Go ahead and ban striking. Crypto investors will go elsewhere
“We’re hearing rumors that the SEC wants to get rid of crypto betting in the US for retail clients. I hope that’s not the case, as I think it would be a terrible road for the US if that were to happen.”
It is chirping from Brian Armstrong, CEO of Coinbase, which earlier this month began to worry crypto holders in the United States.
The crypto space has long been a battleground between US authorities – including the Internal Revenue Service, the Securities and Exchange Commission and the Commodity Futures Trading Commission – due to a lack of definitive regulatory ownership and clarity about whether crypto assets are securities, property or otherwise. .
Given everything that happened in the past year, with the collapse of centralized exchange FTX and lending platforms including Celsius, Voyager, BlockFi and more, many believed that the SEC would focus on ensuring that US-based crypto exchanges were compliant with local laws and fully solvent . .
SEC Chairman Gary Gensler recently stated that cryptoassets would once again be on the agency’s 2023 list. Observers of the crypto space did not have to wait long. Overnight, Kraken announced that it would shut down its crypto staking service for US customers and pay a US$30 million fine to the SEC. This also comes amid the IRS filing with US courts seeking information on Kraken users who failed to report federal income taxes between fiscal years 2016-2020.
This leaves other US-based exchanges, including Coinbase, in the crosshairs of the SEC regarding their staking options available to US customers. Coinbase revealed that USD 62 million in revenue was attributable to the betting product in the three months ending September 30, 2022 – a whopping 10% of its total revenue during the same period.
This move towards centralized betting products for US customers has been touted as “protecting” vulnerable customers in the wake of FTX’s collapse. With millions of users affected and billions of dollars evaporated, it’s almost believable.
However, the actions of the SEC in recent days could have the opposite effect, pushing users towards offshore exchanges – which has already happened since FTX’s collapse – as well as decentralized betting platforms.
So where do we go from here and what is the most likely outcome for US crypto investors?
Is it necessary to ban strikes?
The SEC has often taken a heavy-handed approach to cryptocurrency regulation in the US, and this latest move is no exception. While regulators seem genuinely interested in protecting retail customers from potential fraud, especially after the collapse of FTX, their current approach could have unintended consequences and leave US users even less protected than they are now.
Instead of banning centralized betting providers, regulators should instead address the lack of guidance around both centralized and decentralized betting options.
Since the Ethereum network’s transition to the proof-of-stake security model, more than 16 million ETH, or 13.7% of the total supply, have been staked on a variety of centralized and decentralized platforms. It is clear that users want to bet on ETH, either from the point of view of contributing to the security of the network or simply to attract returns on tokens.
As of today, centralized staking providers account for nearly a quarter of all staking ETH, with Coinbase (11.4%), Kraken (6.9%), and Binance (5.2%) leading the way.
Given the requirement to have 32 ETH to become a solo staker on the Ethereum network, not to mention the technical difficulties of becoming a validator, many retail users have found that the barrier to entry is much lower via centralized staking providers, including Kraken and Coinbase.
The devil in the detailspp
Currently, centralized exchanges have a monopoly on payouts of staked funds, keeping as much as 30-40% of the profits. In addition, customers betting via a centralized exchange can bear all the risks in the event of a hack or lost funds.
While this also applies to decentralized betting avenues, much of this information is detailed within terms and conditions rather than attractive marketing, which may imply guaranteed returns, leaving users unaware of the actual level of risk they may be exposed to for a return of 5 %. .
The SEC should instead focus on creating greater regulatory clarity within the crypto space. With examples from 2022 of rehypothecating user funds to generate returns, crypto stakes could provide the perfect opportunity for regulation to enable more secure crypto custody and storage instead of imposing bans and penalties.
If centralized staking is banned for US-based crypto customers, they will instead look to offshore exchanges in the same way they did after FTX’s collapse. At the same time, other users can look to decentralized staking platforms like Lido or RocketPool, relying on smart contracts instead of regulated US-based crypto exchanges.
If offshore exchanges with little or no know-your-customer and anti-money laundering (KYC/AML) compliance end up being a major beneficiary of the SEC cracking down on US-based and regulated centralized exchanges, “consumer protection” could be least likely outcomes.
Decentralized platforms are not perfect and come with their own risks, such as hacks, smart contract compromise or loss of private keys. However, encouraging users to self-storage instead of staking via centralized exchanges could bolster crypto’s long-term prospects as more people return to the roots of what true cypherpunks envisioned in the early days of crypto.
Go ahead and ban centralized betting
So far, US regulators seem to be struggling with how fast the crypto space continues to grow, and are trying their best to keep up. In the middle of the current US tax season – and after a year that many in the crypto space hope to forget – regulators looking to crack down and ban certain aspects of crypto will likely push the issue to other jurisdictions, resulting in far less protection for it average investor.
Bans should be a last resort and only after careful assessment in combination with good regulatory guidance. It is also unclear whether bans will have any intended effect on protecting consumers who want to bet. Still, under current circumstances, participants and developers will adapt and find easier ways to continue staking their tokens – with or without the SEC.
