"A $92 billion crypto profit maker is in line for a shake-up"

" A $92 billion crypto profit maker is in line for a shake-up \r\n\r\nA lucrative corner of crypto that\u2019s fast becoming the lifeblood of the way many networks operate got a shock to the system this week.\r\n\r\nThe US Securities and Exchange Commission on Thursday signaled a crackdown on platforms offering rewards to their customers via a process called staking, as it reached a settlement with trading platform Kraken for $30 million and won agreement from the exchange to shut down those offerings domestically. It\u2019s possible other providers such as larger rival exchange Coinbase Global Inc. may feel the heat and follow suit in discontinuing their own staking services, experts said \u2014 or move them offshore.\r\n\r\nStaking allows users to lock up their coins on blockchains and help order the transactions that keep the protocols running, earning yields in return at an average of 7.7%, according to an estimate by data provider Staking Rewards based on 176 tracked assets.\r\n\r\nThe \u201cproof-of-stake\u201d method for running a network became a popular choice for developers in recent years, because it uses much less energy than so-called proof-of-work chains like Bitcoin and potentially allows more people to share in the rewards. Networks including Ethereum, Solana, Tezos, Cosmos and Polygon all rely on some version of staking to operate their chains, with Staking Rewards putting the global value of all staked assets at $91.8 billion as of Friday.\r\n\r\nLarge exchanges like Kraken, Coinbase and Binance are at the heart of the staking-as-a-service industry, taking on the significant upfront cost and technical know-how for customers in return for a fee. Coinbase, one of the biggest providers of staking-as-a-service at $3.3 billion in value locked, was previously forecast to be in line for around $450 million in related revenue this year.\r\n\r\nThe enforcement action against Kraken \u201cmay cause all retail-focused and US-based staking-as-a-service businesses to shut down their operations,\u201d Christine Kim, research associate at Galaxy Digital, wrote in a note Friday, adding that Kraken and Coinbase account for nearly 20% of all staking on Ethereum combined. \u201cIf 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\u201d on proof-of-stake blockchains, she said.\r\n\r\nNetwork growth\r\n\r\nWhile Ethereum is the most well-known proof-of-stake network, it\u2019s the smaller blockchains like Solana that may be hit the hardest by a sudden exit of big centralized exchanges from the US market. Staking is what makes these networks run smoothly, facilitating millions of transactions and also helping to improve security.\r\n\r\nThe price of SOL, Solana\u2019s native token, fell as much as 9.15% on Thursday following the SEC\u2019s announcement.\r\n\r\nThere are other staking providers \u2014 \u00a0less centralized services that claim to avoid concentrating oversight under a specific group, person or exchange \u2014 but their interfaces aren\u2019t user-friendly enough for many everyday investors.\r\n \r\n \t Read: US Staking Crackdown Seen as \u2018Gift\u2019 for Decentralized Services \r\n \r\n\u201cIf US crypto exchanges are not able to do custodial staking, we might see much more trend towards decentralization and self-custody,\u201d added Lex Sokolin, chief crypto economist at Consensys. \u201cHowever, that will also make it more difficult for very small accounts to participate in the security of networks, which is something we want.\u201d\r\n\r\nSuch platforms would need to rapidly improve their onboarding processes in order to keep up without a Coinbase or Kraken around, said Conor Ryder, an analyst at blockchain analytics firm Kaiko.\r\n\r\nExchanges\r\n\r\nThere is a question of whether the SEC will target other exchanges like Coinbase that offer staking to customers. Eagle-eyed analysts, lawyers and policy experts pored over SEC Chair Gary Gensler\u2019s Thursday announcements, and largely came to the conclusion that it\u2019s more a matter of how Kraken marketed its staking than the practice itself that is at issue.\r\n\r\nSpecifically, the SEC alleged that Kraken\u2019s terms of service transferred complete control of all staked tokens to the exchange and allowed it to \u201cdetermine these returns, not the underlying blockchain protocols\u201d at its sole discretion. It also didn\u2019t allow customers to have any insight into its overall financial health, which would help them make informed decisions about how likely it was that Kraken would pay the market-beating returns it advertised.\r\n\r\nAs a publicly traded company, Coinbase provides such financial disclosures on a quarterly basis, Paul Grewal, its chief legal officer, said in a series of tweets on Thursday. \u201cWe don\u2019t play games,\u201d he said. \u201cOur customers have a right to their rewards. We can\u2019t just decide not to pay any rewards at all.\u201d\r\n\r\nGalaxy Digital\u2019s Alex Thorn, however, doesn\u2019t see it the same way. \u201cWhile Coinbase\u2019s CLO refers to some of the specifics of Kraken\u2019s program and argues that it\u2019s those specifics that made Kraken\u2019s product a security and not Coinbase\u2019s, it appears both from the complaint and the press release that the SEC isn\u2019t making such a distinction,\u201d Thorn said.\r\n\r\nAccess to revenue from staking services is vital for exchanges such as Coinbase at the moment, stuck in a bear-market environment where low volumes and increased competition have served to crimp the trading fees earned from general crypto buying and selling. Platforms like Binance have sought to mop up what\u2019s left of consumer demand by reducing such fees to zero, placing the burden on other revenue streams to fill the gap.\r\n\r\n\u201cAn SEC settlement with Kraken, shuttering its staking operation, puts this entire growth pillar at risk for Coinbase,\u201d said Bloomberg Intelligence analysts Paul Gulberg and Jamie Douglas Coutts in a note Friday. Coinbase shares fell 14% on Thursday, and Gulberg and Douglas Coutts forecast a 35% downside to its predicted staking revenue this year.\r\n\r\nThe unintended result of Gensler\u2019s crackdown could see some validators move offshore in order to continue servicing non-US customers, a transition that would likely cause increased risk of consumer harm if investors are tempted to access non-regulated products, according to Ryder.\r\n\r\n\u201cThis is only going to hurt US businesses that are involved in crypto, this isn\u2019t going to do much to protect the average investor,\u201d he said, adding that he doesn\u2019t believe staking rewards meet the requirements needed to be categorized as securities. \u201cAt the end of the day, I don\u2019t think the SEC has much jurisdiction here, and it\u2019ll just be something that will harm US customers and see the innovation move to Europe and Asia.\u201d"

"A $92 billion crypto profit maker is in line for a shake-up"

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