Ethereum PoS: the SEC wants to enforce Know Your Customer on staking

After the move to PoS, the SEC wants to impose the Know Your Customer practice on Ethereum staking.

Know Your Customer on Ethereum staking? The SEC puts the PoS system at risk

Over the past two years, the cryptocurrency industry has had to endure numerous attacks both from the US political world, but especially from the SEC, the US financial market regulator led by Gary Gensler, which has put many cryptocurrency companies under fire.

The sensitive issue revolves around treating cryptocurrencies as securities, which, since they are not regulated, would violate the SEC’s own established principles for securities.

Clearly, the most striking case is the one in which the SEC is engaged in a trial, which has been going on for about two years now, against Ripple, accused of having sold in 2020 securities without having the authorization to do so. The case finally seems to be coming to a head, considering that Ripple has asked the court for an abbreviated judgment, after having achieved a series of trial successes, which seem to have put the SEC’s back against the wall.

But Ripple is only the most sensational case, but there are many other instances in which the SEC has tried to put a spoke in the wheels of the development of the crypto sector in the world of finance, such as when it continues to ban the issuance of spot ETFs, and that is, directly parameterized on the prices of the underlying Bitcoin. 

In this regard, in recent months Grayscale has sued the Gensler-led exchange authority, challenging the latter’s decision to deny its request to convert the Grayscale Bitcoin Trust (GBTC) into a spot Bitcoin ETF. 

Just as some exchanges such as Binance had to undergo investigations again by the SEC for an alleged violation of the regulatory regime on the sale of unauthorized tokens. Similarly, the SEC sued the company BlockFi for selling a crypto lending product. In February, the company settled the dispute by paying a $100 million fine.

But now the indiscretion coming from some industry observers and analysts is that the US authority’s next target could be Ethereum after its new Merge update, which could pose some issues again on the selling side of securities.

The SEC is against crypto. Has the time come for Ethereum?

Immediately after the new update went live that initiated the Proof of Stake consensus system instead of the Proof of Work system, SEC Chairman Gary Gensler said that these types of cryptocurrencies that use this system should be considered securities for all intents and purposes and should be treated as such from a regulatory perspective.  

Gensler pointed to the profit that would be derived from PoS, which would be a profit made from the effort. This fact would be one of the crucial points of the famous Howey test, used by the SEC to determine whether an asset is an investment product, and therefore must be subject to the rules set by the SEC.

Staking, according to the SEC Chairman, would be for all intents and purposes comparable to lending services, and therefore should be carefully subjected to the strict rules set by the financial authorities to avoid risks of fraud and criminal acts.

And that is why the US authorities would like all Ethereum validators to be subject to Know Your Customer (KYC) and AML regulations, which would be the anti-money laundering regulations.

The large presence of Ethereum blockchain nodes on US soil would also bring Ethereum under US jurisdiction, which is why it is very likely that the authorities will soon require all companies and developers working on the blockchain to comply with the rules set forth by KYC, which is designed to protect financial institutions from fraud, corruption, money laundering and terrorist financing. Know Your Customer involves several steps to 

• establish the identity of the customer; 
• understand the nature of the customers’ activities;
• qualify that the source of funding is legitimate. 

It may be very complicated that companies such as crypto companies can easily fulfill such procedures, considering the nature of disintermediation and decentralization that characterizes them. 

Then again, once crypto companies manage to comply with these rules, it will become much easier for some institutional investors to approach the cryptocurrency market. 

But going back to the SEC in recent months, they seem to be very concerned about the development of DeFi, which in large part makes use of Ethereum’s very own blockchain, and here the change made by Ethereum could offer the US authority the casus belli to attack the sector and succeed in regulating it to avoid distortions that could, in its view, jeopardize the stability of the traditional financial system.