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Ethereum core developers set April 12 for Shanghai hard fork

The upgrade will enable staked ETH withdrawals on the Beacon Chain, completing Ethereum's transition to a PoS consensus.

A target date for the highly anticipated Shanghai hard fork has now been set: April 12. Ethereum core developers approved the target deadline during the All Core Developers Execution Layer #157 call on March 16.

Initially estimated for late March, the Shanghai mainnet upgrade features five Ethereum Improvement Proposals (EIPs), including EIP-4985, which will enable staked Ether (ETH) withdrawals on the Beacon Chain, completing Ethereum's transition from proof-of-work (PoW) to a proof-of-stake (PoS) consensus.

The target date April 12 at 10:27:35 PM UTC, epoch 620,9536, will now be confirmed by developers on GitHub. The fork was initially forecasted for March, but developers later pushed it back to early April.

Validators will receive rewards payments automatically at periodic intervals in withdrawal addresses. Additionally, stakers can exit positions entirely, reclaiming their entire balance.

According to Etherscan, Ethereum PoS smart contract has attracted over 17.6 million ETH, worth nearly $29.4 billion at the publication time. Analysts predict that the upgrade could trigger a sell-off in the short term, Cointelegraph reported.

Screenshot - Overview Ethereum PoS Smart Contract. Source: Etherscan

The transition to PoS officially started on Sep. 15, 2022 with The Merge, in a significant milestone for the Ethereum network by replacing miners for validators, and introducing ETH staking as a key component for the network. Ethereum’s roadmap has several updates coming after Shanghai, known as the “Surge,” “Verge,” “Purge” and “Splurge.” 

The switch for a PoS consensus could have regulatory implications for ETH and the crypto space. Last September, United States Securities and Exchange Commission Chairman Gary Gensler suggested that the blockchain’s transition might have brought ETH under the regulators’ radar.

After a recent crackdown on crypto firms providing staking services in the U.S., Gensler suggested again on March 15 that proof-of-stake coins might be securities: 

“Whatever they’re promoting and putting into a protocol, and locking up their tokens in a protocol, a protocol that’s often a small group of entrepreneurs and developers are developing, I would just suggest that each of these token operators [...] seek to come into compliance, and the same with the intermediaries."

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Gensler suggests staking token operators should ‘seek to come into compliance’

The SEC head was speaking impromptu to reporters after a commission meeting when he was asked about a statement made by the CFTC chair.

United States Securities and Exchange Commission Chair Gary Gensler has again suggested that proof-of-stake coins may be securities. He expressed his view on March 15 after a commission meeting on cybersecurity issues.

Gensler was asked by reporters about his reaction to statements made by Commodity Futures Trading Commission Chair Rostin Behnam at a Senate Agricultural Committee meeting last week that he felt stablecoin and Ether (ETH) were “going to be commodities.” Gensler replied, as reported in The Block:

“The investing public is investing anticipating a return, anticipating something on these tokens, whether they’re proof-of-stake tokens, where they’re also looking to get returns on those proof-of-stake tokens and getting 2%, 4%, 18% returns.”

“Whatever they’re promoting and putting into a protocol, and locking up their tokens in a protocol, a protocol that’s often a small group of entrepreneurs and developers are developing, I would just suggest that each of these token operators [...] seek to come into compliance, and the same with the intermediaries," he continued.

Gensler has voiced his opinion on proof-of-stake coins before. In September, after the Ethereum Merge, Gensler said proof-of-stake coin holders were members of “the investing public anticipating profits based on the efforts of others.”

Later that month, Gensler told a Senate Banking Committee that staking is “another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others.”

Related: Proof of Stake Alliance publishes white papers on legal aspects of liquidity staking

The Howey test, which dates to 1946, is used in U.S. law to identify securities.

Earlier this year, the SEC also forced cryptocurrency exchange Kraken to discontinue its staking service and pay a $30 million settlement on Feb. 9, setting off concerns that the agency was preparing a new round of enforcement actions in the cryptocurrency industry. Gensler said at the time, “If they want to offer staking, we’re neutral. Come in and register, because investors need that disclosure.”

