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Coinbase CEO: SEC’s Crypto Staking Crackdown Won’t Stop Staking
In the wake of last week’s rumors that the U.S. Securities and Exchange Commission was working up a case against retail-focused crypto staking offerings, Coinbase CEO Brian Armstrong says that they can try, but “open protocols should survive.” For context, in August 2022 the SEC said it was probing Coinbase specifically over its staking services.
Staking, the process of locking native blockchain tokens to secure the network and receive rewards, has become a major business line for centralized exchanges looking to diversify their revenue streams away from transaction fees. Coinbase is the second-largest ETH staker, though competitors like Kraken and Binance have moved into the business. In many ways, if the SEC is successful in banning staking programs, decentralized alternatives like Lido and RocketPool, the largest and third largest ETH-based platforms by value, will benefit.
The SEC cannot block users from posting 32 ETH to become an Ethereum validator, or from pledging coins to other hosts, even if they can put serious restrictions around the activity for crypto economy on-ramps like Coinbase. That message seems to have moved the market: Lido’s governance token has surged following tweets from Armstong and Coinbase itself. As my colleague Sam Reynolds put it: “As a decentralized protocol, it's unlikely [Lido] will have the same compliance with securities rules as a U.S.-domiciled centralized entity like Coinbase.”
If the SEC does move to restrict staking, I’d expect for the crypto industry to put up a major legal challenge – much in the way diverse participants collaborated to prevent the Trump Administration’s eleventh-hour ban on “unhosted wallets.” In just a few years, staking has gone from a theoretical security mechanism to the backbone of many high-valued blockchains – comprising about a quarter of the industry’s market cap. And while Armstrong may be a bit bold in calling staking a “national security” interest, it is a growing economic activity regularly tracked by firms like JPMorgan.
For all I know, the SEC could be right in saying that staking – which incentivizes people to secure a crypto network through payments – does satisfy the “Howey Test” to determine if an asset is a security. But that shouldn’t be up to the SEC to decide alone. It’s also worth noting that staking is not really like “crypto lending,” which requires exchanges to seek out yield to pay to depositors like the shuttered Gemini “Earn” platform or Coinbase’s DOA offering the SEC shut down. Staking has its risks – protocols could be compromised, companies can cheat – but it’s part of an open source process baked into a blockchain’s security, making it far less risky than rehypothecation-driven yield programs.
All that said, the recent staking rumors seem to be part of a widespread crackdown against the crypto industry. As venture capitalist Nic Carter wrote, nearly every financial watchdog seems to be working towards detaching crypto from the real economy – in particular by using the private banking sector as a cudgel. If this speculation is true, what Carter deemed “Operation Choke Point 2.0” after the Obama-era campaign to debank legal-but-morally-dubious businesses, crypto has bigger problems at hand. Staking should stay open, even if Coinbase went down.