In the most recent of a number of enforcement proceedings taken by the US Securities and Exchange Commission, the cryptocurrency exchange Kraken agreed to pay 30 million USD to resolve claims that it violated agency regulations by providing a service that enabled users to receive incentives for "staking" their coins. The SEC wants to regulate cryptocurrency operators in the US similarly to stock and bond markets by bringing them under the same regulatory framework that oversees the staking of all types of assets.
What is Staking?
Staking is a major component of many blockchains, including Ethereum, and it holds the potential to help other cryptocurrencies move away from a system that uses a lot of power, which makes this crackdown attempt distinct from others. Staking is also a characteristic that many blockchains share.
Proof of Stake vs Proof of Work
We must expand on Staking in order to comprehend why the SEC is chasing it. Blockchain networks employ staking as part of the Proof of Stake consensus mechanism to protect their transactions and preserve their decentralization. PoS employs stakers who offer their own cryptocurrency as collateral to validate transactions as opposed to Proof of Work (PoW), which relies on miners to solve challenging mathematical problems. We saw how Ethereum transitioned from PoW to PoS and joined other top staking masters like ALGO, TEZOS, and CARDANO in 2022. The more cryptocurrency a staker holds, the more likely they are to be chosen to validate transactions, and the greater staking rewards.
Wondering how $ETH moved from a PoS to a PoW? We've got you covered here
Staking - the buzzword
Staking has become increasingly popular in the crypto community as more and more blockchain networks adopt PoS as their consensus mechanism. Staking provides a way for crypto enthusiasts to support their favorite networks and earn passive income in return. One of the benefits of staking is that it helps to maintain the security and decentralization of the network. Since stakers are required to put up their own cryptocurrency as collateral, they have a strong incentive to act honestly and maintain the integrity of the network. This creates a more secure and trustworthy environment for all users of the blockchain.
Staking is well-liked in the crypto community for a number of reasons, one of which is that it prevents energy from being misused. In contrast to the rat race in PoW where a rig with 3 GPUs can consume 1,000 watts of power or more when it's running and those who are unable to validate just burn all the energy and power necessary for validation, the validator puts his own machinery to work and completes the task in PoS.
SEC doesn’t like Staking?
On crypto chat platforms like Our Crypto Talk, where crypto communities have a strong support for the energy-efficient consensus mechanism, staking has also grown in popularity as a conversation subject in the past 10-15 days. You may be thinking that if Staking is the solution to all of the environmental damages caused by Proof of Work, then SEC is acting unfairly and why are they having any problems with it. The issue with Kraken was that it provided Staking as a Service, which goes against morality because users could stake their coins without having to provide any hardware for the process of validation. This could eventually turn into a business and outcompete smaller validators because the exchange could use all of its collateral to win the staking battle, and according to the algorithm, those who put up more collateral are more likely to win the staking battle.
Get some more information about what is exactly happening with SEC and staking here -
It is evident from the SEC's decision against Kraken that it sees this as being similar to cryptocurrency lending, in which service providers would pay depositors of cryptocurrency high rates of interest for lending out their coins. Regulators started cracking down on this practice last year after a number of lenders, including Celsius Network, BlockFi, and others, went down. Both cryptocurrency lending and staking-as-a-service are regarded as securities by the SEC, a classification that imposes a multitude of legal obligations that crypto community previously believed crypto was exempt from. Kraken did not acknowledge or dispute any of the claims made in the SEC complaint, but it promised to stop marketing or selling securities through crypto asset staking services in the US right away.
The Future of Staking
Whether the tightening of staking regulations will have an effect on so-called decentralized staking providers, who assert they are immune to them because they are not run by a specific company or based in a specific location, is a matter of debate. In theory, such providers are just collections of code that carry out transactions automatically.
In conclusion, while the recent actions by the SEC against Kraken have raised concerns within the crypto community, it's important to note that the crackdown was focused on businesses offering staking as a service to US customers. For individuals interested in staking, there are still many options available
If you are into crypto and looking to hold up discussions and network better with traders and crypto enthusiasts from all over the globe, you should definitely check out Our Crypto Talk.