Coinbase CEO Brian Armstrong recently commented negatively on the rumours that the SEC will ban staking in the US. He says that this is going to have a negative impact on the crypto industry. However, we must note that the SEC’s decision to ban staking isn’t so bad. In fact, they are not banning ‘staking’; instead, they will ban ‘staking as a service.’ This means centralised exchanges in the US won’t be able to provide staking services anymore.
Why are crypto exchange owners unhappy?
1/ We're hearing rumors that the SEC would like to get rid of crypto staking in the U.S. for retail customers. I hope that's not the case as I believe it would be a terrible path for the U.S. if that was allowed to happen.
— Brian Armstrong (@brian_armstrong) February 8, 2023
When the SEC decides to ban ‘staking as a service,’ it will significantly impact the exchange’s earnings. Centralised exchanges make profits without taking risks by staking or lending out customer funds. Generally, the terms and conditions for the same are stated in the customer agreement. However, no one reads it. This means crypto exchanges make profits but do not take any risk or responsibility for customer funds if anything goes wrong.
An excellent example of this would be FTX which lent out customer funds and comingled them with their operating funds. So, when things went south, customers lost their holdings. The same thing applies to Coinbase as well. They automatically stake user holdings on their behalf and generate passive income for the customers. They make profits by keeping a cut of the generated profits.
However, if something goes wrong when Coinbase is staking or lending out funds, they won’t take any responsibility. This is the problem that is present with staking as a service. So, if the SEC bans this, the exchanges will lose an easy source of revenue.
SEC’s decision to ban staking could protect investors
We can assume that Coinbase is a good exchange, and they won’t mess with customer funds. However, many things might end up happening if case exchanges are allowed to use customer funds to generate returns. And all these cases have massive potential for turning into losses for the customers.
Firstly, the exchange could lend out the funds for a fixed interest rate. This is great, but sometimes exchanges could lend to less trustable borrowers to get a higher interest rate. And because they are not taking the risk, it is acceptable for the platform. Even worse is when a widespread crypto borrowing and lending platform, an exchange gave their customer funds to, goes bankrupt, like Gemini, FTX and more.
Another way things could go wrong is when a platform uses customer funds to trade without appropriate risk control. This could result in huge losses and, ultimately, the loss of funds. For example, during FTX’s bankruptcy filing, it was found that they were involved in reckless trading with customers’ money.
And lastly, the worse scenario could be if the exchange steals customer deposits and mixes them with their funds. This was also one of the allegations FTX faced.
Investors need to have full disclosures.
Gary Gensler, the chairperson of the US Securities and Exchnage Commission, recently pointed out in a youtube video the questions that investors must have answered when staking their tokens. If the customers do not have complete disclosures, then their funds might be at risk, plus it is a situation that no one probably wants to be in.
The first question the investor might ask the company offering them ‘staking as a service’ is, what are they doing with your tokens? Are they lending, staking or mixing the funds with their business? Where do the rewards come from? As a customer, are you getting a fair share of the rewards? This is a fundamental question.
That’s because, let’s say, the crypto protocols where your funds are invested generate real value and offer rewards. That will be a good scenario; however, it is also entirely plausible that the tokens that are developed and given to you overall reduce the value of the previous tokens. So, you didn’t make any money as the supply increased.
Finally, Gary Gensler says that these service providers are providing proper disclosures, so there is no way to get the answers to these questions. He also pointed out that by agreeing to the terms and conditions, you sometimes might even transfer ownership of the tokens to these platforms without knowing.
Ultimately he says, ‘not your keys, not your crypto,’ so if a firm goes bankrupt, you lose your funds and end up in a line in front of the court. So, what are your thoughts, as it looks like the SEC’s decision to ban staking isn’t so bad? Let us know in the comments below. And, if you found our content informative, share it with your family and friends.
Also, Read: Crypto.com is charging 50% fees for fund withdrawals.
