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Crypto industry rails against US regulator after Kraken crackdown: ‘The SEC is extorting everyone’

The US Securities and Exchange Commission ordered Kraken to shut down its Ethereum staking service in the US – and some in the industry are howling in protest.

”The SEC continues its attack on US crypto companies and retail investors, regulating by enforcement and undercutting the potential of public blockchain networks,” said Blockchain Association CEO Kristin Smith in a statement shared with DL News. “Staking is an important part of the crypto ecosystem.””

A crypto trader at a hedge fund told DL News: “The SEC is extorting everyone who trusted it. Every exchange’s position is determined by an educated guess on big legal unknowns with plenty of room to get fucked. Kraken was unlucky, Coinbase will be next.”

Crypto assets fell on the news, with most major assets sinking in the aftermath of the SEC’s announcement. SEC Chair Gary Gensler is outspoken about his stance that some cryptocurrencies should be regulated as securities. And he made it clear the agency is not stopping with Kraken.

“This really should put everyone on notice in this marketplace,” Gensler said in an interview on CNBC. “Other platforms should take note of this and seek to come into compliance,” he said. Shortly after news of the SEC’s enforcement action on Kraken broke, Gensler uploaded a new instalment of his “office hours” series to Twitter.

“When a company or platform offers you these kinds of returns, Whether they call their services ‘lending,’ ‘earn,’ ‘rewards,’ ‘APY,’ or ‘staking,’ – that relationship should come with the protections of the federal securities laws,” he said in the video.

The end of Kraken’s US staking service may make it hard for customers to get their funds back.

That’s because depositing Ethereum (ETH) tokens into the chain’s staking contract is a one-way trip at the moment. The ability to unstake won’t get switched on until Ethereum’s Shanghai upgrade, currently scheduled for March. Kraken customers hold over 1.2 million staked ETH, or about $1.84 billion, which accounts for 7.4% of all ETH currently staked.

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In a blog post announcing the end of its US staking service, Kraken assured US customers that “all staked ETH will become unstaked after the Shanghai upgrade and will continue to earn rewards until then.”

However, staked ETH withdrawals won’t be instant when the Shanghai upgrade goes live. To ensure the Ethereum network remains stable, it will impose an exit queue for staked token withdrawals, meaning only a certain amount can be withdrawn in a given timeframe.

If the SEC brings enforcement action against other centralised staking providers in the run up to the Shanghai upgrade, it could result in a huge backlog of staked ETH withdrawals as exchanges rush to shut down their staking programmes and return ETH to customers.

Juan Pellicer, researcher at data science company IntoTheBlock, said that, with the current number of active validators, stakers will be able to withdraw around 224 ETH every 6.4 minutes after the Shanghai upgrade. If all other parties who wished to withdraw their staked ETH stepped aside and let Kraken withdraw, it would still take approximately three weeks to unstake it all. However, as Kraken only needs to reimburse US stakers, it’s likely it would only need to withdraw a fraction of its 1.2 million staked tokens.

Hester Pierce, the Republican SEC commissioner dubbed “Crypto Mom” for her support of crypto and criticism of regulation of digital assets, voiced her dissent following the announcement. And in a Wednesday tweet, Coinbase CEO and founder Brian Armstrong also voiced concerns about the crackdown.

However, some industry stakeholders were sympathetic to Gensler’s decision.

“If custodial staking involves pooling of customer funds to juice yields and exposes them to the risks of the broader solvency of the business, I do think it should be regulated,” tweeted Euler Labs CEO Michael Bentley. “This will also boost Ethereum’s decentralisation.”

Others have also been quick to point out that the SEC cracking down on staking service providers like Kraken might be beneficial to decentralised staking protocols, such as Lido, Rocket Pool and Stakewise.

“Post-withdrawals, people who staked their ETH with Kraken will be forced to move their stake elsewhere,” tweeted crypto personality and Daily Gwei podcast founder Anthony Sassano. “It’s on us as a community to steward these people into decentralised solutions such as Rocket Pool and solo staking.”

Even before yesterday’s SEC enforcement, liquid staking derivatives, or LSDs, have dominated Ethereum staking. Of them, Lido, launched in December 2021, is by far the biggest, with over five million ETH worth $7.86 billion staked through its smart contracts.

Lido lets users stake their ETH and in return receive stETH, a token that represents the tokens they staked and that accrues staking yields automatically through a rebasing system. Because users receive stETH they don’t need to wait until staking withdrawals are activated to exit their position. Instead, users can trade stETH for ETH or other tokens via decentralised exchanges such as Uniswap.