The Future of Ethereum Staking After Kraken-SEC Settlement

• After closing the doors of Kraken’s staking service, the U.S. SEC could restructure Ethereum staking for the betterment.
• The industry experts and analysts said the restructuring in the industry development may bring benefits.

Last week, the United States Securities and Exchange Commision (SEC) closed the staking service of Kraken — a leading crypto exchange platform. The settlement between the U.S. SEC and Kraken raised existential questions for the future of Ethereum-like blockchains.

The Ethereum experts and blockchain analysts find this industry development in the U.S. may bring benefits such as helping to decentralize the Ethereum network and forcing service providers to make the clarification on how they earn yield for retail investors.

The settlement forced Kraken to shut down its staking as a service offering to its U.S. customers. Kraken previously provided its service to the retail investors to “stake” some amount of cryptocurrency with blockchains in its platform for yield.

The Ethereum-like proof-of-stake blockchains enlist users to stake crypto assets as a form of security guarantee in exchange for rewards. While proof-of-work networks like Bitcoin are operated by a more energy-intensive process of crypto “mining.” 

The recent settlement between Kraken-SEC could affect a growing class of staking as a service products that allow users to stake with lower up-front costs or technical know-how than typically required. Currently, around $25 Billion worth of Ether (ETH) is staked on Ethereum while 18% of ETH stake is held by Coinbase and Kraken.

Ethereum Staking Service

The staking service on Ethereum needs a minimum of 32 ETH that is approximately $50K. The recent changes allow Kraken and Coinbase to help retail investors stake primarily to earn interest. These platforms eliminate the 32 ETH requirement by pooling user funds together. 

The SEC commissioner Hester Peirce noted in a fiery dissent to SEC’s crackdown on Kraken, “staking services are not uniform, so one-off enforcement actions and cookie-cutter analysis does not cut it.”

According to the legal filings, the SEC said it took particular issue with the mechanism by which Kraken calculated the yields it paid to users: “The defendants determine these returns, not the underlying blockchain protocols, and the returns are not necessarily dependent on actual returns that Kraken receives from staking,” as the commission wrote.

The crypto exchange Coinbase insists that its own service is different as its Chief Legal Officer Paul Grewal noted on Twitter “Staking is not a security. Validators form no horizontal community or commonality. There’s no vertical commonality, either. Validators don’t expect rewards from significant managerial efforts of other validators–they expect rewards primarily from their own efforts and funds.”

Grewal also added “The SEC has made a number of misinformed assertions about staking over the past few days, and asked a number of misguided questions. Let’s set the record straight point by point–there’s a lot of FUD to cover.”

Additionally, the CEO of Coinbase Brian Armstrong said “The Commission argues that this staking program should have been registered with the SEC as a securities offering. Whether one agrees with that analysis or not, the more fundamental question is whether SEC registration would have been possible. In the current climate, crypto-related offerings are not making it through the SEC’s registration pipeline.”

However the Coinbase analysts admitted in a report that the developments around Kraken will likely affect the “pace of staking growth going forward.”

Nancy J. Allen is a crypto enthusiast and believes that cryptocurrencies inspire people to be their own banks and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning.

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