Coinbase CEO: If regulators threatened, we'd stop staking ethereum.

Brian Armstrong responded that he would chose to leave the ETH staking business over censoring transactions.



With the long-awaited Ethereum merge rapidly approaching and the U.S. Treasury Department sanctioning coin mixer Tornado Cash earlier this month, blockchain technologists are growing more concerned that regulations may have an impact on Ethereum's core functionality and its post-merge proof-of-stake consensus mechanism.

In response to a hypothetical scenario, Brian Armstrong, CEO of Coinbase, stated on Twitter today that his company will halt its Ethereum staking service in the event of regulatory threats in order to protect the security of the blockchain network.

Lefteris Karapetsas, the creator of the open-source crypto analytics and accounting tool Rotki, presented the query on Sunday. Karapetsas challenged a number of significant Ethereum players to pick between two choices if governmental authorities required that they censor particular addresses.

"Will you A) comply and censor at the protocol level [or] B) shut down the staking service and preserve network integrity," he asked in a tweet, tagging Coinbase, Kraken, Lido, Staked, and Bitcoin Suisse. Armstrong, on behalf of Coinbase, is the only representative of one of the companies singled out in the scenario to respond, as of this writing.

"It's a hypothetical we hopefully won't actually face," Armstrong replied. "But if we did we'd go with B I think. Got to focus on the bigger picture."

He pointed out that there might be a better third choice or that a legal challenge "might help attain a better end."

Armstrong's response is particularly noteworthy given that Coinbase considers its lucrative staking service to be a "huge win" for the business and is relying heavily on it for its future. And just last week, JPMorgan analysts wrote in a note that Coinbase and its shares (COIN) should benefit from the Ethereum merger due to the company's Ethereum staking service.

Coinbase recently informed shareholders that it started offering Ethereum staking for institutional clients in early August. Going forward, "We'll keep adding more assets for staking for both our retail and institutional clients."

Investors and experts in Web3 are worried that, as a result of the merger, large, institutional players who offer staking services for Ethereum will be more likely to buckle under pressure from governmental regulators. Additionally, their absence could endanger the entire network because they control a disproportionate number of validators.

If U.S. regulators demanded that they censor transactions, Eylon Aviv of blockchain and cryptocurrency investment firm Collider VC predicts that these major players would comply, indicating that up to 66% of the Beacon Chain validators would essentially endorse censorship.

"There is a case to be made here that the Ethereum ecosystem has not reached sufficient social decentralization, and we are charting in very dangerous, nation state capture territory," he wrote.

Last week, when news of the Tornado Cash ban broke, Armstrong tweeted, "Sanctioning a technology (as opposed to an individual or entity) seems like a bad precedent to me, and it should probably be challenged. Could have many downstream unintended consequences."

"Hopefully obvious point: we will always follow the law," he added.

At that time, Armstrong cited a blog entry he made for Coinbase on February 4 to describe the organization's "policy on account removal and content management."

The only way to safeguard customers, he wrote, is through decentralization. "Cryptocurrency's decentralized structure gives its own significant protections here, and those protections get stronger the more decentralized our solutions become."

Armstrong claims that the Coinbase moderation policy may be "co-opted over time, cave to pressure, or degenerate into us playing judge and jury" without the safeguards of a decentralized system.


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