Decentralised finance apps such as Lido, Rocket Pool and StakeWise may benefit from the US Securities and Exchange Commission’s crackdown on crypto staking services — if they avoid a similar clampdown.
The US-based exchange Kraken agreed on Thursday to pay US$30-million to settle SEC allegations that its crypto staking products broke rules. The platform will discontinue the products in the US as part of the agreement with the regulator. The SEC alleged that Kraken’s staking service was an illegal sale of securities.
Decentralised finance, or DeFi, apps let people trade, lend and borrow without intermediaries and often anonymously through the use of automated protocols. Many in the DeFi community argue that the autonomous aspect pushes the apps outside the guidelines of regulators since no individual benefits directly.
“This is a huge gift to decentralised staking providers like Lido, Rocket Pool and StakeWise,” said Henry Elder, head of DeFi at Wave Financial. “Their competitive advantage is an innate resistance to regulatory action — something that mattered little in the absence of such action.”
Staking involves earning rewards by locking up coins to help order transactions on various blockchains such as Ethereum. Coinbase Global, Kraken, Binance and others have waded into staking products to diversify revenues.
“In the short term, it’s definitely good news for on-chain direct staking and decentralised platforms, in the sense that people who want to stake have to use those options now,” said Austin Campbell, adjunct professor at Columbia Business School.
Staking platforms, whether it’s centralised exchanges like Coinbase or Kraken or decentralised platforms like Lido or Rocket Pool, let users stake coins, without needing specialist computer equipment nor having a minimum amount of 32 ether. Many users have preferred to stake with the centralised exchanges given their more user-friendly experience.
Too early
Kraken was the third largest ethereum depositor with about 7.5% market share behind Lido and Coinbase, according to Etherscan.
Overall, proof-of-stake blockchains accounted for 23% of the total market value of digital assets at the end of 2022, according to a report from Staked and Kraken. The report estimated the value of staked assets at $42-billion.
Jason Allegrante, chief legal and compliance officer at crypto custody tech provider Fireblocks, said that it is too early for DeFi to call it a win.
Read: Battered DeFi investors pin their hopes on ethereum revamp
“In the industry we tend to think of DeFi as completely decentralised, no one’s in charge,” Allegrante said. “But from the regulator’s perspective, they would come to the table and say, ‘Well, you know, how could that be?’ There has to be somebody who launched this.” — Muyao Shen and Olga Kharif, with David Pan, (c) 2023 Bloomberg LP