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Ethereum layer-2 solutions may focus less on token incentives in the future

Token incentive models may become obsolete as layer-2 networks focus on ease of functionality and low fees, but how will this impact decentralization?

Layer-2 networks continue to gain momentum as the Ethereum ecosystem advances. For example, data from analytics provider Token Terminal found that layer-2 scaling solution Polygon had 313,457 daily active users as of Jan. 17, 2023 — a 30% increase in activity since October 2022. 

Moreover, the Polygon ecosystem recently announced the launch of its beta version Zero-Knowledge Ethereum Virtual Machine. As a result, Polygon’s native token, Polygon (MATIC), maintains a bullish narrative.

While notable, some believe layer-2 networks offering token incentive models may soon become obsolete. For instance, Jesse Pollak — head of protocols and Base core contributor at American crypto exchange Coinbase — told Cointelegraph at ETHDenver 2023 that there are currently no plans to associate a token with Base, the Ethereum layer-2 network recently launched by Coinbase. He said:

“We think about tokens as a powerful incentive tool that can change user and developer behavior. At the same time, we have seen situations unfold over the last few years where tokens have been used as an incentive mechanism with a lack of product fit for the underlying chain. Tokens have also resulted in nefarious or risky situations in the past.”

According to Pollak, Base is a layer-2 solution that allows developers to easily build applications without requiring an incentive mechanism. “Our product will stand on its own. It will be very easy for developers to use to build applications and distribute those to real human beings,” he said.

Shifting focus from token models to user experience

Focusing on ease of use and distribution are important points, as Pollak pointed out that many of today’s decentralized applications have been used solely for trading cryptocurrencies. “Trading is not enough to make cryptocurrency the future of the economy. At Base, we are making it easy for developers to build useful applications that people actually want to use,” he added.

Pollak explained that Base is investing in core infrastructure, such as Ethereum Improvement Proposal 4844, which will make the network secure and low-cost compared with other layer-2 networks. “It costs about 10–15 cents to conduct transactions on layer-2s. We aim to bring that down,” he mentioned.

While Base launched its testnet in February, Pollak shared that the Base mainnet launch will take place in the coming months. Moreover, while no plans exist for Base to offer a native token, several ecosystem participants have already expressed interest in building on Base.

Recent: Next stop Shanghai — Ethereum’s latest milestone approaches

For example, Konstantin Richter, chief operating officer and founder of Blockdaemon — a blockchain infrastructure provider — told Cointelegraph at ETHDenver 2023 that Blockdaemon will serve as an official infrastructure partner for Base. Richter shared that he thinks Base shouldn’t have a token associated with the network, as he believes proof-of-stake (PoS) is an entirely broken system. “Blockdaemon runs more PoS nodes than anyone else, and I can tell you that proof-of-stake only works when token prices go up,” he said.

Richter further explained that Blockdaemon plans to use the Base network to determine how to allow network participants to run nodes while possibly earning a fixed U.S. dollar fee. “This may result in a different type of PoS mechanism, possibly around commitment of compute rather than a staked percentage of tokens that may not serve the network well,” he said. Richter added that such a model could result in a better user experience. He said:

“This could be the biggest paradigm shift within the cryptocurrency ecosystem since the invention of PoS. We are moving away from incentive models that reward users for using a product. We are now focused on ease of functionality and low fees.”

Yet it remains questionable how exactly Base will attract users and developers to the platform without a token incentive model. Given Coinbase’s vast understanding of institutions and decentralized finance (DeFi), Richter doesn’t think this should be an issue: “I prefer to work with Base given Coinbase’s understanding of institutions and DeFi. It’s remarkable that a public Fortune 500 company is committed to putting transactions transparently on Base.”

While it’s too soon to predict future outcomes, it’s important to note that Arbitrum, another Ethereum layer-2 network, also functions without a native token. This has certainly not stopped users from interacting with the Arbitrum network. According to data from the analytics website L2Beat.com, Arbitrum has about $3.35 billion total value locked, making up about 54% of the market share on Ethereum.

