Ethereum validators have re-staked their ETH into mining pools after a successful withdrawal process following the Shapella hard fork. The network upgrade allowed validators to withdraw their long-staked Ether from the Beacon Chain after three years. In the first week of withdrawals, over a million ETH was unstacked by validators. However, in the second week, the number of ETH staked was higher than that of ETH withdrawn, indicating that validators are re-staking most of their ETH back into mining pools.
Staking temporarily locks tokens on a network that uses a proof-of-stake consensus mechanism. In a PoS network like Ethereum, users who validate new transactions and add new blocks must stake a certain amount of cryptocurrency. In return, they receive rewards. Staking ensures that a blockchain is updated only with valid data and transactions. Participants offer to stake large amounts of cryptocurrency as insurance to increase their chances of validating new transactions.
While re-staking is good news for Ethereum, the future of Ethereum staking in the US is uncertain. Ethereum staking is getting tricky for US-based validators as staking service providers, particularly centralised exchanges, fight a regulatory battle with the Securities and Exchange Commission (SEC).
In February, the Kraken crypto exchange settled with the SEC for $30 million and closed its staking services for US clients. The SEC it claimed that the service qualified as a security and that Kraken must obtain the necessary license to operate. Kraken withdrew its validator nodes for US clients just a day before the Shapella upgrade to comply with SEC orders, which triggered an industry-wide debate on the future of staking services in the US.
Coinbase, one of the first crypto exchanges to go public in the US, provides staking services and is trying to force the SEC to answer a petition it filed regarding guidance for cryptocurrencies. Coinbase CEO Brian Armstrong claimed that the SEC’s efforts to curtail staking service providers would prohibit retail staking in the US. This could force many crypto platforms and staking service providers to move to offshore locations. At a time when the SEC is proactive in its enforcement action against crypto-staking services, the future of ETH staking looks shaky in the US.
William Kraus, a partner at FisherBroyles law firm, told Cointelegraph that the SEC’s enforcement against Kraken shows the commission’s position on staking-as-a-service. He added that this could prompt US providers to respond in several ways, with some eliminating the service. In contrast, others might change how they provide it or publicly describe it. Some providers might decide not to change anything.
Danny Talwar, head of tax at Koinly, told Cointelegraph that centralised staking providers account for almost a quarter of all staked ETH, with Coinbase, Kraken, and Binance leading the way. “If offshore exchanges with no Know Your Customer or Anti-Money Laundering compliance end up being major beneficiaries of the SEC cracking down on regulated, domestic, centralized exchanges, ‘consumer protection’ may be the least likely outcome,” he said.
The troubles of centralised staking services might work in favour of decentralised staking services and pools. After Kraken withdrew US-based validator nodes, most of these validators moved to Lido Finance, a decentralised staking pool service provider. While US regulators are clamping down on staking services, crypto proponents are trying to convince regulators that high-yield lending interests offered by centralised entities and staking rewards on the Ethereum blockchain are not the same.
