Community Speculation: ETH staking service providers to comply with sanctions, turning Ethereum into a censorship chain. What will be Coinbase's decision?

In the United States, following the sanctions imposed by regulatory authorities on Tornado Cash and major DeFi protocols cooperating with regulators, speculation within the community has now turned to Ethereum verification nodes. If Coinbase, one of the largest staking service providers and based in a regulatory hub, were to cooperate with sanctions in verifying transactions and exclude specific transactions, would this indirectly push Ethereum towards becoming a chain subject to scrutiny?

The controversy began in early August when the privacy protocol Tornado Cash was included in the sanctions list by the U.S. Office of Foreign Assets Control (OFAC).

Subsequently, developers of Tornado Cash were arrested by Dutch regulatory authorities, sparking discussions on Crypto Twitter such as "code equals free speech" and "OFAC sanctions are unconstitutional."

Furthermore, Infura, which serves as the default RPC endpoint for MetaMask, along with Alchemy and Pocket Network, have also complied with sanctions. Top DeFi protocols that have been collaborating with compliance technology firm TRM Labs, including Uniswap, Aave, and MakerDAO, have also started excluding sanctioned addresses.

The topic of sanctions continues to ferment within the crypto space, with communities curious whether such a scale of sanctions will extend to Ethereum as it transitions to a PoS consensus mechanism. If regulatory agencies require nodes accidentally verifying transactions initiated by sanctioned addresses to undergo scrutiny, how will Coinbase, as one of the largest staking service providers and often compliant with regulatory authorities, respond?

Community Speculation: Verification Nodes Complying with Sanctions

DXdao community contributor eylonverse X pointed out that data shows that including top staking service providers such as Lido, Coinbase, Kraken, Bitcoin Suisse, it appears that over 60% of validators will have to comply with OFAC regulations in the future:

I believe Coinbase will find a way to ensure that blocks with Tornado transactions are not validated. Assuming that 60% of validators do not sign specific blocks, this means that block builders with Tornado transactions may incur losses, making the packaging of such transactions economically unfeasible.

He believes this will drive scrutiny at the protocol level.

Note: For some reason, eylonverse X did not list Binance.

Privacy application Rotkiapp founder Lefteris Karapetsas also tagged these top staking providers and asked:

Will you choose A: comply with the protocol-level scrutiny mechanism; or B: shut down staking services to maintain the integrity of the protocol?

This prompted a response from Coinbase's CEO.

Coinbase: The Answer Won't Be A

Coinbase CEO Brian Armstrong stated:

Hopefully, this is a scenario we won't really face, but if we do, I think we would choose B, as we have to consider the bigger picture, but there may also be some better options, such as legally challenging the scrutiny mechanism for a better outcome.

It's a hypothetical we hopefully won't actually face. But if we did we'd go with B i think. Got to focus on the bigger picture. There may be some better option (C) or a legal challenge as well that could help reach a better outcome.

— Brian Armstrong – barmstrong.eth (@brian_armstrong) August 17, 2022

However, former Blockstream CSO Samson Mow believes that Coinbase just incurred a $1 billion loss in the second quarter, and if they were to close a major revenue stream, it could lead to a massive lawsuit, so he predicts that Coinbase will be forced to continue staking operations and comply with regulations.