However, rumors have been circulating that Arbitrum may initiate a token airdrop in the future. While this may or not be the case, it demonstrates Arbitrum’s ability to determine product market fit before launching a token. Gil Rosen, president of the Stanford Blockchain Accelerator, told Cointelegraph at ETHDenver 2023 that finding product market fit is about ensuring projects acquire the right customers whose value is accretive to the ecosystem, which often isn’t the case with tokens. “Early projects that launch tokens are often locked into tokenomics models before finding product market fit and then are unable to pivot dynamically,” Rosen said.

“DeFi Dad,” a partner at digital asset investment firm Fourth Revolution Capital, told Cointelegraph that he believes the main driver behind layer-2 tokens is to ensure decentralized control over layer-2 networks.

For example, he explained that the upcoming launch of zkSync’s Zero-Knowledge Ethereum Virtual Machine would use a PoS mechanism to allow zkSync tokenholders to act as stakers. “Layer-2 tokens are necessary for building the decentralized future,” he said.

DeFi Dad thinks a layer-2 network without plans to implement a native token could be successful if users are willing to sacrifice decentralization and censorship resistance in the short term. 

Recent: Banks with crypto services require new Anti-Money Laundering capabilities

He said, “Base could be successful as a network for transacting with a user’s crypto. However, make no mistake; Base will be a layer-2 (at least for the foreseeable future) that makes trade-offs. As DeFi users, we tend to deprioritize security and censorship resistance until we really need it.”

With this point in mind, Rosen mentioned that he believes token models will remain for many decentralized projects with large developer and user communities, but these will launch later. “A project may launch a token when the networks themselves are more mature and have found product market fit.”

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While Bitcoin’s Hashrate Remains Sky-High, Merge-Mined Crypto Asset Networks Benefit

While Bitcoin’s Hashrate Remains Sky-High, Merge-Mined Crypto Asset Networks BenefitIn recent times, Bitcoin’s hashrate has been consistently above 300 exahash per second (EH/s) as multiple mining pools dedicate significant hashpower to the Bitcoin blockchain today. Interestingly, some of the world’s top bitcoin mining pools are also using their hashrate to merge-mine other coins, and these networks have benefited from bitcoin’s increased hashrate. How Bitcoin’s […]

Investors shelter in short-term Treasuries, reducing Bitcoin’s chance of rallying to $30K

Ethereum eyes 25% correction in March but ETH price bulls have a silver lining

The Ethereum market has grown cautious around the long-awaited Shanghai upgrade, which will unlock 17.4 million ETH into circulation.

The price of Ethereum's native token, Ether (ETH), shows a growing conflict among traders about the market direction for March. This uncertainty has resulted in ETH price consolidating inside a narrow sideways range between $1,600 and $1,700 since Feb. 15.

25% ETH price correction on the table in March

The uncertainty stems from Ethereum's long-awaited Shanghai upgrade going live some time in March.

Several analysts predict Shanghai's token unlock feature, which will enable stakers to withdraw their vested tokens from Ethereum's proof-of-stake smart contract, will trigger a short-term selloff event. 

The Ethereum PoS smart contract has attracted more than 17.4 million ETH (~$28.35 billion at the current exchange rate) since its introduction in December 2020, per Etherscan.

In addition, Ether is finding it difficult to break above the technical resistance range. The Ethereum token has attempted to flip the $1,650-1,700 area to support multiple times since August 2022, as shown by the red bar in the chart below.

ETH/USD daily price chart. Source: TradingView

Interestingly, each failed breakout attempt has resulted in a strong pullback toward a common support line — a multi-month ascending trendline (black).

Therefore, if history is any indication, ETH's next correction could potentially land its price near $1,250, down 25% from the current levels. Conversely, a break above $1,650-1,700 positions ETH for the $1,925-2,000 range (purple) as its next upside target.

Future ETH selloffs will be limited — data trackers

From an on-chain perspective, as extended Ether price crash appears less likely. 

Notably, there's been a massive drop in ETH supplies on exchanges since September — from around 30% to 11%. Theoretically, this reduces the immediate sell pressure as capital moves to the sidelines.

