Coinbase CEO Tweets Rumors Of Retail Staking Ban, Kraken Faces SEC Probe

Coinbase (COIN) CEO Brian Armstrong tweeted about rumors that the Securities and Exchange Commission (SEC) may ban crypto staking for retail customers as regulators reportedly probe crypto exchange Kraken for selling unregistered securities, signs that increased regulatory scrutiny for cryptocurrencies may be in the cards.

Armstrong Thinks That Ban Would Set US Back

Armstrong tweeted Wednesday about rumors that the SEC “would like to get rid of crypto staking in the U.S. for retail customers.” He said that staking is important for the crypto market and brings improvements such as “scalability, increased security, and reduced carbon footprints.” He also says that staking is not a security.

A related but separate Bloomberg report said that the SEC was investigating crypto-exchange Kraken for the sale of unregistered securities. The report does not reveal which Kraken tokens were the subject of the probe but it is important to note that Kraken also allows investors to stake their crypto and earn rewards.

Armstrong argues that rules must not stifle new technologies. His belief is that regulation by enforcement doesn’t work and that it would lead to companies operating offshore — as in the case of FTX.

In August 2022, Coinbase revealed in its quarterly filings that it had received "investigative subpoenas" and requests for documents from the SEC regarding its staking program.

It is also not the first time Armstrong has taken to Twitter to criticize the securities regulator. In September 2021, Armstrong tweeted about SEC's "sketchy behavior," saying the regulator clamped down on a yield-earning product that Coinbase was about to launch when the company reached out to the SEC with a "friendly heads up and briefing."

Crypto Community Reacts To Staking Ban Rumors

Several notable members in the crypto space have commented on the rumors, offering varying opinions on the matter. While there seems to be a unanimous condemnation of any such move, some individuals offer a more nuanced position.

Cardano co-founder Charles Hoskinson chimed in, saying that Ethereum staking was “problematic,” but was worried that the SEC might clump all proof-of-stake protocols together. He described the blanket ban as “comparing three mile Island [sic] to a modern 4th generation nuclear reactor because they both use the word fission.”

Meanwhile, Dogecoin's founder Billy Markus tweeted that the “government is so weird,” and Ripple’s community lead said that “crypto doesn’t belong in their club.” Both are light-hearted comments that point to exasperation about the SEC’s stance on all matters related to crypto.

Potential Impact If There's A Staking Ban

The securities regulator has upped its scrutiny of cryptocurrency-related products over the past few years.

The SEC probed BlockFi for its ending product, stating that the latter had failed to register its product. BlockFi eventually agreed to a $100 million settlement. It also changed its policy to allow only U.S.-accredited investors to participate in the new product.

If the SEC is considering a ban on staking for retail investors at all, allowing only institutional investors or accredited investors to participate would arguably go against the spirit of decentralization, a key tenet of cryptocurrency.

Another theoretical argument could be made from the implementation point of view. Staking is a fundamental part of the crypto market, and any platforms, such as Coinbase, that offer staking could perhaps comply with the change. However, regulating decentralized platforms may prove to be a challenge.

In other words, it seems like the specific wording is what is important in order to get a better sense of what the market impact could be. For that, investors will have to wait to hear from the SEC on this, if an announcement comes at all.