Crypto would survive an SEC crackdown on crypto efforts
Staking, the process of locking native blockchain tokens to secure the network and receive rewards, has become an important line of business for centralized exchanges looking to diversify their revenue streams away from transaction fees. Coinbase is the second largest player on Ethereum, even as competitors such as Kraken and Binance have moved into the business. In many ways, if the SEC succeeds in banning staking programs, decentralized alternatives like Lido and RocketPool, the largest and third largest Ethereum-based platforms by value, will benefit.
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The SEC cannot block users from posting 32 ether (ETH) to become an Ethereum validator, or from pledging coins to other hosts, although the regulator can place severe restrictions on crypto-economic activity on platforms such as Coinbase. That message seems to have moved the market: Lido’s governance token has surged following tweets from Armstong and Coinbase itself. As my colleague Sam Reynolds put it: “As a decentralized protocol, it’s unlikely [Lido] will have the same compliance with securities regulations as a centralized entity domiciled in the United States such as Coinbase.”
If the SEC moves to limit its efforts, I expect the crypto industry to mount a major legal challenge – much in the way various participants cooperated to prevent US President Donald Trump’s administration’s eleventh-hour ban on “no-host wallets.” In just a few years, the effort has gone from a theoretical security mechanism to the backbone of many highly valued blockchains – accounting for about a quarter of the crypto industry’s market capitalization. And while Armstrong may be a bit bold in calling the venture a “national security interest,” it’s a growing economic activity regularly tracked by firms like JPMorgan.
For all I know, the SEC may be right to say that staking—which encourages people to secure a crypto network through payments—satisfies the “Howey test” for determining whether an asset is a value. But it shouldn’t be up to the SEC to decide alone. It’s also worth noting that staking isn’t really like “crypto-lending,” which requires exchanges to seek returns to pay depositors, such as the closed Gemini “Earn” platform or Coinbase’s DOA offering with the SEC shut down. Staking has its risks—protocols can be compromised, companies can cheat—but it’s part of an open-source process baked into a blockchain’s security, making it far less risky than remortgage-driven yield programs.
All that said, the recent betting rumors appear to be part of a widespread attack against the crypto industry. As venture capitalist Nic Carter wrote, it seems almost every financial watchdog is working to disentangle crypto from the real economy—especially using the private banking sector as a cudgel. If these speculations are true, what Carter deemed “Operation Choke Point 2.0” after the Obama-era campaign to dismantle legal but morally dubious businesses, crypto has bigger problems on its hands. The bet should remain open, even if Coinbase goes down.