"The trend in crypto, particularly since September, has been quickly moving self-custody," Santiment noted, adding:

"This trend picked up after the FTX collapse. Regardless, with both BTC and ETH around 5-year low exchange supplies, future sell-offs will be limited."

In addition, data analytics firm CryptoQuant has reached a similar conclusion about potential Ether selloffs in the future, primarily in the wake of the Shanghai hard fork.

Related: 3 tips for trading Ethereum this year

CryptoQuant notes that 60% of the staked ETH supply — about 10.3 million ETH — is currently at a loss. Meanwhile, Lido DAO, the largest Ethereum staking provider, holds 30% of all staked ETH at an average loss of $1,000, or 24%.

"Typically, selling pressure arises when participants have extreme profits, which is not the case for staked ETH currently," CryptoQuant wrote:

Additionally, the most profitable staked ETH was staked less than a year ago and has not seen significant profit-taking events in the past.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

Investors shelter in short-term Treasuries, reducing Bitcoin’s chance of rallying to $30K

Ethereum Shapella upgrade gets new date, making way for un-staking ETH

The upgrade is only for the Sepolia network and a subsequent upgrade for Goerli network would be introduced in March.

Ethereum core developer Tim Beiko announced the Shapella (Shanghai/Capella) upgrade is scheduled for Feb. 28. The Shapella network upgrade will activate on the Sepolia network at epoch 56832.

Shanghai and Capella are the names of the upcoming Ethereum hard fork. Shanghai is the name of the fork on the execution client side, and Capella is the upgrade name on the consensus layer client side.

Some of the key Ethereum improvement proposals (EIP) changes on the execution layer include Warm Coinbase and Beacon chain push withdrawals. The push withdrawals will make way for validator withdrawals from the beacon chain to the EVM via a new "system-level" operation type. On the other hand, WARM Coinbase could be a game changer that could reduce network fees for some of the key network participants called builders.

Coinbase here is the name of the software that builders use to receive new tokens on the network. Every new transaction on the platform needs to interact with the Coinbase software multiple times, The first interaction costs more as the software needs to “warm” up, and then the fees decline as the interactions increase. However, with the introduction of EIP-3651, the Coinbase software will remain warm to begin with, thus requiring a lower gas fee to access it.

Related: Ethereum on-chain data suggests ETH sell pressure could be a non-event after the Shanghai upgrade

Major changes to the consensus layer include full and partial withdrawals for validators and independent state and block historical accumulators, replacing the original singular historical roots.

Partial withdrawal means validators can withdraw Ether (ETH) rewards in excess of 32 Ether and keep validating. In case they want a full withdrawal, validators can fully exit and take all 32 Ether and rewards and stop doing the work

The upcoming upgrade would enable validators to withdraw their staked Ether (ETH) from the Beacon Chain to the execution layer. Moreover, the upgrade would bring changes to the execution layer and consensus layer adding new features, making it a key upgrade following The Merge.

Stakers and non-stakers who operate nodes must, however, upgrade their nodes to the most recent Ethereum client versions in order to take advantage of the Sepolia upgrade. After the deployment of the Sepolia upgrade, the next step would be the release of the Shanghai upgrade on the Ethereum Goerli test network, expected to commence in March.

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Proof of Stake Alliance publishes white papers on legal aspects of liquidity staking

Experts from 10 industry organizations contributed to this pioneering examination of legal questions surrounding proof of stake.

The Proof of Stake Alliance (POSA), a nonprofit industry alliance, has published two white papers examining on the status of deposit tokens in United States securities and tax law on Feb. 21. The papers were authored by representatives of over 10 industry groups.

Liquid staking is the practice on blockchains using a proof-of-stake consensus mechanism of issuing transferrable receipt tokens to show ownership of staked crypto assets or rewards accrued for staking. The tokens are often referred to as liquid staking derivatives, which is a term the POSA objected to as being inaccurate, recommending that they be called liquid staking tokens instead. Liquid staking has seen a surge of interest since the Ethereum Merge.

