While Coinbase Global is set to benefit from a big upgrade to the Ethereum blockchain network this week, there is a risk: the part of the company that stands to gain has already caught the attention of regulators.
Even if
Bitcoin
prices just surpassed $30,000 for the first time since June, the attention of many crypto traders is on
Ether,
the second largest digital asset and the token that underpins the Ethereum blockchain network. Ethereum's overhaul, known as the Shanghai Upgrade, is the biggest change to the ecosystem since last year's merger.
In the merger, Ethereum moved from an energy-intensive “proof-of-work” system that awarded tokens to crypto miners using computers to solve increasingly complex puzzles to a “proof-of-stake.” Under proof-of-stake, participating Ether holders lock up their tokens as collateral while they validate transactions and secure the network, earning interest in the process.
Current returns for staking Ether are around 4.5%, but staked tokens are temporarily blocked by the system. The Shanghai upgrade will remove these tokens.
“The most significant upgrade to the Ethereum network since the merger will likely be completed” on Wednesday, analysts led by Clara Medalie of crypto data provider Kaiko wrote in a Tuesday note. “This raised some big questions: Will big bettors throw away their newly unlocked chips? Will this create more confidence in staking and thus increase participation?”
Advertising - Scroll to continue
These questions have been at the heart of trader bets that have driven Ether prices higher in recent weeks. It is not clear if this trade will work.
Ether prices could come under pressure as some investors withdraw staked ether and sell it. But Shanghai's upgrade, which will also make staking easier, is expected to make trading more popular. This should support prices.
If staking becomes more popular, Coinbase will benefit.
Advertising - Scroll to continue
The staking services it offers are a mainstay of its efforts to diversify income away from the core business of crypto trading, which is highly sensitive to price swings and the movements of retail investors that make up the bulk of the volume of transactions. Those wishing to stake Ethereum need to lock up 32 Ether, or around $61,000, but Coinbase is one group that offers a solution for smaller investors. It allows customers to stake the amount of Ether they have, while collecting significant fees in the process.
In February, a team of JP Morgan analysts led by Kenneth B. Worthington said Shanghai could have the immediate impact of "significant revenue potential for intermediaries such as Coinbase" as intermediaries can earn more 20% of customer staking revenue.
But that was before the Securities and Exchange Commission (SEC) intervened.
Advertising - Scroll to continue
Coinbase said in March that the regulator had warned the company of an impending enforcement action, which it said would focus on crypto trading as well as services including staking.
Coinbase still offers Ether staking, and Shanghai's upgrade this week will likely only make that part of the company's business even better. But as is the case with the entire crypto industry, a lack of regulatory clarity and the potential for repression are significant risks.
Write to Jack Denton at [email protected]