CEO of Coinbase Warns an SEC Crackdown May Be Coming that Can Hurt Ethereum 

SEC might be considering cracking down on a practice called staking, according to the CEO of Coinbase Global COIN –9.56% Coinbase Global Inc. $62.766.69(-9.63%) Open$68.49 Volume15.26MP/E RatioN/ADiv YieldN/AMarket Cap$ 15.76B60.5568.93 It would be detrimental to the crypto broker's business, likely negatively affecting EtherETHUSD –1.43%, the largest crypto after Bitcoin BTCUSD –1.69%.

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It is important to understand that stake refers both to the process that supports the blockchain networks as well as the way that investors can earn a return on their crypto holdings through the stake.

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Bitcoin does not support staking, but Ethereum, one of the largest blockchains, does, and staking is possible with Ethereum. In a process called staking, Ether holders can secure their tokens as collateral for a validation process that validates transactions and secures the Ethereum network, earning them money while doing so. There is an upwards of 5% yield on staking Ether at the current time. Staking on Ethereum requires that "Validators" provide a minimum of 32 Ether, which is around $52,000 before they can participate.

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A good example of this is Coinbase (ticker: COIN), a platform that is itself a validator, and which offers a service that lets investors stake smaller amounts of Ether. As there is no minimum amount needed to participate, a broader group of people will have a chance to take advantage of the yield opportunity. 

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Coinbase receives a 25% fee from Ether yields and investors earn crypto yields that would otherwise be out of reach. Since crypto trading revenue has fallen in tandem with Bitcoin prices over the past year, analysts say Coinbase needs to diversify.

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There is some speculation, however, that regulators are looking at this business model with a view to eliminating crypto staking in the U.S. for retail customers. “We are hearing rumors that the SEC might disallow crypto staking for retail customers,” Armstrong wrote on Twitter on Wednesday. “It would be a terrible path for the U.S. if those sorts of events were allowed to take place, and I hope that's not the case.” 

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It has been reported that the SEC has declined to comment on this matter. Coinbase disclosed last summer in its second-quarter financial filings that it had been under scrutiny from the SEC regarding its stake program, which it said had been served with investigative subpoenas and other requests for documentation.

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Both Coinbase and Ether would be adversely affected by a potential ban on staking. This would mean that Coinbase would lose a source of high-margin revenue that is expected to be a pillar of growth in the future. In the case of Ether, U.S. retail investors, a group that has been a major driving force behind cryptos' recent bull run, would be unable to participate in the staking of the project. Ethereum will not be crushed by such a scenario, but rather it will have a major impact on the wider adoption of the network, which would support the price of Ethereum as well.

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Armstrong, for his part, does not want this to be the case. According to the Coinbase CEO on Twitter, "Staking is one of the most important innovations in the crypto space." As the CEO puts it, "Staking allows users to participate directly in the operation of open crypto networks." The Staking concept brings a number of positive improvements to the space, including scalability, increased security, and reduced carbon footprints.

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Armstrong and others argue that staking isn't a security, therefore, it would not be subject to regulation by the SEC, which would make Ether a financial instrument. There has been an argument between the SEC and the broker before: The SEC has stated that some tokens, which Coinbase says are not securities, are simply tokens and should not be regarded as securities.

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In the absence of any confirmation from the SEC, these concerns can only be considered as concerns for now. While these actions are positive for cryptocurrencies, they also add to the uncertainty presented by the bear market in prices, other regulatory pressures, as well as declining investor interest in cryptocurrencies.