Crypto Crackdown

The SEC is making headlines as it has fined cryptocurrency exchange Kraken $30 million and forced it to shut down its crypto “staking” operation.  According to the SEC, Kraken had $2.7 billion worth of crypto in the program, earning Kraken $147 million. Coinbase CEO Brian Armstrong has commented that the SEC was looking to “get rid of crypto staking in the U.S. for retail investors”. Coinbase has a similar operation called “Earn”, so I looked to see what Coinbase has to say about “staking.” 

As far as I can tell you turn over your crypto to Coinbase, which then either turns it over to a third party to use as “proof of stake” or uses it on its own crypto servers for the same purpose. Coinbase does not assume any of the risks involved. Proof of stake is essentially a security deposit required of anyone who wishes to participate in the validation of new blocks on certain blockchains – which earns a share of the transaction fees or “gas” paid by users. Faults such as validating a fraudulent block or going offline may cause the stake to be “slashed.” And that means your crypto goes bye-bye.

This is unlike, for example, a bank deposit where your account is an obligation of the bank, not related to any lending activity of the bank. Losses from defaulting borrowers are charged against the bank’s capital account, not depositors’ accounts. The bank’s capital is backed up by the FDIC or FSLIC. I presume this is the basis for the SEC’s position. Seems to me a very modest return for an unknown risk, especially when compared to short-term Treasury securities.

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