Explainer – What is staking, the cryptocurrency practice in the crosshairs of regulators?

By Hannah Lang and Elizabeth Howcroft

(Reuters) – Crypto companies that offer their customers staggering returns through so-called ‘staking’ products are drawing the wrath of the US Securities and Exchange Commission, which says such services should be registered.

Crypto exchange Kraken on Feb. 9 agreed to suspend its staking service for US customers and pay $30 million in penalties as part of a deal with regulator, and investors fear a broader ban could follow this practice.

Here’s what you need to know about staking:

What is staking?

Staking is a process whereby holders of cryptocurrencies voluntarily to validate transactions in the Blockchain participate – in other words, check that the ledger all adds up.

Verification is not done by individuals, but by computers on the blockchain network, often via third-party staking services. In return, validators who are unable to use their cryptocurrencies involved in the validation process for a certain period of time receive a share of the transaction fees or newly created cryptocurrencies. This reward is then passed on to customers on centralized exchanges who agree to stake their wealth.

From a customer perspective, one way of earning returns on cryptocurrencies is by agreeing to have them “commissioned” or “locked up” for a period of time. Staking is only like on proof-of-stake blockchains Ethereum possible.

The question for regulators is whether this remuneration system is similar to an investment contract and should comply with the accompanying rules.

Which companies are involved?

Almost all major crypto exchanges offer their customers staking services for a variety of tokens, including Coinbase, Binance, Crypto.com, Gemini, Huobi, and OKX. These firms offer their clients annual percentage returns ranging from 2% up to 40% APY on certain tokens. Some of the most popular tokens that can be staked include Ethereum, Solana, polygon and avalanches.

While these centralized exchanges offer staking as a service to their customers, cryptocurrency owners can also trade their tokens on decentralized exchanges such as Uniswap, although this requires more technical know-how.

It’s not just crypto companies either. British digital banking app Revolut recently started allowing customers in the UK and Europe to stake cryptocurrencies they hold on the platform.

Why are regulators unhappy about this?

The SEC has said that most staking providers do not provide customers with adequate disclosures about how their cryptocurrency is being used and should register their staking services with the agency. In its Feb. 9 settlement with the SEC, Kraken neither admitted nor denied the SEC’s claim that its staking service should have been registered.

SEC Chairman Gary Gensler said the action was intended to notify other crypto exchanges that offer similar services to US users and that those platforms should comply with securities laws.

While regulators have raised concerns about crypto products luring customers with promises of high returns, the practice of staking in countries other than the United States has not been singled out for particular regulatory attention.

Kraken said it will continue to offer staking to customers based outside of the United States.

What’s next?

Although Gensler said the SEC’s settlement with Kraken should be a warning sign to the rest of the cryptocurrency industry, it’s not immediately clear that other crypto exchanges that offer staking will register these services with the SEC.

In a statement, Coinbase said its staking program was unaffected by Kraken’s settlement with the SEC because its own service is “fundamentally different” from Kraken’s.

The Blockchain Association, an industry trade group representing a number of prominent crypto firms in the United States, noted that the Kraken settlement is not law but should serve as an impetus for Congress to pass legislation governing cryptocurrency.

(Reporting by Hannah Lang in Washington and Elizabeth Howcroft in London; Editing by Andrea Ricci)

the post Explainer – What is staking, the cryptocurrency practice in the crosshairs of regulators? first appeared on Crypto News News in German.

Source: Crypto News Deutsch