Decentralized finance apps such as Lido, Rocket Pool and StakeWise may benefit from the US Securities & Exchange Commission’s crackdown on crypto staking services — if they avoid a similar clampdown.
The US-based exchange Kraken agreed Thursday to pay $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.
Decentralized 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 decentralized staking providers like Lido, Rocket Pool and StakeWise,” said Henry Elder, head of decentralized finance 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 Inc., 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 decentralized 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 centralized exchanges like Coinbase or Kraken or decentralized 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 centralized exchanges given their more user-friendly experience.
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.
“In the industry we tend to think of DeFi as completely decentralized, 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.”
--With assistance from David Pan.
©2023 Bloomberg L.P.
