Should you trust exchanges with your crypto holdings? Pros and Cons of Staking-as-a-Service

As the crypto industry continues to face increased regulatory scrutiny, the recent $30 million settlement by Kraken over allegations of violating SEC rules has put the spotlight on staking as a service. Staking, which involves investors earning rewards by locking up their coins to support the operations of a blockchain network, has become a central feature of many popular cryptocurrencies like Ethereum. As the SEC pushes to regulate the crypto industry under the same framework as traditional securities, the legality of staking as a service remains unclear, leaving many stakeholders wondering about its future.

Also read: What does the recent Kraken mean for the future of Crypto Staking and the Market?

Staking as a service

Staking is an act of civic-mindedness in the world of cryptocurrency, where holders of digital assets opt to play a pivotal role in the verification of transactions on the blockchain. Rather than relying on a solitary entity, this task is undertaken by a network of computers, functioning through the intermediary of specialized staking services. The objective is to ensure the integrity of the ledger and guarantee that every entry is accurate and in order.

Staking as a Service (SaaS) is an offering provided by some exchanges, wallets, and other providers that allow users to participate in the staking of a cryptocurrency without having to set up and manage their own staking infrastructure. Instead, the provider manages the technical details of staking on behalf of the user, including maintaining the necessary hardware and software, and ensuring the security of the staked coins.

With SaaS, users simply deposit their coins into the provider’s wallet, and the provider handles the rest. The provider earns rewards from staking on behalf of their users, and a portion of these rewards is shared with the users who have staked their coins. This can be a convenient option for individuals who may not have the technical expertise or resources to participate in staking themselves.

Staking as a Service allows individuals to earn rewards from staking without having to set up their own infrastructure, which can be technically challenging and requires a certain level of technical knowledge. It also offers a more secure alternative for individuals who are concerned about the security of their staked coins.

Role of exchanges?

Exchanges play a central role in Staking as a Service (SaaS) by offering this service to their users. Exchanges typically provide a platform for users to deposit their coins, which are then staked on their behalf by the exchange.

By offering Staking as a Service, exchanges provide a convenient and accessible way for individuals to participate in staking and earn rewards from their cryptocurrency holdings. This can be particularly useful for individuals who are not comfortable with the technical aspects of staking, or who may not have the resources to set up their own staking infrastructure.

In this service model, the exchange is responsible for the technical details of staking, including setting up and maintaining the necessary hardware and software, and ensuring the security of the staked coins. The exchange earns rewards from staking on behalf of its users, and a portion of these rewards is shared with the users who have staked their coins.

What are the issues? Issues with design?

When using Staking as a Service, individuals have to trust the exchange or the provider with their crypto holdings. This can be concerning for some, as the exchange has control over the private keys associated with the staked coins. In the event of a security breach or hack, staked coins may be at risk.

Additionally, there may be a lack of transparency in the staking process when using Staking as a Service. For example, it may not be clear how rewards are distributed, how the exchange determines the rewards, or how they are allocated to users.

In the case of self-staking by exchanges, there may be potential conflicts of interest as the exchange is staking its own coins and validating its own transactions. This could lead to centralization and potentially compromise the security and integrity of the blockchain network.

Therefore, the issue with the design of Staking as a Service and self-staking by exchanges refers to the potential security risks and lack of transparency associated with these approaches to staking. It highlights the need for individuals to carefully consider the security and transparency of their staking options

What constitutes securities under SEC regulations?

To understand whether something is considered a security in the US, the Securities and Exchange Commission (SEC) applies a legal test based on a 1946 Supreme Court decision. The test considers factors such as whether investors contribute money to a common enterprise with the expectation of profiting from the efforts of the organization’s leadership. In the context of staking-as-a-service, users deposit their coins to earn a yield while the service provider handles the technical aspects. This raises questions about whether staking falls under SEC purview.

The SEC may determine that certain tokens being staked are securities and therefore subject to federal securities laws. If this is the case, exchanges and other providers offering Staking as a Service would need to comply with these laws, including registering their offerings with the SEC and following the necessary disclosure and investor protection requirements.

In addition, the SEC may also be concerned about the potential for fraud and other abuses in the context of Staking as a Service and may take action to prevent these abuses and protect investors.

Overall, the SEC plays a role in the regulation of Staking as a Service by ensuring that these activities are in compliance with federal securities laws, protecting investors from fraud and abuse, and maintaining the integrity of the markets.

How does being designated as a security impact staking-as-a-service programs?

The label imposes strict investor protection and disclosure requirements under US rules, making it more expensive and complex to run such programs. Smaller providers would be at a disadvantage compared to larger competitors. The label also means continuous regulatory scrutiny, potential fines and penalties, and losing future funding from investors wary of the increased compliance burdens. However, supporters argue that securities designations could increase transparency for investors and bring in more users to the service.

What does the Kraken incident mean in this? What does it mean for exchanges in future?

The Kraken incident highlights the importance of security and transparency in the context of Staking as a Service.

The incident shows that even well-established exchanges are not immune to security vulnerabilities and that it is crucial for users to carefully consider the security and transparency of the platforms and providers they use for staking.

In response to the Kraken incident, exchanges may take steps to improve the security and transparency of their Staking as a Service offering. This may include implementing more robust security measures, improving the transparency of the staking process, and providing more information to users about the risks and rewards of staking.

For exchanges, the Kraken incident serves as a reminder that they need to take security and transparency seriously in order to protect their users and maintain the trust of the wider cryptocurrency community. It also highlights the importance of careful due diligence for individuals who are considering participating in Staking as a Service.

Future challenges for Staking as a Service in cryptocurrency?

It is difficult to predict the exact future of Staking as a Service, but it is likely that it will continue to play an important role in the cryptocurrency ecosystem.

As more and more people become interested in cryptocurrencies and blockchain technology, the demand for easy and accessible staking options is likely to increase. Staking as a Service offers a convenient and user-friendly way for individuals to participate in staking, which may make it an attractive option for many people.

However, the issue of security and transparency remains a concern for many people and is likely to continue to be a focus of attention in the future. Exchanges and other providers of Staking as a Service will need to take steps to address these concerns in order to maintain the trust of their users.

In addition, the regulatory environment is also likely to play a role in shaping the future of Staking as a Service. The SEC and other regulatory bodies may continue to take an interest in this area and may impose additional rules and regulations that will affect the way in which staking is performed and how Staking as a Service is offered.

In conclusion, while the future of Staking as a Service is uncertain, it is likely to continue to play an important role in the cryptocurrency ecosystem, but will likely be shaped by factors such as security, transparency, and regulation.


Note: All copyrights including its responsibility for accuracy of information of the content & its liability is owned by their respective author.