Kraken was heavily fined and shut down its US crypto staking services. What do industry insiders think?

Rumors that the U.S. Securities and Exchange Commission ( SEC ) may ban retail customers from staking cryptocurrencies have sparked heated discussions in the community. On February 9, the SEC announced a settlement with the crypto exchange Kraken , in which Kraken agreed to "immediately" stop providing on-chain staking services to U.S. customers and pay a $30 million fine to settle the SEC's allegations that it provided unregistered securities.

Kraken is the second-largest cryptocurrency exchange in the United States after Coinbase , with daily trading volume of about $700 million, according to data site Coingecko .

It is not new that US regulators are targeting crypto staking: in August last year, Coinbase disclosed that securities regulators were investigating Coinbase specifically for its staking service, but later found no results. Yesterday, Coinbase CEO Brian Armstrong tweeted that there were rumors that the SEC wanted to ban crypto staking for US customers, which once again sparked market concerns.

In the settlement announcement, Kraken neither admitted nor denied the SEC's allegations. The SEC emphasized: "Whether through staking as a service, lending, or other means, cryptocurrency intermediaries must provide appropriate disclosures and safeguards required by our laws. Today's action should show the market that staking as a service providers must register and provide full, fair and truthful disclosures and investor protections."

Decentralized platforms may further divert the staking market

Staking is a way to secure a network by holding specific tokens for a certain period of time and earning rewards. In return for staking, users receive yield or additional rewards in exchange for holding their tokens to protect the network. The Ethereum Foundation’s ethereum.org website explains that staking is “the act of depositing 32 ETH to activate the validator software.” But crypto exchanges like Coinbase allow ETH holders to participate in staking and earn rewards without having to meet the 32 ETH minimum requirement.

According to a report by Galaxy Digital , at least 75% of the staked Ethereum on Ethereum is controlled by intermediaries, such as Coinbase/Kraken exchanges, or DeFi platforms such as Lido or Rocketpool.

Staking has become the main business line of centralized crypto exchanges, and the platform hopes to diversify its revenue sources through transaction fees. According to Kraken's website, Kraken's staking service offers up to 20% APY and promises to provide rewards to customers twice a week. As of April last year, U.S. investors have invested more than $2.7 billion worth of crypto assets in the company's staking program, which has brought Kraken about $147 million in net income since its launch. Coinbase's 10.8% of total revenue last quarter came from crypto staking.

As Ethereum is about to usher in a major post-merger upgrade, data provided by DeFiLlama shows that Lido's total locked value (TVL) has soared 33% last month. Currently, Lido's TVL is $8.56 billion. On-chain data shows that Lido has a 25% share of the staking pool market, and Coinbase has 11.5%. Even though competitors such as Kraken and Binance have entered the track, Coinbase is still the second largest stakeholder in Ethereum staking.

As a decentralized protocol, Lido is unlikely to be subject to the same securities rules as centralized entities like Coinbase that are registered in the U.S. If the SEC does succeed in banning staking schemes, it would be a boon for decentralized alternatives like Lido, allowing them to take market share from Coinbase and other U.S.-registered exchanges.

Henry Elder, head of decentralized finance at Wave Financial , said Kraken’s case was “a huge gift to decentralized staking providers like Lido, RocketPool and StakeWise , making it harder for regulators to control them.”

What do industry insiders think?

Whether the SEC will block all crypto staking in the future remains unknown.

SEC Commissioner and "Crypto Mom" ​​Hester Peirce publicly condemned the agency's approach. She wrote: "The SEC shut down Kraken's staking program and presented it as a victory for investors, which I disagree with... A paternalistic and lazy regulator has taken a familiar settlement solution: not launching a public proceeding to develop a viable registration program that provides investors with valuable information, but simply ordering it to close... It is not clear whether we need a unified regulatory solution, and whether that regulatory solution is best provided by a regulator hostile to crypto in the form of an enforcement action."

Jake Chervinsky, Chief Policy Officer of Blockchain Association: “The judgment is not the law. Their decision is that it is better to solve the problem with money than to tear each other apart, that’s all. The SEC believes that staking as a service is a security. Kraken neither admits nor denies it. This can be a tricky question, and the SEC has not answered it one way or the other today… I strongly agree with Brian Armstrong that attacking staking would be an extreme mistake in U.S. policy. Thankfully, we are a country ruled by law. Even if the SEC wanted to ban cryptocurrency completely (I’m just saying one possibility), the law and the courts will not allow it.”

Daniel Kuhn, deputy editor-in-chief of Coindesk , believes that the SEC may be correct in what it says - incentivizing people to secure crypto networks through payments - does satisfy the "Howey test" to determine whether an asset is a security, but this should not be determined by the SEC alone. It is also worth noting that staking is not like "crypto lending", which requires exchanges to seek returns to pay depositors, such as the Gemini "Earn" platform. Staking has its risks - the protocol may be attacked, the company may cheat - but it is part of an open source process that is integrated into the security of the blockchain, making it much less risky than a re-hypothecation-driven yield scheme. The crypto staking products of US exchanges are not completely comparable to crypto lending, and it is not clear whether the SEC should unilaterally cut off the channels for retail investors to participate simply because staking generates returns.

Marcus Sotiriou, market analyst at digital asset broker GlobalBlock, commented: "Obviously, this would be a huge mistake from the US perspective as it would result in the rest of the world taking the lead in a significant crypto and blockchain technology revolution."

Chris Burniske, partner at Placeholder VC, tweeted: “What Gary didn’t anticipate was that crypto staking would become global, decentralized, and offshore, and that his interventionist hand would have less and less say in the matter.”

Crypto analyst David Canellis believes that modern permissionless blockchain systems are built to allow ordinary people to participate in consensus - without greedy intermediaries - and thus receive generous rewards. The SEC's crackdown on staking as a service should not be seen as an attack on cryptocurrencies, because staking directly through the blockchain is completely unaffected.