SEC Targets Ethereum Staking Increasing Withdrawal Queues

The U.S. Securities and Exchange Commission (SEC) has recently intensified its scrutiny on Ethereum staking, generating uncertainty and volatility in the market. 

Meanwhile, this heightened regulatory activity has led to notable shifts in Ethereum’s withdrawal queue, which has increased markedly since June 28.

The SEC has consistently targeted staking services from major cryptocurrency exchanges such as Kraken and Coinbase. These platforms have faced regulatory challenges as the SEC seeks to define the legal framework surrounding staking. As a result, spot Ethereum ETF issuers have removed staking from their applications in hopes of gaining approval.

Ethereum’s consensus mechanism shift from Proof-of-Work to Proof-of-Stake has also drawn the SEC’s attention. The agency has not classified ether as a security, sometimes suggesting that all Proof-of-Stake tokens could be considered securities due to the rewards users receive from staking. This ambiguity is compounded by the Commodity Futures Trading Commission’s (CFTC) interest in ether, which it views as a commodity, further complicating the regulatory landscape.

Legal Actions Against Consensys and DeFi Protocols

Last month, the SEC concluded its investigation into Ethereum, hinting at a more lenient stance by approving the spot Ethereum ETF 19b-4s. Despite this, the regulator has not eased its efforts against Consensys, the company behind the MetaMask crypto wallet. The SEC recently filed a lawsuit against Consensys, challenging its swaps and staking services.

Although anticipated due to a Wells notice from Consensys in April, this lawsuit included accusations against well-known decentralized finance (DeFi) protocols like Lido and Rocket Pool, labeling their staking programs as securities. This move marks a shift in the SEC’s strategy, previously focused on centralized staking services, towards encompassing DeFi protocols following its earlier lawsuit against Uniswap.

Market Reaction and Withdrawal Queue Dynamics

The legal actions have had tangible effects on the market, particularly influencing Ethereum staking behavior. When Coinbase was sued over its staking program on June 6, 2023, there was a significant increase in cbETH burns, reflecting users’ exit from the platform due to the uncertainty surrounding its future. This event marked the second-largest day of redemptions since the Shapella upgrade enabled staked ETH withdrawals.

Since June 28, there has been a noticeable rise in the Ethereum withdrawal queue, escalating from 4 to 132 validators pending exit by June 30. Despite this uptick, the queue remains relatively short compared to the 605 validators earlier in the month. The ongoing regulatory pressure has yet to trigger a mass exodus from decentralized staking providers, but the potential remains if further enforcement actions occur.

The long-term outlook for Ethereum staking remains unclear as regulatory bodies like the SEC continue navigating cryptocurrency regulation’s complex landscape. The agency’s recent actions against major players in the industry suggest an evolving stance that could shape the future of staking services.