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Brian Armstrong, co-founder and chief executive officer of Coinbase Inc., speaks during the Singapore Fintech Festival, in Singapore, on Friday, Nov. 4, 2022. 
Bryan van der Beek | Bloomberg | Getty Images

Coinbase shares closed down more than 14% Thursday, after CEO Brian Armstrong voiced concern on rumors that the Securities and Exchange Commission was mulling new enforcement action against crypto staking.

Those rumors coalesced on Thursday afternoon, when the SEC announced a settlement with Coinbase’s rival crypto exchange, Kraken. The SEC alleged that Kraken had engaged in the unregistered offering and sale of securities through its crypto staking platform.

Many centralized exchanges, including Coinbase, offer customers the option to stake their tokens in order to earn yield on their digital assets that would otherwise sit idle on the platform. With crypto staking, investors typically vault their crypto assets with a blockchain validator, which verifies the accuracy of transactions on the blockchain. Investors can receive additional crypto tokens as a reward for locking away those assets.

Coinbase has a staking service called Earn which currently offers 6% interest rates to customers. The company recorded $62 million in revenue from “blockchain rewards” for the three months ending on Sep. 30, 2022, about 10% of its $590.3 million in total revenue for that time period. It is a potentially lucrative revenue stream for Coinbase, which charges a staking commission ranging from 25-35% of the rewards that users gain by staking their crypto.

Armstrong tweeted the night before the Kraken action to express his concern over a “terrible path” the SEC would be pursuing if it classified crypto staking as a security.

“We’re hearing rumors that the SEC would like to get rid of crypto staking in the U.S. for retail customers. I hope that’s not the case,” Armstrong wrote on Wednesday night.

“When it comes to financial services and web3, it’s a matter of national security that these capabilities be built out in the U.S.,” Armstrong tweeted.

Thursday’s selloff comes on the heels of an positive year-to-date rally for Coinbase and significant tumult for the crypto industry at large. Coinbase is up over 77% in 2023, but is down over 76% since the beginning of 2022 and down over 82% since its 2021 IPO.

Coinbase reports fourth quarter 2022 earnings after the bell on Feb. 21.

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