Neither the U.S. Treasury nor the Internal Revenue Service have issued guidance on liquid staking, the POSA noted in “U.S. Federal Income Tax Analysis of Liquid Staking,” but it should be subject to capital gains tax rules under general principles. The paper said:

“Receipt Tokens evidence ownership of intangible commodities in the digital world in a substantially identical manner that warehouse receipts, bills of lading, dock warrants and other documents of title evidence title to tangible commodities in the physical world.”

In line with capital gains taxation, the argument continued, “a liquid staking arrangement will be a taxable event only if there is a sale or other disposition of cryptoassets in exchange for property that differs materially in kind or extent,” which is standardly referred to as “realization” of an asset.

That reasoning is supported with an argument that a liquid staking protocol (smart contract) should not be considered a separate entity, as it lacks a second party that shares in the profits. “If a Liquid Staker does not have a taxable event as discussed above, the Liquid Staker must then grapple with the taxation of its continuing ownership of the staked cryptoassets,” it concludes.

In “U.S. Federal Securities and Commodity Law Analysis of Staking Receipt Tokens,” the POSA said that determining whether or not a receipt token is an investment contract is a gating issue.

It argued that liquid staking is not an investment contract, and therefore not a security, using a case-based analysis of the well-known Howey test. Then it examined all four prongs of the Howey test and concluded that the tokens generally do not meet any of them.

Related: Expect the SEC to use its Kraken playbook against staking protocols

The paper also considers the Reves test, from a 1990 Supreme Court ruling that determined when an instrument constituted a “note” based on its “family resemblance” to an investment contract. The SEC and federal courts have found some crypto assets to be notes. Further, the paper argued a receipt token is not a swap under the Commodity Exchange Act.

A receipt token serves security purposes, allowing the holder to transfer ownership of staked funds between wallets in the event of a compromised key, and commercial purposes, similarly to warehouse receipts, the paper concludes.

The papers were intended to offer “a framework for meaningful legislative codification or elucidation,” according to an accompanying statement. They also were meant to provide a basis for self-regulatory standards.

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Ethereum’s Transition to Proof-of-Stake Yields Deflationary Results

Ethereum’s Transition to Proof-of-Stake Yields Deflationary ResultsAfter the transition from proof-of-work (PoW) to proof-of-stake (PoS), Ethereum’s annual issuance rate has been reduced to negative 0.057%, according to statistics 158 days after The Merge. The metrics indicate that more ethereum tokens have been removed than issued, and if the chain were still under PoW consensus, 1,823,678 ether would have been minted to […]

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Ethereum’s deflation accelerates as Shanghai upgrade looms — Can ETH price avoid a 30% drop?

A deflationary Ethereum supply does not necessarily mean a bullish market for ETH, at least in the near term.

The price of Ethereum's native token, Ether (ETH), has surged by more than 40% year-to-date to around $1,750, the highest level in seven months. However, ETH price is not out of the woods yet despite several bullish cues such as the Shanghai upgrade in the pipeline. 

Ethereum price bull trap?

Ether's rise has appeared primarily in the wake of similar upside moves elsewhere in the crypto market, responding to lowering inflation that reduces the Federal Reserve's likelihood of raising interest rates aggressively.

At the same time, warnings about an imminent bull trap in the risky markets have emerged, which may wipe out their recent profits. Ethereu, due to its long-term correlation with stocks and Bitcoin, faces similar risks.

Let's take a closer look at  several potential bullish and bearish catalysts for the price of Ethereum below.

ETH becomes most deflationary since Merge

The issuance rate of Ether has dropped to its lowest level since the network's transition to Proof-of-Stake (PoS) via "the Merge" in September. 

On Feb. 20, Ether's annual supply since the Merge shrunk to -0.056%. In other words, the Ethereum network had been minting fewer ETH tokens than were removed from the supply in the past five months.

Ether supply since Merge. Source: Ultrasound Money

Investors typically perceive a cryptocurrency with a fixed supply or deflationary issuance rate as bullish in the longer term. 

Ethereum's supply is currently around 120.50 million, but there is technically no max supply. The London hard fork in August 2021, however, introduced a fee-burning mechanism that added deflationary properties to Ether's tokenomics.

