This week, a lucrative sector of the cryptocurrency industry that was rapidly becoming the backbone of many networks to save on energy consumption unlike Bitcoin, received a shock to the system. A little over half a year ago, Ethereum, the second largest cryptocurrency by market value, led a resurgence in the prices of cryptocurrencies ahead of a major technological update that would make something called “staking” available to crypto investors globally.

SEC’s Crypto Abolition

The majority of individuals had hardly begun to wrap their heads around the idea, but after yesterday’s crypto crackdown by the U.S. SEC, things now appear bleak for the majority of crypto-staking service providers and investors in the country. After reaching a settlement with trading platform Kraken for $30 million and claiming an agreement from the crypto exchange to shut down their staking operations, the United States Securities and Exchange Commission (SEC) declared on Thursday that it would begin charging platforms that offer rewards to their customers through the process staking.

It is highly likely that other companies, such as the larger rival exchange Coinbase Global Inc., would feel the pressure and discontinue their staking services in the same manner that Kraken has. On Wednesday, just the night before Kraken ceased its staking service, Coinbase CEO Brian Armstrong issued a warning to his 1.1 million followers on Twitter that the securities regulator may wish to put an end to staking for retail users in the United States.

While speaking about the present market sentiment regarding staking, research associate Christine Kim of Galaxy Digital was quoted as saying:

If the recent enforcement action by the SEC is, as it appears, targeted against all staking-as-a-service businesses in the US, this will have wide-reaching impacts. It may cause all retail-focused and US-based staking-as-a-service businesses to shut down their operations.

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What Is Crypto Staking?

In recent years, the “proof-of-stake” method for running a network has become a popular choice for developers. This is due to the fact that it consumes a significantly lower amount of energy than so-called proof-of-work chains like Bitcoin, and it also has the potential to allow more people to share in the rewards. For their chains to function, decentralized applications like Ethereum, Solana, Tezos, Cosmos, and Polygon all rely on some form of staking in some capacity. According to Staking Rewards, the total value of all assets that had been staked as of Friday was $91.8 billion globally.

Read More: Rich Dad Poor Dad Author Predicts “Valentine Day Massacre”, Another Crypto Crash?

When someone makes an investment with a reasonable expectation of gains that would be generated from the work or effort of others, the SEC typically views this as a red signal. However, the SEC has not issued any explicit guidelines regarding which crypto assets it considers to be securities. According to Oppenheimer’s research, Coinbase currently controls approximately 15% of the market share of Ethereum assets. The current retail staking participation rate in the industry is 13.7%, and it is continuing to expand.

U.S. Falling Behind In Race Of Web3?

Cathie Wood, CEO of ARK Invest, lambasted the ineptitude of United States authorities in a comment she made as speculations of a potential ban on staking for retail customers continue to gain momentum. On February 11, Wood posted her thoughts on Twitter regarding the potential prohibition of staking services provided by centralized entities that are regulated in the United States. She emphasized that it would hurt the country’s competitiveness in the rapidly developing Web3 technology sector.

So, activity moves to offshore exchanges or to self custody, self sovereignty, and self control? Decentralization wins. Great! Given regulatory arbitrage, however, US exchanges lose to foreign exchanges, not so good for US competitiveness in the crypto revolutions, in my view. https://t.co/1Lv4IqVsmn

— Cathie Wood (@CathieDWood) February 11, 2023

There is a concern as to whether or not the SEC will go after other exchanges similar to Coinbase that provide staking as a service to its consumers. Scrupulous analysts, attorneys, and policy experts pored over SEC Chair Gary Gensler’s comments on Thursday and essentially came to the conclusion that the issue at hand is not the practice of staking itself but rather how Kraken advertised its staking.

Specifically, the SEC claimed that Kraken’s terms of service gave the exchange full control of all staked tokens and gave it the ability to “determine these returns, not the underlying blockchain protocols” at its own discretion. The SEC made this claim in its lawsuit against Kraken. In addition to this, it did not provide its customers with any information regarding the company’s general financial health, which would have assisted them in making educated decisions regarding the likelihood that Kraken would provide returns that exceeded those of the crypto market.

Will DeFi Turn Out As Savior?

In response to the recent action taken by the SEC, Kraken has stated that it would continue to offer the crypto staking service to its users located in other countries, but it will do so through a distinct corporation or a new Kraken subsidiary. This is being touted as the most prudent way for exchanges to still participate in the staking market, however, retail users would still be barred. The only option left at their disposal would be to shift towards decentralized exchanges (DEX) and self-custody.

DEXs and self-custodians are considered to be regulation resistant as they run on the blockchain without a central authority or management. It might be significantly hard for the SEC to take direct action or trace down the users using the service. Although outright banning the particular web domain can do the trick — similar to how most torrent-based websites or portals selling illegal substances & copyrighted materials are barred from public access — a simple VPN setup will disrupt the restriction imposed. And since it’s on the blockchain, where identities are pseudo or completely anonymous, it will be quite a task for the agency to catch hold of users unlike accessing other prohibited sites hosted on a centralized server.

Proponents of decentralization, on the other hand, are in a conundrum. Although they consider this development to benefit the broader DeFi market, the lack of risk awareness, rampant security breaches and the sheer learning curve might dissuade certain users while leaving others with a bitter taste.

Also Read: Check Out The Top 10 DeFi Lending Platforms Of 2023

Pratik has been a crypto evangelist since 2016 & been through almost all that crypto has to offer. Be it the ICO boom, bear markets of 2018, Bitcoin halving to till now – he has seen it all.

The presented content may include the personal opinion of the author and is subject to market condition. Do your market research before investing in cryptocurrencies. The author or the publication does not hold any responsibility for your personal financial loss.