Crypto industry fears a staking ban, and some are turning to bitcoin

“Starting today, with the exception of staked ether, assets enrolled in the on-chain staking program by U.S. clients will automatically be unstaked and will no longer earn staking rewards. Further, U.S. clients will not be able to stake additional assets, including ETH,” a Kraken spokesperson said in a emailed statement.

Staking, which allows users to earn rewards by using their existing holdings of tokens to verify transactions, is a feature of proof-of-stake blockchains, such as Ethereum
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Solana
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Cardano
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Polygon
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and Cosmos. Bitcoin
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on the other hand, operates on a different mechanism called a proof-of-work system, where so-called miners solve complicated mathematical puzzles to secure the blockchain and obtain rewards. Proof-of-stake blockchains are usually much more energy-efficient than their proof-of-work counterparts.

Many major crypto exchanges, such as Binance and Coinbase
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offer staking services, where they provide custody of users’ cryptocurrencies and stake them. Some decentralized staking service providers, such as Lido Finance, allow users to safeguard their own cryptocurrencies while participating in staking. 

Market participants are waiting for further actions from regulators, as it is unclear whether the SEC will only target centralized staking service providers like Kraken, or ban staking in any form in the U.S. 

If the SEC aims at centralized staking providers, it may push users to flock to decentralized staking services, according to Francesco Melpignano, chief executive at Kadena Eco. 

However, if the regulators issue a blanket ban on staking, it could be “a huge hit” for proof-of-stake blockchains, depending on the decentralization level of these networks, especially on how many users are U.S.-based, Melpignano told MarketWatch in a call.

Others may turn to bitcoin and its proof-of-work system. “Bitcoin has always been on the safe side of regulation,” said Melpignano. SEC Chairman Gary Gensler has said bitcoin is the only cryptocurrency he’s prepared to publicly label a commodity.

Still, bitcoin, the largest cryptocurrency, tumbled more than 5% Thursday to a three-week low.

Staking services could be an important source of income for many crypto exchanges. Coinbase recorded $62 million in revenue, or more than 10% of its total revenue, from “blockchain rewards” for the three months ended Sept. 30, 2022. The crypto exchange takes an up to 35% commission fee of rewards that users gain through staking their crypto. A Coinbase spokesperson said the company’s staking revenue was less than 3% of its total revenue in the first three quarters of 2022.

Brian Armstrong, chief executive at Coinbase, on Wednesday tweeted that it would be a “terrible path for the U.S.” if the SEC decides to ban crypto staking for retail customers.

“Coinbase’s staking program is not affected by today’s news,” Paul Grewal, the company’s chief legal officer said in an emailed statement Thursday. “What’s clear from today’s announcement is that Kraken was essentially offering a yield product. Coinbase’s staking services are fundamentally different and are not securities,” Grewal wrote.

Coinbase shares closed down over 14% on Thursday at around $59.63, according to Dow Jones Market Data.

Some argued that the SEC’s move would drive crypto staking out of the U.S. 

“What [SEC chief] Gary [Gensler] doesn’t get is crypto staking will march on globally, decentralized and offshore, and his meddling hands will now have even less of a say in the matter,” Chris Burniske, partner at Placeholder VC, wrote in a Thursday tweet. 

“Today’s settlement isn’t law, but is another example of why we need Congress – not regulators – to determine appropriate legislation for this new technology,” Kristin Smith, chief executive at lobbyist group Blockchain Association said in an emailed statement. “Otherwise, the U.S. risks driving innovation offshore and taking online freedoms away from individual users,” she said.