We’d Rather Stop Staking Than Censor Ethereum: Coinbase CEO

Coinbase CEO Brian Armstrong has chimed in on ongoing debates surrounding Ethereum’s ability to remain censorship resistant under Proof-of-Stake.

Coinbase Wouldn’t Censor Ethereum

If Coinbase was forced to choose between preserving Ethereum’s network integrity and complying with regulators to censor transactions, it would prioritize the protocol, Brian Armstrong has said.

It’s a hypothetical we hopefully won’t actually face. But if we did we’d go with B i think. Got to focus on the bigger picture. There may be some better option (C) or a legal challenge as well that could help reach a better outcome.

— Brian Armstrong – barmstrong.eth (@brian_armstrong) August 17, 2022

Responding to a hypothetical scenario posed on Twitter Thursday, the CEO of the U.S. crypto exchange said that the firm would rather close its staking service than comply with potential regulatory requirements to censor Ethereum transactions at the network level.

“If regulators ask you to censor at the ethereum protocol level with your validators will you: A) comply and censor at the protocol level, [or] B) shut down the staking service and preserve network integrity,” Rotki founder Lefteris Karapetsas wrote in a post tagging some of the largest Ethereum token stakers, including Coinbase. Responding to the question, Armstrong said:

“It’s a hypothetical we hopefully won’t actually face. But if we did we’d go with B i think. Got to focus on the bigger picture. There may be some better option (C) or a legal challenge as well that could help reach a better outcome.”

Armstrong’s comments come amid a raging debate within the cryptocurrency community concerning the prospective strength of Ethereum’s censorship resistance following its anticipated “Merge” upgrade to Proof-of-Stake, which is scheduled to ship next month. 

The debate kicked off last week after the U.S. Treasury Department’s Office of Foreign Assets Control sanctioned the Ethereum-based privacy protocol Tornado Cash. A few days later, Dutch authorities arrested Tornado Cash developer Alexey Pertsev on suspicion of “concealing criminal financial flows and facilitating money laundering.” 

Several notable U.S.-based crypto entities, including crucial blockchain infrastructure providers Infura and Alchemy and stablecoin issuer Circle, immediately complied with the sanctions, blocking users from accessing the website and blacklisting Tornado Cash-related addresses. dYdX and Aave, two of Ethereum’s most popular DeFi applications, also blocked certain users following the Treasury’s bans (both projects later lifted some of the blocks following controversy in the community). 

The unprecedented nature of the ban and the swift reaction from centralized service providers raised concerns that centralized entities may eventually be forced to censor transactions at the Ethereum network’s protocol level in the future. Some raised fears that Coinbase could potentially cave under regulatory pressure to exclude certain transactions from being included in new blocks on Ethereum. According to Dune data compiled by hildobby, Coinbase is slated to become the third-largest Ethereum validator with over 14.7% market share of all ETH staked. 

If a big centralized validator like Coinbase opted to censor transactions, other Ethereum validators and clients could potentially decide to coordinate and slash the validator’s stake. That would effectively destroy all ETH that investors had entrusted to it. According to a recent Twitter poll posted by Eric Wall, a significant majority of users, including Ethereum’s creator Vitalik Buterin, would opt to slash a validator’s stake if they censored transactions at the network level. 

As the debate rages, Armstrong’s indication that Coinbase would prefer to close its staking service than comply with potential censorship demands will likely come as a relief to the Ethereum community.

Disclosure: At the time of writing, the author of this piece owned ETH and several other cryptocurrencies.