According to Coinbase officials, staking does not qualify as a security under the Howey test or the US Securities Act.
Executives of the cryptocurrency exchange Coinbase are defending their company's crypto staking services, asserting that they cannot be categorized as securities and threatening to take the case to US courts if necessary.
The action follows the agreement reached by cryptocurrency exchange Kraken with the Securities and Exchange Commission on Feb. 10 to stop providing staking services or programs to clients in the country. Coinbase CEO Brian Armstrong announced on Twitter that the company will "defend this in court if needed."
The SEC said that Kraken had neglected to "register the offer and sale of its crypto asset staking-as-a-service business," which it has since deemed to be a kind of securities. Kraken also consented to pay $30 million in disgorgement, prejudgment interest, and civil penalties in addition to ceasing the service.
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
Staking is neither a security under the US Securities Act or the Howey test, according to Coinbase's chief legal officer, Paul Grewal, who spoke on the matter in a blog post. Grewal stated:
“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 contends that the four criteria of the Howey test—investment of money, shared enterprise, a reasonable expectation of rewards, and other people's efforts are not met by staking. “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.”
He continued:
“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's decision on crypto staking kindled criticism among the community. Commissioner Hester Peirce openly criticized her own organization for shutting down Kraken's staking service. Peirce claimed that governing a developing business by enforcement "is neither an efficient or fair manner of regulating" it.
