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The crypto space has always been known for its decentralized nature, a feature that has made it attractive to investors, entrepreneurs, and traders alike. However, in recent times, financial regulators in the US have stepped up their scrutiny of the crypto sector, generating a debate among stakeholders in the space.
The latest development was the enforcement action by the US Securities and Exchange Commission (SEC) against Kraken, a popular crypto exchange. It resulted in the termination of its staking program for US residents and a $30 million fine.
Crypto and SEC Crackdown on Staking
The CEO and founder of Ark Invest, Cathie Wood, believes that the recent regulatory pressures in the US would be good for decentralization. But the new laws could affect the country’s competitiveness in the crypto space. She maintains the increased regulatory scrutiny would drive residents to use “offshore exchanges or self-custody,” which is good for decentralization.
Still, Cathie Wood noted:
“US exchanges lose to foreign exchanges, not so good for US competitiveness in the crypto revolution.”
Ark Invest’s director of research, Frank Downing, likened the SEC action against Kraken to China’s ban on Bitcoin mining. He stated that the enforcement could have the same impact on proof-of-stake networks.
Many members of the crypto community echoed this view. Some believe that regulators must strike a balance between protecting consumers and supporting innovation.
However, not everyone agrees with this view. Crypto investor Nic Carter believes that crypto protocols would benefit from the situation, as exchanges becoming dominant nodes is the main failure of proof-of-stake.
While this may sound great in theory, an adjunct professor at Columbia Business School, Omid Malekan, has a different view. In his opinion, Carter’s view would only hold in a better world, but he also notes:
“It’s only a matter of time until regulators go after liquid staking protocols. Eventually, only whales and institutions (accredited investors) will be able to stake legally, which is even worse for decentralization.”
Others in the crypto space share the concerns raised by Malekan. Market participants note that the ban would force people to use centralized staking pools, and self-staking is even scarier than self-custody, and not everyone has the means.
In a statement, the SEC Chair, Gary Gensler, emphasized the need for crypto intermediaries to provide the proper disclosures and safeguards required by securities laws when offering investment contracts in exchange for investors’ tokens.
“Whether it’s through staking-as-a-service, lending, or other means, crypto intermediaries, when offering investment contracts in exchange for investors’ tokens, need to provide the proper disclosures and safeguards required by our securities laws,” said Gensler.