As a result of this upgrade, the higher the Ethereum network's transaction fees at any given time, the more Ether will be "burned" or removed from the supply forever.

Interestingly, Ethereum's median gas price has rebounded to a seven-month high of 27.13 Gwei (the smallest ETH unit) in the week ending Feb. 17.

Ethereum 7-day median transaction gas price. Source: Glassnode 

Shanghai hard fork

ETH demand must not drop against a deflationary supply rate for the price to climb. One potential bullish catalyst in the pipeline for Ethereum is its upcoming network upgrade dubbed Shanghai, slated for mid-March.

The Shanghai hard fork enables users who have locked their Ether into Ethereum's PoS smart contract to withdraw their assets finally. This increased liquidity could encourage more people to hold and stake Ether tokens, according to Kennan Mell, an independent market analyst.

In his SeekingAlpha note, Mell argues:

"It's possible that the successful implementation of staking withdrawals will boost Ethereum's price as new investors decide to buy in right afterward, either because they were waiting to buy until the network successfully went through a risky hard fork to implement withdrawals or because they are lured by a more liquid staking yield."

Meanwhile, the total value locked in the Ethereum PoS contract continues to rise to new record highs, with the latest data showing deposits worth nearly 16.63 million ETH.

Ethereum 2.0 total value staked. Source: Glassnode

Crypto staking crackdown

The above-mentioned potential bullish catalysts for ETH price, however, could be offset by regulatory crackdowns and unfavorable technicals in the near term. 

In February, the United States Securities and Exchange Commission (SEC) fined Kraken, a popular crypto exchange, $30 million for not registering its staking-as-a-service program, which includes the option of Ethereum staking.

Related: Ethereum's Shanghai fork is coming, but it doesn't mean investors should dump ETH

Coinbase exchange CEO Brian Armstrong also warned that the SEC might ban crypto staking services for retail investors altogether. If true, such a prohibition could hurt Ether's demand among U.S. investors.

ETH price hits bearish inflection level

From a technical perspective, Ether price is currently testing a key resistance confluence for a potential pullback.

Notably, the confluence comprises a multi-month descending trendline resistance and a 50-week exponential moving average (50-week EMA; the red wave), as shown below.

ETH/USD weekly price chart. Source: TradingView

A pullback from the confluence could have ETH's price test the 200-week EMA (the blue wave) near $1,550 as its short-term downside target.

Furthermore, an extended correction could push the price toward the black ascending trendline support near $1,200 by March 2023, down about 30% from the current levels.

Conversely, a decisive breakout above the descending trendline resistance could activate a bullish reversal setup toward the $2,000-$2,500 area. 

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

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SEC vs. Kraken: A one-off or opening salvo in an assault on crypto?

The U.S. Securities and Exchange Commission may be focused on custodial staking programs today, but does it also have proof-of-stake blockchain networks in its sights?

In a year of crypto upheavals, the United States Securities and Exchange Commission’s settlement with crypto exchange Kraken, announced on Feb. 9, set off yet another tremor. Agency chief Gary Gensler took to mainstream media last week to explain the agency’s action, which seemed to be an attack on crypto staking — part of the validation mechanism used by a number of blockchain platforms, including Ethereum, the world’s second-largest network. 

The immediate issue, in the agency’s view, was that Kraken had been selling unregistered investment products. Indeed, it was advertising big returns on staking crypto — up to 21%, Gensler told CNBC.com.

“The problem was they were not disclosing to the investing public the risks that the investing public were entering into,” Gensler said. Moreover, the SEC's action, which required Kraken to shell out $30 million and shut down its staking operation, could have been easily avoided, he seemed to imply:

“Kraken knew how to register, others know how to register. It's just a form on our website. They can come in, talk to our talented people on disclosure review teams. And if they want to offer staking, we're neutral. Come in and register, because investors need that disclosure.”

Not all in the crypto industry were totally satisfied with this response, however. “I find the SEC’s ‘all crypto projects have to do is come in and register’ line unbelievably insulting,” tweeted Morrison Cohen LLP attorney Jason Gottlieb. “There is simply no path to registration for many crypto products.”

