Yes, strike actually needs to be regulated

Strike is everywhere.

More and more service providers, banks, custodians, non-custodial providers and protocols offer all kinds of staking services – from reinvestment to liquid staking and derivatives.

Strike has truly become a force in crypto, reaching an all-time high of $350 billion in total market cap. Institutional investors and financial institutions are finally starting to understand the new business models of blockchain and the role of staking – it is as if we will soon see an Ethereum staking ETF from one of the Wall Street giants.

But as the popularity of staking increases, in many cases institutional investors gain access to permissionless staking protocols, staking and node infrastructure without proper risk management and Anti-Money Laundering (AML) controls in place. Examples include mixing crypto-assets on validator node infrastructure or using permissionless smart contracts to take deposits and make withdrawals with exposure to sanctioned funds.

As our industry matures, we must face the fact that a new guard of regulated crypto companies will emerge. These companies will have to comply with regulatory requirements and oversight when offering services.

We cannot in good conscience claim that custodians and strike providers are not subject to regulatory oversight when offering strike services because the services are a) just renting a server, or b) are non-supervisory or sufficiently decentralized . This is misleading and, at worst, misleading to customers.

Blockchain technology and the reinvention of money, finance and the web will happen using distributed, and in some cases, fully decentralized networks that will release ownership in the same way that information was on the early internet.

But existing regulatory frameworks and new crypto regulations will have to apply to institutions involved in staking crypto assets. For example, the EU recently agreed to make all CASPs mandatory entities subject to enhanced due diligence and strict AML regulation. This mandate will extend to the management of validator nodes, meaning that regulators will oversee all entities that facilitate custody and settlement by centralized and decentralized counterparties.

How will regulators regulate strike?

The crypto market cap is rapidly dividing into open, permissionless crypto and regulated crypto. Regulated crypto is where institutions work with known counterparties that create avenues for retail investors through vehicles such as exchange-traded funds (ETFs).

Regulators will regulate at the entity level, meaning they need a counterparty to sue if the entity itself violates anti-money laundering laws, securities laws, or violates sanctions. This drives already established practices with institutional clients, who rigorously conduct counterparty evaluations of their service providers.

Read more from our opinion section: DeFi needs institutions – and regulation

In addition, crypto-regulation will focus on points of centralization, as we know today from a similar type of regulation for the Internet. For example, GDPR is enforced at the entity level, not the network or application level, requiring operating entities to demonstrate to authorities that they are operating in compliance. This means that certain types of data cannot be stored in certain jurisdictions and the burden of proof rests with the operating entity.

GDPR can be directly compared to EU crypto-regulation, where institutions will need to document to regulators that they, and by extension, their counterparties, operate in compliance with current AML and security laws and future crypto-regulation.

It’s not about linking your wallet

The intention of a crypto-native stakeholder may only be to earn passive income through their staking, which in this context does not make staking a financial service. But it would be hard to argue against the regulation of strike, as it exhibits all the characteristics of a financial service through the lens of an institutional investor.

Institutional investors have become accustomed to the same ease of use as crypto-native practices, meaning they inadvertently subscribe to services they haven’t fully risk-assessed. Investors often realize too late in the process that they are breaching their fiduciary duty to thoroughly risk assess all counterparties.

From a regulatory standpoint, how to invest safely in a compliant manner may have been poorly understood prior to the Ethereum merger, BTC ETF approval in the US, and the recent crypto fraud and bankruptcy cases. The next explosion in crypto will likely be related to lax compliance with current and future crypto regulations or exposure to sanctioned entities through tools, as regulators gradually gain the enforcement tools they need.

We encourage all investors and financial institutions to look beyond crypto’s technical complexities. Instead, they should make sure they follow known and accepted practices that ensure they don’t get caught on the wrong side of regulation just because they locked in on a service they didn’t fully understand or research. .

Jesper Johansen is the founder and CEO of NORTHSTAKE, a regulated escrow company specialized in building regulatory compliant crypto staking products for institutional investors and financial institutions. The team has backgrounds from financial institutions, pension funds, large investment companies to consulting, technology and audit firms, such as Accenture, Deloitte, PwC as well as blockchain and crypto projects e.g. DAI Foundation (MakerDao), Ethereum and L1/L2s. Prior to NORTHSTAKE, Jesper held leadership positions at Accenture Strategy and Deloitte Consulting advising clients in heavily regulated industries to implement new technologies and drive business transformation. He holds an MBA from Copenhagen Business School and a B.Sc. in International Business.

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