KYC to stake your Ethereum? It is likely to be available in the US at

The United States regulators have been particularly concerned with the cryptocurrency industry in recent years.

The legal fight between Ripple and United States Securities and Exchange Commission, Nexo’s lawsuit against the securities regulators in eight states and Coinbase’s Lend program scrutiny last year are just a few of the many high-profile examples. Kim Kardashian was able to experience regulatory scrutiny this year after agreed to pay a $1.26million fine for promoting dubious crypto project EthereumMax.

Although Ethereum developers intended to open the door for future network upgrades, the Merge seems to have complicated matters between U.S. regulators and crypto projects.

Ethereum: Is it too substantial for the crypto market

SEC Chairman Gary Gensler, who was speaking at a congressional hearing on Sept. 15, stated that proof-ofstake (PoS), digital assets could qualify as securities. Gensler stated that he believed holders could earn revenue from staking PoS coin, which could indicate that they can expect to profit from other people’s efforts. This is the Howey test used by the SEC, and other U.S authorities, to determine whether an asset falls under federal securities law. It was established in 1946.

You may be aware that Ethereum moved from the mining-based proof of work (PoW), to the PoS. To add new blocks to the network, validators must stake Ethereum ( ETH). This means that Ether could be subject to the Securities Act of 1933. The project would need to register with the SEC, and adhere to strict standards to protect investors.

Related: Federal regulators prepare to rule on Ethereum

Gensler claimed that crypto exchanges and other providers of staking services, “look very similar to lending.” Cryptocurrency lending has come under intense scrutiny by the SEC, particularly considering BlockFi’s $100 Million fine in February.

Gensler’s second argument is actually very relevant to Ethereum. To become a validator, one must stake 32 ETH ($42,336 at current prices of $1,323 each coin). To avoid the capital requirement, many users turn to staking providers to hold their digital assets for them.

This could also mean that large central providers may gain more control over the network. If they fall under the SEC’s control, it’s possible that the agency will prohibit them from validating individual transactions (censorship), which could lead to transactions taking longer to confirm. However, speed of confirmation should not be a concern as there will always exist validators who will confirm the transaction.

This would make Ethereum the most important regulator in this context, since it is one of the largest networks for decentralized finance (DeFi). Many tokens, such as USD Coin ( USDC), have blacklisting and blocking mechanism at the development level. This is in contrast to the DeFi market as a whole. It makes sense that validators as well as the MEV market will be used as leverage tools. This is a concern in the short-term, though, as there are many validators and no one can manage this process at an affordable cost.

The above may indicate that U.S. regulators might require node validators in their jurisdiction to use Anti-Money Laundering and Know Your Customer procedures to validate transactions.

The SEC has the opportunity to take action with Ethereum’s Merge. How?

The SEC claims that ETH transactions are subject to U.S. jurisdiction because of the high concentrations of nodes within the United States. This would indicate that the U.S. Treasury’s Financial Crimes Enforcement Network, FinCEN (the U.S. Treasury) will require all Ethereum-based businesses to adhere to KYC and AML regulations if this statement proves to be true and further developments are made across the country.

This means that customers will need to verify their identity and residency, as well provide additional information to service providers, before they can use a DeFi service. This increases the cost of crypto projects and could be argued to be against decentralized finance. But regulatory compliance will allow for trust between providers and investors, which will attract institutional clients to invest.

However, it is important to mention the controversy surrounding the SEC’s approach, communication, and decisions regarding crypto regulation. This has been heavily criticised by digital asset market players. BlockFi’s case provides a great example. The SEC took legal action against BlockFi for failing to register high-yielding interest accounts, which the commission considered securities. According to the documents in the case, one of the requirements of the agency was to bring BlockFi’s business activities into compliance with the Investment Company Act of 1941.

BlockFi was placed on the auction block and two similar companies went bankrupt. These were Ripple general counsel Stu Elderoty’s words.

The SEC has used 1940 legislation to regulate technology that is not yet fully developed. This is absurd.

Related: Income tax you have never earned After Ethereum’s Merge, it’s possible.

To put it mildly: the SEC’s assertion that all Ether is under U.S. jurisdiction, is also untrue. It would make the agency’s job easier if it was true. SEC logic is that Ethereum’s node network in the U.S. is densely clustered, so all ETH transactions globally could be viewed as if they are American.

According to Etherscan however, just 46% of all Ethereum nodes are located in the United States at present. This is not a small number. According to the SEC statement, it is possible to argue that only the European Union should regulate Bitcoin. BTC The latter argument is absurd, as is the claim of the agency.

These statements are based on the SEC lawyers’ limited understanding of cryptocurrency. However, it is possible to rule out previous tendencies by the SEC to regulate via enforcement.

Ethereum will have to make a huge sacrifice in order to comply with regulatory compliance

The large amounts of DeFi funds that are freely flowing without any oversight from U.S. regulators is causing concern. The Ethereum blockchain is the primary chain that holds most tokens. This may allow them to use their recent shift from PoW into PoS to argue for trying to influence the decentralized market.

If the SEC or other U.S. regulators succeed in this latter, DeFi could be restructured so that another evolution blockchain is the leader. However, it is certain that the full regulation of Ethereum will result in traditional banks and investment funds boosting ETH’s use as an asset for investments or payment methods.

Given all of this, it is difficult to give any timeline as statements by the SEC are still very raw and recent. Let’s see what additional actions the U.S. regulators take in the near-term and how they impact the KYC/AML procedures in the crypto space.

Slava DeMchuk is co-founder and CEO of AMLBot. AMLBot monitors a global cryptocurrency address database to help businesses and private users meet compliance requirements.

This article is intended for informational purposes only and should not be construed as investment or legal advice. These views, thoughts and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.

Opinion writer on 7trade7