“The registration of staking program securities is not as simple as filing a form on the SEC’s website,” Michael Selig, an attorney with Willkie Farr & Gallagher LLP, told Cointelegraph. “Public offerings of securities are heavily regulated and expensive to conduct.”

Others view the agency’s decision to charge Kraken as the first salvo in a general assault on crypto by U.S. regulators. “If approved by a court, the settlement marks a potential turning point for cryptocurrency regulation and the SEC’s broader efforts to bring the industry under its jurisdiction,” reported CNN. “The move could lead to a wider clampdown,” speculated The New York Times, including possibly banning staking for retail U.S. investors.

But maybe the industry was over-reacting. That is, staking as practiced by Ethereum and other blockchains as a way to reward network validators may not be on the SEC’s radar screen at all. The agency could be motivated by consumer protection concerns primarily and, in this instance, it wanted to make an example of Kraken, especially in light of FTX’s November collapse and the bankruptcy of assorted crypto lending firms.

“Yes, I am sure they [the SEC] wanted to make an example of Kraken, especially because it promoted the opportunity to make returns of up to 21%,” Carol Goforth, university professor and Clayton N. Little professor of law at the University of Arkansas, told Cointelegraph.

Recent: Binance banking problems highlight a divide between crypto firms and banks

“Kraken set the returns for amounts staked, not the underlying blockchain protocols. [...] Honestly, the way that Kraken operated its program looks like an investment contract under Howey,” she said. The SEC uses the Howey Test to determine whether a transaction qualifies as an investment contract, which then requires SEC registration.

Bill Hughes, senior counsel and director of global regulatory matters at ConsenSys, told Cointelegraph, “It’s a one-off action that is intended to not just resolve Kraken’s offering but, importantly, to send signals across the space about what features of staking-as-a-service the SEC believes are problematic.” If another staking service fails to pay attention to these signals, they too can expect the SEC to take action, said Hughes, adding:

“I think the SEC hopes the market gets the message and adjusts accordingly — as they’d probably prefer to move on to other issues.”

“The U.S. Kraken case is primarily about sanctioning its [Kraken’s] blatant and non-transparent behavior vis-à-vis their retail customers, and not for just offering a staking-as-a-service per se,” Markus Hammer, an attorney and principal at the Switzerland-based Hammer Execution consulting firm, told Cointelegraph.

Is Ethereum at risk?

The market didn’t necessarily see this as a one-off action on the part of the agency, however. Ether (ETH) plummeted around 6.5% on the day of the settlement announcement, its largest one-day decline since mid-December. As widely reported, Ethereum moved last year from a proof-of-work to a proof-of-stake (PoS) consensus mechanism. Dubbed “the Merge,” this technical makeover was hailed by many for radically reducing the network’s prodigious energy usage and carbon footprint. But some, at least, feared Ethereum was now in the sights of U.S. regulators because of its new staking protocols.

Equating Kraken and Ethereum could be a mistake, though. As Matthew Hougan, chief investment officer at Bitwise Asset Management, told Cointelegraph:

“The SEC's enforcement action against Kraken is not an enforcement action against Ethereum for using a proof-of-stake consensus mechanism. It was an enforcement action against Kraken for offering a staking service. Those are different things.”

Moreover, Ethereum could continue to function securely as a PoS network even if the SEC were to ban all staking services in the U.S., said Hougan, though he doesn’t expect that to happen. “Activity would simply migrate offshore or be done directly by individuals,” he said. More than enough ETH could still be staked to ensure network integrity. “The main result would be that U.S. investors would lose out on both the opportunity and the risk of staking. The world, however, would go on.”

“The action is not against staking platforms but against staking service providers that organize and operate pools,” Goforth said. “If the organizer controls the pools and the rates of return” — as with Kraken — “then this action does suggest that the SEC will treat the program as involving the distribution of investment contracts.”

By comparison, she said, “if the blockchain protocol allows others to set up pools,” as with Ethereum, “that is not necessarily within the rationale of this order.”

