Coinbase executives claim that staking is not a security under the US Securities Act or Howey test.
Crypto exchange Coinbase’s executives are standing up for its crypto staking services, claiming they cannot be classified as a security and threatening to bring the matter to the courts in the United States.
Coinbase CEO Brian Armstrong posted on Twitter that the company will “defend this in court if needed.” The move follows the agreement reached by crypto exchange Kraken with the Securities and Exchange Commission on Feb. 10 to stop offering staking services or programs to clients in the country.
According to the SEC, Kraken failed “to register the offer and sale of their crypto asset staking-as-a-service program,” which the commission now qualified as securities. Aside from the service’s halt, Kraken agreed to pay $30 million in disgorgement, prejudgment interest and civil penalties.
Coinbase's staking services are not securities. We will happily defend this in court if needed.https://t.co/GtTOz77YV3
— Brian Armstrong (@brian_armstrong) February 12, 2023
Coinbase’s chief legal officer, Paul Grewal, weighed in on the issue in a blog post, claiming that “staking is not a security under the US Securities Act, nor under the Howey test.” Grewal added:
“Trying to superimpose securities law onto a process like staking doesn’t help consumers at all and instead imposes unnecessarily aggressive mandates that will prevent US consumers from accessing basic crypto services and push users to offshore, unregulated platforms.”
Grewal argues that staking fails to meet the four elements of the Howey test: investment of money, common enterprise, reasonable expectation of profits and the efforts of others. “The Howey test comes from a 1946 Supreme Court case – and there is a separate discussion to be had about whether that test makes sense for modern assets like crypto,” he wrote.
“The purpose of securities law is to correct for imbalances in information. But there is no imbalance of information in staking, as all participants are connected on the blockchain and are able to validate transactions through a community of users with equal access to the same information.” Further, the executive wrote:
“Blockchain technology can spur significant economic growth in the US and staking is a safe and critical aspect of that technology. [...] But regulation by enforcement that does nothing to help consumers and drives innovation offshore is not the answer. Getting it right on staking matters.”
The SEC decision on crypto staking sparked criticism. In a statement titled “Kraken Down,” Commissioner Hester Peirce publicly rebuked her own agency over the shutdown of Kraken's staking service. Peirce argued that regulation by enforcement “is not an efficient or fair way of regulating” an emerging industry.
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