Staking ban is another nail in crypto’s coffin — that’s a good thing

The SEC’s move to ban staking is going to encourage more people to move toward decentralized options beyond the agency’s reach.

Rumors of an impending crypto ban came to fruition on Feb. 9 with the Securities and Exchange Commission’s enforcement action against Kraken, which resulted in a settlement where the exchange agreed to end its staking services for American users. The action will likely extend to all companies based in the United States.

Reactions were predictable depending on where you stand on crypto in general. Crypto advocates railed against regulators who are slowly asphyxiating this burgeoning industry, while skeptics celebrated crypto’s impending demise. The advocates have it right. Antagonistic regulators will force crypto into friendlier jurisdictions, which will reap the economic benefits. The skeptics have it right, too. This event, and much of those from last year, is killing crypto. Their apparent glee is misplaced, though. This is a good thing.

Emboldened by the slew of blow-ups of crypto businesses in 2022, the SEC and the Commodities Futures Trading Commission have begun to take an increasingly harder line with the crypto industry. They’ve been targeting fiat on-ramps via U.S. banks. They are now targeting staking. Brian Armstrong, CEO of centralized exchange Coinbase, intimated on Feb. 9 that “the SEC would like to get rid of crypto staking in the U.S. for retail customers.” A day later, Kraken announced it would be shuttering its staking-as-a-service program as well as paying a $30-million fine. It now seems likely something akin to a ban on staking will extend to all U.S.-based companies.

Armstrong rightly stated in his tweets that a ban on staking “would be a terrible path for the U.S. if that was allowed to happen.” If U.S. regulators press too hard, they might be responsible for the U.S. ceding ground in the crypto industry to other countries. Better stop now because crypto businesses are already leaving the United States.

1/ We're hearing rumors that the SEC would like to get rid of crypto staking in the U.S. for retail customers. 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.

— Brian Armstrong (@brian_armstrong) February 8, 2023

The latest action by the SEC is even drawing criticism from within the SEC. Commissioner Hester Peirce objected to the rashness of this enforcement action, stating that “using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating.” It creates uncertainty and forestalls investment. What is needed are fair and clear rules. Barring that, American leadership in crypto will fade.

However, the ban on staking is a good thing for crypto.

Good riddance.

Related: My story of telling the SEC ‘I told you so’ on FTX

Staking with an incorporated business is antithetical to what makes crypto special. Staking is used to secure global networks like Ethereum’s, which is designed to be controlled by no one. Since companies operate under the purview of governments, there is an obvious dissonance between them and staking. This might not be a problem if businesses represented a trivial amount of total staking activity, but just Coinbase and Kraken, both domiciled in the U.S., represent roughly 20% of total staked ETH.

It would be great if all government-regulated companies accounted for considerably less than 10% of Ethereum’s staking, or any public blockchain’s for that matter. It might be the case that the fastest way to achieve this change is to ban staking! After Mr. Armstrong’s tweets, decentralized staking projects’ token prices got a boost. Hopefully, this will translate into an increase in their staking percentages. There was another bump upon the Kraken announcement. If the SEC continues, expect to see a significant shift away from centralized to decentralized staking.

This is part of a larger trend the crypto industry began last year. When opaque crypto business after business went insolvent like falling dominoes, people began looking for viable on-chain alternatives. Suddenly, the quaint values that defined early crypto adopters weren’t so quaint anymore — e.g., “not your keys, not your coins” or “don’t trust, verify.”

Related: Digital Currency Group’s Genesis implosion: What comes next?

People began looking for trustless platforms for things like derivatives and yield. We can probably add staking to the list, too. Luckily, on-chain technology is now mature enough to offer a comparable experience to centralized services. This experience will only become better as the tech continues to develop rapidly, and as more people move their assets on-chain.

Fiat on-ramp exchanges like Coinbase will always play an important role in crypto, but it’s clear that eventually, every crypto-to-crypto service these intermediaries currently offer will be retired in favor of superior fully decentralized alternatives.

To the skeptics that say “crypto is dead.”

Simply reply, “Yes, crypto is dead. Long live crypto.”

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.