Coinbase To Shut Down Ethereum Staking If Threatened By Regulators

Following the U.S Treasury Department sanctioning coin mixer Tornado Cash earlier this month, and the long awaited Ethereum Merge approaching, blockchain technologists are concerned. 

They are concerned about the government regulations impacting the fundamental operation of Ethereum and its post-merge proof-of-stake consensus mechanism.

Coinbase’s CEO Response To The Hypothetical Situation

Brian Armstrong respond on twitter today and stated that in the case of regulatory threats. He made it clear his company would shut down its Ethereum staking services. The company would do this in order to preserve the integrity of the blockchain network. 

The question was asked on sunday by Lefteris Karapetsas, a founder of open-source crypto analytics and accounting app Rotki. Karapetsas tagged several major Ethereum players, challenging them to choose between  two options if government regulators demanded they censor specific 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. 

Along with this tweet he tagged 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 noted that a better, third option could present itself, or that a legal challenge “could help reach a better outcome.”

Actually, Armstrong’s answer is especially notable as Coinbase is betting much of its future on its lucrative staking service. He is calling it a “big win” for the company. And just this week, JPMorgan analysts said in a note that the Ethereum merge should be bullish for Coinbase. This also includes its shares (COIN), thanks to its Ethereum staking service.

Coinbase And Ethereum Merge

In early August, we began offering Ethereum staking for institutional clients for the first time,”  Coinbase told shareholders a little over a week ago. ”We’ll continue to add more assets for staking for both our retail and institutional clients going forward.”

With the merge, Web3 investors and analysts are concerned large, institutional players that provide staking services for Ethereum. They are more likely to succumb to pressure from government regulators. And because they manage an outsized percentage of validators, their absence could threaten the entire network.

Eylon Aviv of blockchain and crypto investment firm Collider VC estimates that these large players would adjust on one condition. On the Condition that the U.S. regulators demand censor on transactions. This means that, as much as 66% of the Beacon Chain validators would essentially support 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 added.

Armstrong On Decentralization

However, last week, when news of the Tornado Cash ban broke. Armstrong tweeted, “Sanctioning a technology 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 the time, Armstrong pointed to a February 4 Coinbase blog post he wrote to articulate the company’s “philosophy on account removal and content moderation.

Decentralization is the ultimate customer protection,” he wrote. “The decentralized nature of cryptocurrency offers its own important protections here. And those protections get stronger the more our products decentralize.