Is the crypto staking industry dead now?

On the following day, SEC Chairman Gary Gensler issued a warning to other cryptocurrency companies, urging them to comply with regulations. Gensler emphasized that this applies to any profit-making program on exchanges, regardless of its name.

Coinbase CEO Brian Armstrong shared his thoughts on the situation. He reported rumors about Kraken even before the official announcement was made. 

Armstrong pointed out that the crackdown on staking is primarily targeted at retail investors, and argued that forced regulation is not effective, as it drives companies to operate from offshore locations, like FTX did.

Even SEC Commissioner Hester Peirce expressed her disagreement with the decision made by her colleagues. "Using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating," she says.

There's another crucial issue that has arisen – will the SEC scrutinize "classic" staking (i.e., ETH staking), which involves validators of the Ethereum network? It also concerns intermediaries that enable retail investors to participate in this activity. To become an Ethereum validator, one needs to stake 32 ETH, which currently costs almost $48,000 – a significant expense that not everyone can afford.

Coinbase's chief legal officer also commented on the issue, stating that staking on Coinbase is different from staking on Kraken because it involves actual staking that's used for blockchain operations. In other words, it is fundamentally distinct and hence doesn't fit the criteria of the Howey test, which determines whether an asset is a security.

Consequently, there's a strong likelihood that the SEC won't consider traditional cryptocurrency staking as a security or at least won't be able to prove its allegations in court. However, Gary Gensler has a rather tough and negative stance on the crypto industry in general, yet he believes that certain cryptocurrencies (such as Bitcoin) belong to the category of commodities, not securities.