Coinbase CEO Brian Armstrong is sounding the alarm on a potential 'staking' crackdown. Here's what it says about crypto

Published Thu, Feb 9 20232:45 PM ESTUpdated Thu, Feb 9 20236:29 PM EST

There are rumors that the Securities and Exchange Commission may want to end staking for U.S. retail customers, according to Coinbase CEO Brian Armstrong, who said it would have damaging consequences for the ecosystem and its investors, if true. "We're hearing rumors that the SEC would like to get rid of crypto staking in the U.S. for retail customers," he said in his tweet . "I hope that's not the case as I believe it would be a terrible path for the U.S. if that was allowed to happen." Crypto is no stranger to fear, uncertainty and doubt about government crackdowns. So far, the rumor Armstrong addressed is exactly that: a rumor. The SEC declined to comment for this story. Staking is not just a yield-generating opportunity for crypto investors, it's also essential to the way proof-of-stake protocols like Ethereum operate. If there was some kind of chokehold on staking or staking services, the outcome for Ethereum could be "disastrous," according to Owen Lau, an analyst at Oppenheimer. "For Ethereum to work you have to stake your ether onto the network to support the transaction," Lau said. "If nobody can stake, then how can you support that transaction being made on the network?" ETH.CM= 1D mountain The price of ether on Thursday Less than six months ago, Ethereum migrated to the "proof-of-stake" protocol, a technical upgrade known as the " Ethereum merge " that was meant to lower the network's energy consumption by 99.95%. In doing so, it also turned some investors – the ones that choose to "stake" their ether on Ethereum to generate yield – into validators on the network. This made them essential to keeping the network running. That opportunity is widely seen as a catalyst for mainstream adoption of crypto and a revenue opportunity for exchanges like Coinbase. Coinbase said last summer that it was facing an SEC probe over its staking programs. A month later, in September, SEC Chair Gary Gensler warned that crypto networks and intermediaries like Coinbase or Kraken, which allow people to stake their crypto might trigger securities laws , the Wall Street Journal reported. Armstrong's latest comments came a day before Kraken, one of Coinbase's main exchange competitors, agreed to shutter its crypto staking operations to settle charges with the SEC. Kraken declined to comment. The rules of the game The murmurs in the industry highlight an issue that has been a big headache for crypto businesses for years: there aren't clear rules for them to follow. "The better way for this industry to move forward is Congress should just act right now, have a bill, get opinion from the public and determine which tokens are securities, which activities are securities and which are not, so that we don't have these kind of unnecessary public fights going forward," Lau said. "We are just too slow," he added. "Whether you like it or not, if they define everything to be securities or define everything to be commodities … we need to have the clarity right now." It isn't the first time a crypto leader has fought publicly with the SEC seeking more clarity or insight into the agency's stance. Last summer Grayscale sued the regulator after it rejected an application to turn the Grayscale Bitcoin Trust into an ETF. Many hoped to see faster action by regulators after the catastrophic fall of FTX at the end of 2022, though many on Capitol Hill may feel a sense of betrayal after the time Sam Bankman-Fried spent meeting with lawmakers and their staff, having what could have been productive conversations and ideas exchanges. With the rising popularity in crypto over the years, lawmakers and regulatory agencies have sharpened their understanding of the sector and the industry itself has beefed up its lobbying. Still, many see enforcement actions by the SEC as well as the Commodity Futures Trading Commission and U.S. Treasury, among other regulatory bodies, as the most likely way the rules of the road will be established. Earlier this year, the SEC has charged Genesis and Gemini with selling unregistered securities. "Instead of taking the path of thinking through staking programs and issuing guidance, we again chose to speak through an enforcement action, purporting to 'make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection,'" SEC Commissioner Hester Peirce said in a statement Thursday following the Kraken news. "Using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating, she added. "Moreover, staking services are not uniform, so one-off enforcement actions and cookie-cutter analysis does not cut it."