Hughes agreed. There is nothing in the SEC’s complaint that implies that staking itself is problematic. “SEC’s action focuses squarely on the Kraken custodial staking program, which promised a specific yield, pool funds and did not disclose risks or fees. It says nothing about ETH staking or any other chain’s consensus mechanism,” he said.

Ethereum also hosts many use cases that have nothing to do with investing (e.g., elections). Just because the network has moved to a proof-of-stake consensus mechanism doesn’t by itself mean that its native coin, Ether, should now automatically be classified as a security. One has to look at “the nature of the underlying multi-purpose blockchain and respective ecosystem,” said Hammer. Moreover, these will need to be assessed blockchain by blockchain, he added.

An opening volley?

All this may be well and true, but could this really be an opening fusillade as part of a broader post-FTX attack on cryptocurrencies and blockchain technology — and not just “investment solutions” offered by a few centralized service providers?

“The SEC tends to act in an incremental way, bringing new enforcement actions that build upon prior enforcement actions,” Selig told Cointelegraph. “The crypto industry is sensibly concerned that the SEC is focused on custodial staking programs today but will set its sights on staking more broadly in the future.”

Hughes tends toward the more limited view, mainly “because that is what this complaint is on its face. Whether the SEC gets more aggressive and goes after core blockchain functionality is to be seen.”

Blockdaemon CEO and founder Konstantin Richter appeared to agree. “With the complaint, staking itself does not appear to be the issue,” Richter told Cointelegraph. “This indicates that institutional investors that have the ability to stake can continue without using a centralized custodial exchange.”

Hougan, for his part, isn’t quite so confident that a clampdown isn’t coming, telling Cointelegraph:

“Crypto is facing a coordinated regulatory crackdown in the U.S. You are seeing that crackdown in the SEC's recent statements and actions, and in recent efforts by the FDIC, OCC and Federal Reserve to restrict the crypto industry's access to the traditional banking system.”

These actions are worrisome but not surprising, continued Hougan. The numerous failures over the past year like FTX, Celsius, Genesis, BlockFi, Voyager and Terra have “pointed to some significant risks in the crypto ecosystem and the need — in certain cases — for better regulation.”

“This is far from the first salvo in a U.S. assault on crypto,” said Goforth. “The SEC has been relatively hostile to crypto assets for years; this seems to be a continuation of that approach [...] as it continues to devote resources to case-by-case enforcement rather than offering a genuinely helpful roadmap for compliance, such as by drafting exemptions based on tailored disclosures.”

‘First inning of a nine inning game’

Gensler may have been disingenuous when he invited exchanges like Kraken to just fill out a form on the SEC’s website. SEC registration is an involved undertaking. “It is an incredibly difficult process, often costing a million dollars or more — in legal, accounting, and investment advisor fees — the first time an issuer seeks to register a conventional security,” noted Goforth. It also can take a long time to get approved.

It doesn’t necessarily follow, however, that Gensler will go after Ethereum and other PoS platforms. The agency chief, it might be remembered, once taught a course on blockchain technology at the Massachusetts Institute of Technology, and he knows a good bit about decentralized networks and their purposes. He probably understands that the technology offers all sorts of non-investment use cases, even PoS platforms with validators that have “skin in the game” as they work to ensure network integrity.

Recent: Multichain DEXs are on the rise with new protocols enabling them

Indeed, the Kraken settlement might have only confirmed that “that the SEC still is not clear about when consumer protection regulations apply to the crypto world,” Hammer opined. Before the Merge, both the SEC and the Commodity Futures Trading Commission regarded Ether as a commodity rather than a security.

Overall, the jury could still be out as to whether the SEC is engaged here in a limited regulatory action or is instead discharging the opening volley in a wider war on cryptocurrencies and blockchain technology. Most favor the former interpretation, but as Hougan concluded:

“Whether the current regulatory crackdown is going to strangle crypto or ultimately unleash its full potential — I think it's too early to say. The right kind of regulatory progress could be incredibly positive for crypto, but overly restrictive or punitive regulation would be crippling. [...] We're in the first inning of a nine-inning game.”

Investors shelter in short-term Treasuries, reducing Bitcoin’s chance of rallying to $30K