stock had fallen more than 30% last week, immediately after the news about Kraken, but gradually over the last few days the mood seems to have changed and the share price has risen by 10%.

Coinbase, however, considers the SEC’s decision on Kraken controversial and has analyzed its reasoning in detail.

The exchange explained that the staking services it offers are not securities and attempted to distance itself from the Kraken case, without commenting on it in any way.

Furthermore, it said it was ready to challenge in the courts if necessary, a possible attack against it.

“Staking is not considered a security under the US Securities Act, nor under the Howey Test, which the SEC uses to determine whether an investment contract is a security. The Howey Test derives from a 1946 Supreme Court case and there is a separate debate about whether this test makes sense for modern assets such as cryptocurrencies,” he said.

In addition, a statement was also made by Brian Armstrong, co-founder and CEO of Coinbase:

“We are hearing rumors that the SEC would like to get rid of cryptocurrency staking in the US for retail investors. I hope that’s not the case as I think it would be a terrible road for the US if this was allowed to happen. Regulation through enforcement does not work. It encourages companies to operate offshore, which is what happened with FTX.”

Furthermore, Brian Armstrong referred to a very detailed legal analysis of Ethereum’s new “Staking” model and the fact that this model does not make it a floating value.

Conclusion

Coinbase believes that the staking service it offers does not violate US law and that is why it has not “frozen” its services.

On the other hand, the position of Lido DAO is expected to be known in the coming weeks.

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