Cryptocurrency exchange Kraken and the U.S. Securities and Exchange Commission (SEC) have settled the staking issue.
The Kraken exchange eventually paid a $30 million fine and immediately ceased its service in the United States. But, more importantly, staking continues in the United States.
Staking refers to locking up tokens for a certain period of time to help support the operation of the blockchain. Liquidity staking platforms, on the other hand, issue derivative tokens representing the amount of tokens locked for users, enabling them to access decentralized finance (DeFi) services such as lending.
The way Kraken offers staking is quite peculiar, which is why the exchange’s services were shut down and the SEC took no action against Coinbase or the decentralized liquidity staking protocol.
As Coinbase’s chief legal officer Paul Grewal explained in a statement:
“It is clear from today’s announcement that Kraken is essentially offering a for-profit product. Coinbase staking services are fundamentally different than securities.”
On Coinbase, rewards are paid out according to the agreement, and the exchange discloses its commission.
Staking Lack of Transparency Gets Kraken Penalized
At the heart of the SEC’s statement is Kraken’s lack of transparency. Yes, on-chain data shows that Kraken is one of the largest validators, operating a large stake pool. But the SEC seems to be concerned about capital outflows: Will the ether deposited into Kraken for pledge be actually pledged? Or a loan?
Liquidity staking protocols like Lido and Rocket Pool don’t face the same issues. Users can track the transfer of their ether from wallets to pools through block explorers or other block monitoring tools.
In the first hours after the market learned of the SEC’s interest in staking via a tweet from Brian Armstrong, staking tokens like Lido’s LDO surged and continued to rise as Kraken’s staking service was forced to shut down in the US.
Some believe the tokens have soared because their decentralized nature makes them immune to U.S. rules and directives.
As crypto lawyer Preston Byrne pointed out in his analysis of social networking project BitClout in 2021, most decentralization is just dramatic.
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Usually there is a server controlled by the bill payer with administrator privileges. In an interview last year, the co-founder of ethereum mixing service Tornado Cash said the protocol is autonomous and unstoppable. However, the developers working on the protocol were arrested for aiding money laundering.
A more plausible explanation for the spike could be the SEC’s current “yellow light” on staking. Staking is not allowed as an investment strategy, but Staking is allowed as a technical service.
As crypto lawyer Gabriel Shapiro tweeted:
“Authentication as a service is not like a ‘money-making’ scheme, like raising money for a business or a foundation. It’s an add-on technology service.”
TVL profits fall
It’s worth mentioning that the total value locked (TVL) of liquid staking protocols like Lido or Rocket Pool hasn’t increased since then.
Since the beginning of the year, Lido’s TVL has remained stable: 4.9 million ETH on January 1, the beginning of the year, and currently around 5.19 million ETH. During the same period, the ETH staked on Rocket Pool increased from approximately 472,000 to 608,000.
- SEC Chairman ‘Gently Reminds’ Staking Rules: ‘Not Your Keys, Not Your Cryptocurrency’
- List of tokens with double-digit growth after Kraken stops staking
According to CoinDesk