Yahoo Finance’s David Hollerith breaks down Coinbase CEO’s comments on a potential crypto staking ban and the outlook for crypto regulation.

Video Transcript

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- Coinbase CEO Brian Armstrong is fighting back against rumors that the SEC is considering removing crypto staking by retail investors, saying he believes it would, quote, "be a terrible path for the US should it be the case." Yahoo Finance's David Hollerith joins us now with the details. David, what are you hearing?

DAVID HOLLERITH: Well, Rachelle, in Armstrong's tweet from yesterday, he made the argument that making clear, clearer regulation for crypto staking boils down to a national security issue, obviously imploring that it needs to be permitted in the US. Now, as a primer for about crypto staking, it's used as an alternative to crypto mining to essentially validate transactions on the blockchain. So there are a lot of blockchain projects that essentially cannot work without it.

Also from a financial perspective, it involves depositing cryptocurrency into a smart contract in return for some kind of yield. And so questions have come up for several years, actually, about whether this constitutes an investment contract. Now, using Ethereum, the second largest blockchain, as an example, staking works by having-- essentially anyone can participate as long as they can fork over about $52,000 in Ether by the market rate. And not everybody has that capital.

So what has happened in the industry is that crypto firms have offered a service to allow essentially any customers to stake their assets. And what the companies do is they pull together the assets so that they can meet the capital requirements and allow this. And in return, it offers something like a 5.3% annual return.

Now, obviously, these companies take a fee from that. And this has been noticeable to Coinbase's balance sheet. Coinbase, in its last quarter, actually, earned a total 10.8% of its total revenue from crypto staking and about $60, $62, $63 million.

So this is going to be an issue that is going to be continually watched. And it actually came up early in September when Ethereum officially made its move to using staking as its model for validating transactions. SEC Chair Gary Gensler, actually, shortly after Ethereum made this move, came out saying that staking could be considered a security.

Now, a clear point here is that the service and staking itself are slightly different in terms of whether or not they would be considered a security. And it does seem more likely, based from the lawyers I've spoken with, that staking as a service, which is done by these third parties, like Coinbase, is probably more likely to be considered something like that.

Now, none of this has actually been brought up yet. But we do expect this to heat up. And when Armstrong tweets about the SEC, there's usually fire to that smoke.

- I mean, we know that this is something that would be-- I mean, a lot of retail investors, this is how they get into this space. And that's how they're encouraged to stay in. So it'd be interesting to see what materializes here. We'll be keeping an eye on that story. Dave Hollerith, thanks so much.