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The digital currency industry rumor mill recently began speculating that the SEC was about to ban staking for retail speculators in the United States. While the usual dismissal of this as “FUD” took hold, Coinbase (NASDAQ: COIN) CEO Brian Armstrong poured gasoline on the fire when he went on yet another Twitter rant spewing outright misinformation.
I’m going to break down this tiresome tweetstrom piece by piece and show how Brian Armstrong is either an outright liar or an ignoramus who has no idea what he is talking about. Either way, it’s not a good look for the CEO of a company many are dubbing the AOL of ‘crypto.’
1/ We're hearing rumors that the SEC would like to get rid of crypto staking in the U.S. for retail customers. I hope that's not the case as I believe it would be a terrible path for the U.S. if that was allowed to happen.
— Brian Armstrong (@brian_armstrong) February 8, 2023
Banning staking would be a terrible path
Armstrong begins by saying that he’s hearing rumors that the SEC wants to get rid of staking digital currencies for U.S.-based retail speculators. He gives his opinion that this would be a “terrible path,” and while I disagree with him, he’s entitled to his opinion.
Why do I disagree? There are protections in place for retail speculators in almost every other industry. Why should digital currencies be different? While setting up clear rules to protect speculators may be a better path than outright banning staking, we’ve seen the sheer destruction it can do to those who naively get involved without fully understanding the implications. Just last year, there were rumors of suicides due to the LUNA implosion, and countless other financial disasters have been linked to worthless tokens linked to proof-of-stake blockchains.
Ultimately, this is a matter of opinion. While I semi-agree that outright banning retail speculators from staking is a little heavy-handed, it may be a temporary solution until legal issues around proof-of-stake tokens play out fully. After all, if these tokens are securities, what is essentially happening right now is that U.S. retailers are speculating on unregulated securities, and the SEC has the mandate to protect them whether Brian Armstrong likes it or not.
Staking is an important innovation in digital currency
This tweet, the second in the series, made me come close to spitting my tea out. Armstrong is the CEO of an over $15 billion company that’s supposed to be the tip of the spear in his industry. It astounds me that someone like him would hold such an uneducated opinion. I find it impossible to believe and can only conclude that he’s being deliberately dishonest here.
Proof-of-stake is nothing short of a regression—proof-of-misunderstanding. Its touted benefits, which Armstrong mentions in his thread—increased scaling and security and reduced carbon footprints, are only true in comparison to broken proof-of-work blockchains like BTC, which has been deliberately kneecapped and held back by a cabal of control freaks who want to see it fail to protect their interests.
Compared to Satoshi’s original Bitcoin protocol, now known as Bitcoin SV, proof-of-stake provides zero improvements. Let’s handle Armstrong’s points one by one.
None of the POS blockchains can scale like the original Bitcoin. As Nakamoto once said, Bitcoin has no scaling ceiling. As he designed it, block sizes have no limits and can handle any number of transactions. This is only a problem for wannabe anarchists who insist on running home ‘nodes,’ something Nakamoto explicitly said was not the intended configuration at scale.
The security of proof-of-stake is inherently compromised because large stakeholders can accumulate tokens and achieve total dominance over the blockchain. The fact that stakers don’t have to identify themselves means they can accumulate large numbers of tokens in multiple wallets, appearing to be different parties, and vote as they wish.
Proof-of-stake is inherently undemocratic and unsecured. What’s to stop the CCP or Russian government from accumulating a dominant position over the network? In a proof-of-work system, we’d be able to identify the nodes and figure it out. In a proof-of-stake system, they could easily do this and hide it.
On the point about carbon footprints, while it’s true that POS blockchains use less energy than proof-of-work ones, that comes at unacceptable costs. Bitcoin’s energy use is a feature, not a bug, and it serves important purposes, such as making it expensive to try and attack the network and making nodes identifiable so they can be served with legal orders.
Besides, a Bitcoin blockchain processing millions and eventually billions of transactions per second will have a tiny carbon footprint per transaction.
Staking is not a security
I won’t comment too much on Armstrong’s third point that “staking is not a security.” This is a matter for the courts to decide, and the SEC’s Gary Gensler has voiced an opinion that POS tokens may be securities.
This is merely Armstrong’s opinion, and clearly, there’s plenty of disagreement about this point. Time will tell who is right here, and the law will decide.
Innovation needs to happen in the US—It’s a matter of national security
In the fourth tweet in his thread, Armstrong makes a two-pronged point: we need to make sure innovation occurs in the U.S. and isn’t stifled by unclear rules, which is a matter of national security.
As Armstrong is well aware, Satoshi Nakamoto designed Bitcoin to comply with the existing financial regulations in most of the Western world. This is why the SEC has been clear that Bitcoin is not a security and has never gone after it. The problem is anarchist loons wrecked the original Bitcoin, ushering in the artificial ‘need’ for other blockchains like Ethereum, which has led to the proliferation of tens of thousands of them and the worthless tokens associated with them.
This has caused the mass confusion Armstrong laments along with the lobbying groups he funds to promote his interests. The irony is palpable. In essence, things are unclear because of people like Armstrong, who have an interest in promoting these tokens in their altcoin casinos. There was never any need for any of them—the original Bitcoin could do it all.
That Armstrong plays the national security card here is beyond reprehensible. I asked him if he’s worried about national security when he allowed tokens like USDT, which are issued by a Chinese company banned from New York State for criminal behavior, to be traded on Coinbase? Those who embrace Tether, which has several executives under investigation by the DOJ, don’t get to talk about national security with a straight face.
Also, the original Bitcoin, which Armstrong has repeatedly come out against by aligning Coinbase with entities like COPA, can massively enhance national security. Just look at Sentinel Node by Certihash and how it revolutionizes cybersecurity on BSV.
Regulation by enforcement doesn’t work
While there’s a debate about whether regulation by enforcement works and what that even means, Armstrong goes off the reservation completely when he points to Sam Bankman-Frieds’ FTX as an example of what happens when regulators push companies offshore.
No, Brian, what happened with FTX was a simple case of fraud. Onshore, offshore, or on the moon, it doesn’t matter—FTX happened because SBF was a greedy scam artist who stole client funds and abused the trust people put in him. Bernie Madoff did the same in the heart of New York. This isn’t on regulators—it’s squarely on Sam Bankman-Fried.
This guy can’t be serious, right?
I’ve called Armstrong out for his unhinged Twitter rants before, and I’m happy to do it again and again. There’s no way this man is this uninformed when he has an army of lawyers and advisors to help him run his public company.
I believe Armstrong is engaged in the oldest trick in the book, spreading false information to protect his interests. After all, if proof-of-stake tokens are unregistered securities, he’s probably in a lot of trouble, and if staking for retailers is banned, most of the tokens on Coinbase will face a dramatic reduction in demand, reducing the firm’s ability to print money in the form of fees.
Everyone has an agenda, and Armstrong’s is clear: protect his wealth at all costs. After all, since he earns million dollars per year as CEO of Coinbase and has earned an estimated $4 million by selling 89,000 Coinbase shares in the past few months, he has plenty of reasons to obfuscate the truth.