The Ethereum network underwent the successful Shapella hard fork on April 12, allowing validators to withdraw their long-staked Ether (ETH) from the Beacon Chain after three years. In the first week of withdrawals, more than a million ETH was unstaked by validators.
However, from the second week onward, the number of ETH staked was higher than that of ETH withdrawn, indicating that validators are re-staking most of their ETH back into mining pools.
Staking is temporarily locking tokens on a network that uses a proof-of-stake (PoS) consensus mechanism. In a PoS network like Ethereum, users who wish to support the blockchain by validating new transactions and adding new blocks must “stake” a certain amount of cryptocurrency. In return, they receive rewards.
Staking ensures that a blockchain is only updated with valid data and transactions. Participants wanting to increase their chances of validating new transactions offer to stake large amounts of cryptocurrency as insurance.
Ether being re-staked is a big positive for the Ethereum network, but its future in the United States remains uncertain. Ethereum staking is getting tricky for many U.S.-based validators as staking service providers, particularly centralized exchanges, are fighting a regulatory battle with the Securities and Exchange Commission (SEC).
In February, Kraken crypto exchange settled with the SEC for $30 million and closed its staking services for U.S clients. The SEC claimed that the service qualified as a security and that Kraken must obtain the necessary license to operate.
Today we charged Kraken with failing to register the offer and sale of their crypto asset staking-as-a-service program, whereby investors transfer crypto assets to Kraken for staking in exchange for advertised annual investment returns of as much as 21 percent.
— U.S. Securities and Exchange Commission (@SECGov) February 9, 2023
Kraken withdrew its validator nodes for U.S. clients just a day before the Shapella upgrade to comply with SEC orders. The shutdown triggered an industry-wide debate on the future of staking services in the United States. Coinbase — one of the first crypto exchanges to go public in the U.S. — also provides staking services and is trying to force the SEC to answer a petition it filed regarding guidance for cryptocurrencies.
Coinbase CEO Brian Armstrong claimed that the SEC’s efforts to curtail staking service providers would prohibit retail staking in the United States. This might force many crypto platforms and staking service providers to move to offshore locations. At a time when the SEC is proactive in its enforcement action against crypto-staking services, the future of ETH staking looks shaky in the United States.
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Stephenie Lord Eisert, senior director of law enforcement at crypto intelligence firm Merkel Science, told Cointelegraph that cryptocurrencies are a global entity. Thus, a clampdown by one particular jurisdiction would only force service providers to move elsewhere.
“The proposed ban on crypto staking will not protect investors from fraud or scams. Instead, it will create a regulatory void that will be exploited by bad actors. Rather than banning centralized staking providers, regulators should focus on addressing the lack of guidance around both centralized and decentralized staking options,” she said.
Staking-as-a-service under threat in the U.S.
The U.S. is home to the majority of node operators on the Ethereum blockchain. Of the 9,849 active nodes, 5,214 are in the U.S., followed by 1,679 in Germany and 277 in Japan. The latest data from Etherscan indicates that node operators in the U.S. declined by 20% in the past week.
William Kraus, a partner at FisherBroyles law firm, told Cointelegraph that the SEC’s enforcement against Kraken shows the commission’s position on staking-as-a-service.
He added that this could prompt U.S. providers to respond in several ways, with some eliminating the service altogether, while others might implement changes to how they provide the service or publicly describe it. Some providers might decide not to change anything. However, the settlement has lessened ambiguity about staking, and providers must carefully consider the SEC’s position going forward, he said, adding:
“The U.S. certainly has not banned staking-as-a-service. Instead, the Kraken settlement establishes that the SEC considers at least some forms of staking to fall under its jurisdiction. The market response remains to be seen, but we can reasonably expect fewer, and perhaps more limited, offerings of staking-as-a-service to retail consumers in the U.S.”
Danny Talwar, head of tax at Koinly, told Cointelegraph that centralized staking providers account for almost a quarter of all staked ETH, with Coinbase (11.4%), Kraken (6.9%), and Binance (5.2%) leading the way.
Talwar said that if the SEC moves on with…
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