Are Regulators Taking Aim at Crypto Staking? Rumors Suggest New SEC Scrutiny

As U.S. regulators continue to tighten their reigns on crypto, rumors are swirling that the next target could be the practice of cryptocurrency staking.

“We’re hearing rumors that the SEC would like to get rid of crypto staking in the U.S. for retail customers,” Coinbase co-founder and CEO Brian Armstrong tweeted Wednesday. “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.”

Staking is the process by which users can deposit proof-of-stake tokens to a blockchain to help secure the network, with stakers receiving rewards for doing so.

After Armstrong’s tweet, at least one other crypto Twitter commentator claimed to have confirmed a multi-agency action against Coinbase. However, sources close to the matter told Decrypt that the claim was unsubstantiated. Paul Grewal, chief legal officer at Coinbase, said succinctly, "Totally false."

Following the collapse of FTX in November 2022, the SEC has made cryptocurrency and digital assets a top priority of its examination division for 2023.

“The Division will conduct examinations of broker-dealers and RIAs that are using emerging financial technologies or employing new practices, including technological and online solutions to meet the demands of compliance and marketing and to service investor accounts,” the agency said.

Also on Wednesday, Bloomberg reported cryptocurrency exchange Kraken faces an SEC probe over claims of offering unregistered securities, citing a person with knowledge of the matter.

The SEC and its chair Gary Gensler have long been accused of regulation by enforcement, something Armstrong and others say will encourage companies to operate offshore. But regulators and politicians like U.S. Senator Elizabeth Warren say the crypto industry is “scared of a strong SEC,” adding that the agency needs to do even more across the entire crypto market.

“We need to make sure that new technologies are encouraged to grow in the U.S. and not stifled by lack of clear rules,” Armstrong wrote. “When it comes to financial services and Web3, it’s a matter of national security that these capabilities be built out in the U.S.”

In a tweet posted an hour after Armstrong’s initial thread, Coinbase tweeted its support for staking, saying that it has the potential to accelerate the adoption of digital payments globally because it is not dependent on setting up expensive centralized intermediaries.

“For staking to work successfully it needs to remain decentralized, neutral, and global,” Coinbase wrote.

Other U.S. agencies wading into crypto include the FTC, CFTC, the Justice Department, and the IRS, which is being sued by a Tennessee couple attempting to recover federal income taxes levied on the Tennessee couple’s stake-generated Tezos in 2021.

The lawsuit stems from a Tezos user being denied a refund from the IRS, saying the coupled owed taxes for earning staking rewards.

The lawsuit was joined on Tuesday by crypto Giant ConsenSys, which said it would financially support the challenge.

“Hopefully,” Armstrong wrote. “We can work together to publish clear rules for the industry, and come up with sensible solutions that protect consumers while preserving innovation and national security interests in the U.S.”