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The Securities and Exchange Commission, under the leadership of Gary Gensler, continues to wage a campaign against crypto firms of all shapes and sizes. With enforcement actions against crypto firms having increased 183% following the collapse of FTX, and lawsuits filed against Binance and Coinbase on consecutive days, the crypto sector continues to look for answers to relatively basic questions. Where should crypto issuers, exchanges, and other developers go to register themselves? The SEC, despite stating that firms should come in and register, has issued very little in terms of guidance to help firms do just that. Additionally, how will cryptoasset instruments be treated and regulated; another area where firms have continually sought dialogue with little success.
Following the collapse of FTX, and the many meetings that then-CEO Samuel Bankman-Fried had with regulators and policymakers (including two with Gary Gensler), the regulatory approach in the U.S. has turned antagonistic toward anything looking like cryptoassets. One subset of the crypto sector, however, continues to be featured again in multiple lawsuits; staking-as-a-service. Beginning with Kraken, which paid a $30 million fine and shuttered U.S. staking services for U.S. investors, and continuing with the lawsuit against Coinbase, staking services seem to be where the SEC is focusing its regulatory ire.
Not every crypto firms offers staking as a service, and not ever crypto investor is interested in staking cryptoassets. That said, it seems likely that the trends around staking services will play large role in crypto investing decisions moving forward. Let’s take a look at a few of things investors should keep in mind going forward.
What Is Crypto Staking
Staking in its simplest form, is a way that crypto investors can make use of existing cryptoasset holdings to generate returns, on either an individual or institutional basis. Where the nuance, and controversy, has arisen is around just how the mechanics of staking operations differ. As specifically mentioned in the enforcement actions levied by the SEC against many crypto organizations, as well as follow-up actions taken by individual states against those same firms, the pervading regulatory opinion is that staking-as-a-service should be registered as security offering.
There are strong views, and non-profit groups, that continue to advocate that staking is a new and unique service offering; this does not change how regulators (including the IRS) view staking. From the perspective of these regulators investors are 1) contributing assets to a managed project, 2) receiving benefit from the efforts of others, and 3) are doing so with the expectation of earning a profit.
Any market investor would be well served in asking; why is such a seemingly basic product or service causing such controversy, and leading to a blizzard of legal action?
What Upsets Regulators
The SEC has emerged as the default U.S. regulator of everything connected to crypto for a number of reasons. Firstly, the U.S. Congress has proved unable and/or unwilling to put any substantial cryptoasset regulation into writing; this may or may not be yet another aftermath of the perceived influence of FTX over these conversations. Secondly, the fact that Gary Gensler, who is widely acknowledged to have deep knowledge of both blockchain technology and cryptoassets, heads up the SEC has tilted the playing field even more in the favor of this powerful financial markets regulator. Lastly, even though other U.S. standard setters and regulators, particularly in the accounting field, have tried to integrate crypto into the rule-making process, these efforts have been patchwork at best, and also rely on litigation to set precedent.
This means that the regulatory issue with staking is a seemingly simple one. As defined above, and the opinion of the SEC under Chairperson Gensler, is that staking-as-a-service offerings quality as security offerings and should be regulated such. Via public comments and testimony provided by Chairperson Gensler, his position that these offerings constitute unregistered securities seems unlikely to change anytime soon.
This matter remains debated by many in the marketplace, but with the wide discretion that the SEC possess, this will need to be sorted out via the legal system. Legal decisions, unfortunately, do not always set industry wide precedent, and the implications of these individual enforcement actions might ultimately end up just being individual settlements.
Why It Matters
Staking, and the cryptoasset industry at large, continues to strike some in financial services as a nascent, emerging, but ultimately niche asset class of limited systemic importance. What this ignores are some of the following realities. Staking, no matter what form it takes, allows investors of all sizes and levels of sophistication to gain access to wealth creation opportunities directly connected to cryptoassets. Staked ETH
ETH
Additionally, since many of the largest centralized exchanges in the world – including Coinbase – have working relationships with large traditional financial institutions, staking provides a logical starting point for greater crypto integration. Lastly, the very same centralized staking services that are at the center of multiple lawsuits are also ways that allow individuals exposure to cryptoassets with lower required levels of initial investment. In other words, staking allows the non-expert investor to participate in and benefit from the promise of cryptoassets while availing themselves of the stability offered by centralized exchanges.
Staking is a multi-billion industry that enables retail participation in crypto wealth creation, but it is currently suffering due to lack of regularity clarity and policymakers more interested in headlines that substantive policy. Investors will be served to take note, and plan accordingly.
