This week, a lucrative segment of the cryptocurrency industry, which was quickly becoming the backbone for many networks to save energy, experienced a shock to its system. Ethereum, the second-largest cryptocurrency by market value, led a resurgence of cryptocurrency prices a little over a year ago ahead of major technological updates that would make “staking” available for crypto investors worldwide.
SEC’s Crypto Abolition
Although the idea was new to most people, it is now clear that things are not looking good for crypto-staking service providers or investors in the United States. The United States Securities and Exchange Commission (SEC), after reaching a settlement for $30 million with Kraken and claiming an agreement from Kraken to close down their staking operations and charging platforms that offer rewards through the process of staking, announced on Thursday.

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It is likely that other companies such as Coinbase Global Inc., a larger rival exchange, will feel the pressure and cease staking services in the exact same way that Kraken did. Just a night before Kraken stopped its staking service was terminated, Coinbase CEO Brian Armstrong warned his 1.1 million Twitter followers that the Securities Regulator may want to end staking for US retail users.
Christine Kim, a research associate at Galaxy Digital, was quoted as saying:
The recent enforcement action taken by the SEC appears to be directed against all staking as-a-service companies in the US. This could have far-reaching consequences. It could cause all US-based, retail-oriented staking-as a-service businesses to close down.
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What is Crypto Staking?
The “proof-ofstake” method of running a network has been a popular choice in recent years. It consumes significantly less energy than proof-of-work chains such as Bitcoin and also allows more people to share the rewards. Decentralized applications such as Ethereum, Solana and Tezos, Cosmos and Polygon all require some form of staking to allow their chains to function. According to Staking Rewards the global total value of all assets staked as of Friday was $91.8 million.
Read More: Rich Dad Poor Father Author Predicts “Valentine Day Massacre”, Another Crypto Crash
The SEC considers it a red flag when someone makes an investment without a reasonable expectation that they will make a profit from the work or effort made by others. The SEC has not yet issued any guidelines about which crypto assets it considers securities. Oppenheimer’s research shows that Coinbase controls about 15% of the Ethereum assets market. The industry’s current retail staking participation rate is 13.7% and is growing.
U.S. U.S. Falling Behind in Race Of Web3
Cathie Wood CEO of ARK Invest lashed out at the incompetence of US authorities in a comment she made while speculations about a ban on staking for retail customers continue gain momentum. Wood shared her thoughts on Twitter about the possible ban on staking services provided in the United States by centralized entities. She stressed that it would affect the country’s ability to compete in the rapidly growing Web3 technology sector.

Activity moves to offshore exchanges, or to self custody and self sovereignty. Decentralization wins. Great! However, US exchanges are losing to foreign exchanges due to regulatory arbitrage. This is not good for US competitiveness during the crypto revolutions. https://t.co/1Lv4IqVsmn
— Cathie Wood (@CathieDWood), February 11, 2023
There is concern that the SEC may pursue other exchanges like Coinbase that offer staking services to their consumers. Scrupulous analysts and lawyers, as well as policy experts, analyzed the comments of Gary Gensler, SEC Chair, on Thursday. They concluded that the issue is not the practice or advertising Kraken’s staking.
The SEC claimed Kraken’s terms gave Kraken full control over all staked tokens, and that it had the power to “determine these return, not the underlying Blockchain protocols” at its discretion. This claim was made by the SEC in its lawsuit against Kraken. It also failed to provide information about the company’s financial health to its customers, which would have helped them make educated decisions about whether Kraken would deliver returns that were higher than those of the crypto markets.
Will DeFi be the Savior?

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Kraken responded to the SEC’s recent actions by stating that it will continue to offer crypto staking services to users located in other countries but it will do this through a separate corporation or a new Kraken subsidiary. This is the most prudent way for exchanges still to participate in the staking marketplace, but retail users would still be prohibited. Their only options would be to move towards decentralized exchanges (DEX), or self-custody.
Self-custodians and DEXs are considered to be regulatory resistant because they operate on the blockchain without any central authority or management. It may be difficult for the SEC or other regulatory agencies to trace users of the service or take direct action. A ban on the web domain may be sufficient. This is similar to the way that most torrent-based websites and portals selling illegal substances or copyrighted material are blocked from public access. However, a simple VPN setup can help to break the restriction. It’s on the blockchain so identities are either completely anonymous or pseudonymous, so it will be difficult for the agency to get hold of users. This is in contrast to accessing other prohibited sites on a central server.
On the other hand, decentralization advocates are stuck in a bind. While they believe this development will benefit the wider DeFi market, some users might be dissuaded by the lack of risk awareness and rampant security breaches, while others may feel bitter.
Also read: The Top 10 DeFi Loan Platforms of 2023

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The content presented may contain the author’s personal opinion and may not reflect current market conditions. Before investing in cryptocurrency, do your market research. The publication or the author are not responsible for any financial loss.

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