The Ethereum network underwent the successful Shapella hard fork on April 12, allowing validators to withdraw their long-stakes Ether (ETH) of the Beacon Chain after three years. In the first week of withdrawals, the validators did not stake more than one million ETH.
However, from the second week onwards, the amount of ETH staked was higher than the amount of ETH withdrawn, indicating that validators are re-staking most of their ETH in mining pools.
Staking is temporarily locking tokens on 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 a 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 staking again is very positive for the Ethereum network, but its future in the United States remains uncertain. Ethereum staking is becoming complicated for many US-based validators as staking service providers, particularly centralized exchanges, are waging a regulatory battle with the Securities and Exchange Commission (SEC). .
In February, the Kraken crypto exchange reached a settlement with the SEC for $30 million and closed its engagement services for US clients. The SEC claimed that the service qualified as a security and that Kraken was required to obtain the necessary license to operate.
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 for staking in exchange for advertised annual investment returns of up to 21 percent.
โ US Securities and Exchange Commission (@SECGov) February 9, 2023
Kraken pulled its validation nodes for US clients just one day before the Shapella update to comply with SEC orders. The shutdown sparked an industry-wide debate about the future of engagement services in the United States. One of the first crypto exchanges to go public in the US, Coinbase also provides staking services and is trying to force the SEC to respond a petition he filed regarding guidance for cryptocurrencies.
Coinbase CEO Brian Armstrong claimed that the SEC's efforts to restrict service providers from participating would prohibit retail participation in the United States. This could force many crypto platforms and staking service providers to move to overseas locations. 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.
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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 move elsewhere.
โThe proposed ban on crypto gambling will not protect investors from fraud or scams. Instead, it will create a regulatory vacuum that will be exploited by bad actors. Rather than ban centralized staking providers, regulators should focus on addressing the lack of guidance on both centralized and decentralized staking options,โ he said.
Staking as a service under threat in the US
The United States is home to the majority of node operators on the Ethereum blockchain. 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 were down 20% last week.
William Kraus, a partner at law firm FisherBroyles, told Cointelegraph that the SEC's application against Kraken shows the commission's position on staking as a service.
He added that this could prompt US providers to respond in a number of ways, some by removing the service altogether, while others could implement changes to how they provide the service or describe it publicly. Some providers may decide not to change anything. However, the agreement has lessened ambiguity about participation, and providers should carefully consider the SEC's position going forward, she said, adding:
โThe United States certainly has not banned staking as a service. Instead, the Kraken settlement states that the SEC considers at least some forms of participation to fall under its jurisdiction. The market response remains to be seen, but we can reasonably expect fewer, and perhaps more limited, engagement-as-a-service offerings for US retail consumers.โ
Danny Talwar, Koinly's head of tax, told Cointelegraph that centralized staking providers account for nearly a quarter of all ETH staked, with Coinbase (11.4%), Kraken (6.9%), and Binance (5%). .2%) in the lead.
Talwar said that if the SEC goes ahead with its enforcement action, staking service providers will be forced to look outside of the US to offer their services.
โIf offshore exchanges that fail to meet Know Your Customer or Anti-Money Laundering requirements end up being the primary beneficiaries of SEC crackdowns on centralized, domestic, regulated exchanges, 'consumer protection' may be the less likely outcome," he said.
The rise of decentralized participation
While US regulators are clamping down on staking services, cryptocurrency advocates are trying to convince regulators that interest on high-yield loans offered by centralized entities and staking rewards on the Ethereum blockchain are not the same.
Staking cryptocurrency on a blockchain like Ethereum contributes to daily transaction verification. Therefore, Ethereum staking differs from borrowing rewards like those offered by BlockFi and Celsius.
On the other hand, the SEC is looking to brand all kinds of staking services under one standard banner, Konstantin Boyko-Romanovsky, CEO of staking service provider Allnodes, told Cointelegraph.
Boyko-Romanovsky said that banning centralized exchanges from offering staking services would further enhance decentralization. He also noted that the government's approach could stifle adoption, as many cryptocurrency newcomers in the US rely on centralized entities like Coinbase for staking services.
He noted that engagement groups could become more popular with retail participants, explaining:
โParticipation pools will likely see an increase in US participation as the concept of participation pools democratizes access to participation opportunities and associated rewards. However, the exact extent of this potential influx is difficult to predict, as it will depend on several factors, including widespread acceptance and adoption, regulatory policies, scalability, and continued innovation.โ
He added that those interested in gambling will likely find alternative means. โThe focus of regulatory bodies should be to create precise and clear definitions for new and innovative concepts, such as staking. It would probably benefit clients more than trying to force crypto instruments into existing fiat currency molds,โ he said.
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The problems of centralized participation services could work in favor of decentralized participation services and participation groups. After Kraken decommissioned US-based validation nodes, most of these validators moved to Lido Finance, a decentralized staking pool service provider.
As @krakenfx ETH withdrawals where allowed, most of that predictably went to @LidoFinance. pic.twitter.com/Ud8vuvsvAT
โ Seraph (@MacroMate8) April 26, 2023
While it may help decentralization, the SEC's 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. , abandon significant market share in the domestic market, or struggle to comply with guidance from the SEC and US securities laws.
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