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US-based Crypto exchange, Kraken, is under the radar of the Securities and Exchange Commission (SEC) and is heavily imposed a fine. That could significantly impact the Crypto industry on a broader level. In this article, let’s learn the reason for the fine and how it can impact the industry.
According to the Securities and Exchange Commission (SEC), the Crypto exchange has broken the agency’s rules with its Crypto-asset staking products. As a part of the agreement with the regulatory body, the Crypto exchange will discontinue all its staking operations and is obliged to pay a fine of $30 million.
Understanding staking
As a general term, staking refers to the act of committing one’s Crypto holdings in exchange for a reward. By locking up tokens, users can contribute to the network’s security via staking. As a result, native tokens are awarded to users for helping secure the network.
Rewards increase in direct proportion to your pledged Crypto assets. Since the incentives are delivered on-chain, earning them is a completely automated procedure. All that’s required of you is that you stake them. In other words, your Crypto-assets are making money when you’re not even paying attention!
The primary purpose behind staking is to protect the network. Because of this, the network becomes increasingly secure with each new wallet that joins the pool. In addition, verifying a transaction earns you a reward that serves as a payment for your efforts in return for your time and effort. Consequently, the network now has an inherent “economic worth” because of the possibility of gaining more of the underlying asset.
For more information on staking, click here.
About Kraken
Kraken is a San Francisco-based Crypto exchange where market participants can trade multiple cryptos. The buyers and sellers are permitted to use a variety of fiat currencies, such as U.S. dollars, Canadian dollars, euros, and Japanese yen, to purchase or sell the cryptocurrencies. Kraken is regarded as the third-largest cryptocurrency exchange in the world. There are more than 200 cryptos and 600 Crypto pairings that can be traded.
Impact on Kraken’s user base
With this agreement, Kraken will stop offering staking services to customers in the United States. However, according to a blog post by the company, non-U.S. Kraken users can continue to stake their Crypto assets through a different Kraken subsidiary.
As of Feb 9, 2023, Kraken mentioned, “From today, with the exception of staked Ether (ETH), assets that are on the on-chain staking program by U.S. clients will accordingly be unstaked & will no longer earn staking rewards. Further, U.S. customers will not be able to stake additional assets, including ETH.”
All stake assets will return to the user’s spot wallets, and any rewards that were required to be paid out on formerly staked Crypto assets will be prorated through Feb 9.
Impact on Ethereum
Bitcoin prices slipped a bit after the settlement was announced, and talking about Ethereum, the second-largest Crypto, there was a severe dip in its price. The reason behind this is Ethereum has just moved to Proof-of-Stake (PoS) consensus mechanism from the Proof-of-Work (PoW) consensus mechanism.
Why Ethereum?
As we know, the Ethereum Merge has happened successfully; other things are also on track, including the Shanghai upgrade. The main improvement proposal included in the Shanghai upgrade is the EIP-4895. It enables the validators to withdraw the ETH they have so far “staked” to support network security. So, now we know why the Kraken fiasco majorly impacted the prices of Ethereum.
Bottom line
The fine imposed on Kraken has cast a gloomy outlook for various Crypto exchanges offering staking as a service. Cryptos that work on a Proof-of-Work consensus mechanism, like Bitcoin or Litecoin, may not see severe effects on their prices. But, the ones that rely on Proof-of-Stake consensus will definitely experience a downfall in their prices, among which Ethereum is the major Crypto.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
