October 19, 2023
 min read

Illicit activity in Ethereum staking is low. It’s still enough to spook big finance firms

Louise Hallersbo

A recent report reveals that Ethereum liquid staking providers face a minimal exposure to illicit funds, but the real numbers might be higher. Sebastian Heine, Head of Compliance at Northstake, has highlighted the importance of this discovery.

In the report shared with DL News, it's disclosed that DeFi protocols pooling users' Ether for staking are encountering funds linked to money laundering, scams, sanctioned addresses, and malicious actors. While the proportion of these illicit funds is relatively low, it poses challenges for institutional investors grappling with strict regulations.

Heine emphasizes that the "dark number" may be significantly underestimated, and identifying these problematic addresses requires human effort and expertise.

The report examined three top Ether liquid staking protocols, all revealing exposure to illicit activities and high-risk exchanges. This revelation prompts questions about acceptable thresholds for exposure to illicit funds, especially for institutional investors.

Liquid staking protocols simplify Ether staking and enhance market efficiency by staking depositors' Ether and providing liquid staking tokens in return. These tokens automatically accumulate Ether staking rewards and can be used as collateral for DeFi loans.

In 2023, the Ether liquid staking market witnessed explosive growth, with significant amounts locked in these protocols. However, institutional investors face a matrix of issues and due diligence when navigating this space, as highlighted by James Butterfill, Head of Research at CoinShares.

While concerns exist, it's essential to consider the scale. The exposure to illicit funds in this context is remarkably low compared to other currencies and traditional finance. In fact, crypto's transparency, thanks to blockchain, allows for the documentation of such issues, making them easier to address.

This report underscores the complexities and considerations that institutional investors face as they navigate the Ethereum blockchain and DeFi landscape. Transparency and diligence remain key in ensuring the security of these emerging financial ecosystems.