What Is Crypto Staking and Is the U.S. About to Ban It?

  • Top proof-of-stake cryptos are in focus today.
  • The Securities and Exchange Commission (SEC) settlement with Kraken included a $300 million fine and required the exchange to shut down its staking services.
  • This has led to fear of a widespread crackdown across the sector today.
crypto staking - What Is Crypto Staking and Is the U.S. About to Ban It?

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It’s been a wild few days in the crypto market. Indeed, following a strong start to the year for most cryptocurrencies, we’ve seen considerable selling pressure take hold over the past couple days. Much of this has to do with specific news around crypto staking and the settlement made between crypto exchange Kraken and the Securities and Exchange Commission (SEC) this week.

This settlement essentially results in Kraken paying the SEC $30 million and agreeing to shutter its staking operations. Accordingly, this announcement has sent shockwaves through the sector, with many crypto investors now concerned about an outright ban on crypto staking for other exchanges and networks.

Notably, Coinbase (NASDAQ:COIN) CEO Brian Armstrong has come out in a pretty vocal way in support of staking activities. Coinbase, like other exchanges, earns some revenue from providing such services to its clientele. Accordingly, there’s some skin in the game for Armstrong and others. That said, the message that technological growth an innovation should be encouraged within the U.S. market is one many can get on board with.

Let’s dive into what staking is and why there’s so much discussion on this topic right now.

What Is Crypto Staking?

In the world of blockchain technology, there are two prominent ways blocks are added to a continually-growing chain. The “original” means for adding blocks continually to an ever-growing blockchain, made popular by Bitcoin (BTC-USD), is called proof-of-work. This involves so-called “miners” with highly-specialized computers solving complex mathematical problems in an effort to validate transactions, earning Bitcoin for their troubles. This is a seriously energy-intensive process that has come under pressure from many inside and outside the crypto community.

Proof-of-stake consensus, on the other hand, involves the validation and additions of blocks to a given blockchain via so-called “nodes” that stake their tokens on the network. The staked tokens are used to validate transactions, essentially allowing those with a greater stake (or more skin in the game) to earn greater rewards. This incentivizes loyalty and historical performance in terms of how effective a node is at validating transactions. Notably, a portion of the stake can be slashed in situations where nodes are down or act nefariously in a bid to protect the network.

Staking is much more energy-efficient than mining, and this is one of the reasons why Ethereum (ETH-USD) recently made the switch to proof-of-stake from proof-of-work. However, a full-on crypto staking crackdown could affect this sector broadly, with most altcoins and Ethereum-related projects now on the proof-of-stake consensus.

There’s no clear indication what the SEC will be pursuing and whether it will be a full crackdown or case-by-case investigations of key exchanges. All the same, this news isn’t welcome for investors. Thus, today’s decline of around 4% in the crypto market makes sense in light of this uncertainty.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

Article printed from InvestorPlace Media, https://investorplace.com/2023/02/what-is-crypto-staking-and-is-the-u-s-about-to-ban-it/.

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