On April 12, the Ethereum network successfully underwent the Shapella hard fork, allowing validators to withdraw their staked Ether (ETH) from the Beacon Chain after three years. In the first week of retreats, validators withdrew more than one million ETH.
However, as of the second week, the number of ETH staked was higher than the number of ETH withdrawn, indicating that validators are re-staking most of their ETH in mining pools.
Staking consists of temporarily locking tokens in a network that uses a proof-of-stake (PoS) consensus mechanism. In a PoS network like Ethereum, users who want to support the blockchain by validating new transactions and adding new blocks must stake a certain amount of cryptocurrency. In return, they receive rewards.
Staking ensures that the blockchain is only updated with valid data and transactions. Participants who want to increase their chances of validating new transactions offer to stake large amounts of cryptocurrency as insurance.
The fact that Ether is re-staking is very positive for the Ethereum network, but its future in the United States remains uncertain.. Ethereum staking is becoming complicated for many United States-based validators as staking service providers, particularly centralized exchanges, are waging a regulatory battle with the Securities and Exchange Commission (SEC).
In February, cryptocurrency exchange Kraken settled with the SEC for $30 million and shut down its staking services for US clients. The SEC claimed that the service was considered a security and that Kraken had to obtain the necessary license to operate.
Today we charged Kraken with failing to register the offer and sale of their crypto asset staking-as-a-service program, whereby investors transfer crypto assets to Kraken for staking in exchange for advertised annual investment returns of as much as 21 percent.
— US Securities and Exchange Commission (@SECGov) February 9, 2023
Today we are accusing Kraken of failing to register the offer and sale of its crypto asset staking-as-a-service program, whereby investors transfer crypto assets to Kraken to stake in exchange for advertised annual investment returns of up to 21 percent.
Kraken pulled its validator nodes for US clients just one day before the Shapella update to comply with SEC orders. The shutdown triggered an industry-wide debate about the future of staking services in the United States. Coinbase — one of the first publicly-listed cryptocurrency exchanges in the US — also offers staking services and is trying to force the SEC to respond to a petition it filed regarding cryptocurrency guidance.
Coinbase CEO Brian Armstrong claimed that SEC efforts to restrict staking service providers would ban retail staking in the United States. This could force many cryptocurrency platforms and staking service providers to move to tax havens. At a time when the SEC is proactive in its enforcement action against cryptocurrency staking services, the future of ETH staking looks shaky in the United States.
Stephenie Lord Eisert, a senior director of law enforcement at crypto intelligence firm Merkel Science, told Cointelegraph that cryptocurrencies are a global entity. Therefore, a crackdown by a particular jurisdiction would only force service providers to relocate elsewhere.
“The proposed ban on cryptocurrency staking will not protect investors from fraud or scams. Rather, it will create a regulatory vacuum that will be exploited by bad actors. Instead of banning centralized staking providers, regulators should focus on address the lack of guidance around centralized and decentralized staking options,” he said.
Staking as a service, threatened in the US
The US is home to the majority of Ethereum blockchain node traders. Of the 9,849 active nodes, 5,214 are in the US, followed by 1,679 in Germany and 277 in Japan. The latest data from Etherscan indicates that US node operators are down 20% in the past week.
William Kraus, a partner at law firm FisherBroyles, told Cointelegraph that the SEC action against Kraken shows the commission’s position on staking as a service.
He added that this could lead US providers to respond in a number of ways: some would remove the service entirely, while others could introduce changes to the way they provide the service or describe it publicly. Some providers might decide not to change anything. However, the agreement has lessened ambiguity about staking, and providers should carefully consider the SEC’s position going forward, he said, adding:
“The United States has not banned staking-as-a-service. Instead, the settlement with Kraken states that the SEC considers at least some forms of staking to fall within its jurisdiction. The market response remains to be seen, but we can reasonably expect fewer, and perhaps more limited, staking-as-a-service offerings to US retail consumers.”
Danny Talwar, Koinly’s head of tax, told Cointelegraph that centralized staking providers account for almost a quarter of all staked ETH, with Coinbase (11.4%), Kraken (6.9%) and Binance (5.2%) leading the way. head.
Talwar said that If the SEC goes ahead with its enforcement action, staking service providers will be forced to look outside of the United States to offer their services.
“If offshore exchanges that don’t have Know Your Customer or Anti-Money Laundering regulations end up being the main beneficiaries of SEC crackdowns on centrally regulated, national exchanges, “consumer protection “It may be the least likely outcome,” he said.
The rise of decentralized staking
As US regulators clamp down on staking services, cryptocurrency advocates are trying to convince regulators that the interest on high-yield loans offered by centralized entities and the rewards of staking on the Ethereum blockchain are not the same. same.
Staking cryptocurrencies on a blockchain like Ethereum contributes to the daily verification of transactions. Therefore, Ethereum staking differs from borrowing rewards like those offered by BlockFi and Celsius.
Moreover, the SEC is trying to flag all types of staking services under one standard flag, Konstantin Boyko-Romanovsky, CEO of staking service provider Allnodes, told Cointelegraph.
Boyko-Romanovsky said that banning centralized exchanges from offering staking services would further reinforce decentralization. He also noted that the government’s approach could curb adoption, as many cryptocurrency newcomers in the US rely on centralized entities like Coinbase for staking services.
He noted that staking pools could become more popular with retail stakers, explaining:
“Staking pools will likely experience increased participation from the United States as the staking pool concept democratizes access to staking opportunities and associated rewards. However, the exact extent of this influx is difficult to predict. potential as it will depend on a number of factors including mainstream acceptance and adoption, regulatory policies, scalability and continued innovation.
He added that those interested in staking will likely find alternative means. “Regulators should focus on creating precise and clear definitions for new and innovative concepts such as staking. It would probably benefit clients more than trying to ram crypto into existing fiat currency molds”said.
Problems with centralized staking services could favor decentralized staking services and staking pools. Following Kraken’s removal of US-based validator nodes, most of these validators moved to Lido Finance, a decentralized staking pool service provider.
Ace @krakenfx ETH withdrawals where allowed, most of that went predictably into @LidoFinance. pic.twitter.com/Ud8vuvsvAT
—Seraphim (@MacroMate8) April 26, 2023
Since ETH withdrawals from @krakenfx were allowed, most of it predictably went to @LidoFinance
Although it can help decentralization, SEC stance on cryptocurrency staking could spell trouble for US-based service providers. However, it remains to be seen if companies like Coinbase uproot and move abroad, give up significant market share in the domestic market, or struggle to comply with SEC guidelines and US securities laws.
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