The executives of Coinbase are defending its cryptocurrency staking services, stating they cannot be categorised as securities and threatening to take the subject to court in the United States.
Brian Armstrong, the CEO of Coinbase, stated on Twitter that the business will “defend this in court if needed.” The action follows Kraken’s agreement with the SEC on February 10 to cease delivering staking services or programs to clients in the U.S.
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
According to the SEC, Kraken “failed to register the offer and sale of its crypto asset staking-as-a-service program,” which the agency now classifies as securities. Kraken agreed to pay $30 million in disgorgement, prejudgment interest, and civil penalties in addition to the suspension of service.
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 U.S. Securities Act, nor under the Howey test.” Grewal also noted:
Paul Grewal, the chief legal officer of Coinbase, stated that staking is not a security under the U.S. Securities Act or the Howey test. He also noted that:
“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 U.S. consumers from accessing basic crypto services and push users to offshore, unregulated platforms.”
Staking does not satisfy the four criteria of the Howey test: investment of money, shared enterprise, reasonable expectation of gains, and others’ efforts. The Howey test stems from a 1946 Supreme Court case, and there is a different conversation to be held about whether this test applies to current assets such as cryptocurrency.
“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.”
The SEC’s ruling regarding cryptocurrency staking aroused criticism. Commissioner Hester Peirce publicly reprimanded her own agency in a statement titled “Kraken Down” for the termination of the Kraken staking service. Peirce claimed that enforcement-based regulation of a developing business is neither efficient nor fair.