“Staking services provided by Coinbase are not securities. If necessary, we will gladly defend this in court, Armstrong wrote on Twitter on Sunday. The article also includes a link to a Coinbase blog that discusses cryptocurrency staking in depth and explains why it does not qualify as a security under the US Securities Act or the Howey test.
The SEC employs the Howey test, which originates from a 1946 Supreme Court case, to decide whether an investment contract is a security. The test primarily takes into account four factors: monetary investment, joint venture, reasonable expectation of profits, and other people’s work.
Cryptocurrency staking, according to Coinbase, does not satisfy any of the Howey test’s four criteria. First of all, because users do not trade their digital assets for something else, staking is not an investment. They always have the opportunity to “unstake” their assets and possess everything just as they did before.
Second, since assets are staked on decentralised networks, staking services do not satisfy the “common enterprise” prong of Howey, according to the Coinbase blog, which also added that stakers validate transactions through a community of users, not a common enterprise.
Staking also fails to satisfy the “reasonable expectation of profits” requirement because incentives are not returns on investments but rather payments for blockchain validation services.
Finally, staking services carry out validation tasks using computers and publicly accessible software. Staking, then, does not fulfil the fourth requirement of the Howey test since it does not offer rewards based on the “efforts of others.” From Coinbase:
“Coinbase supports sensible regulation in our industry. But regulation by enforcement that does nothing to help consumers and drives innovation offshore is not the answer. Getting it right on staking matters.”
Following Kraken’s agreement with the SEC to discontinue providing staking services or programmes to customers in the nation, Armstrong and Coinbase made their move.
The SEC claimed that Kraken had neglected to “register the offer and sale of their cryptoasset staking-as-a-service product,” which the agency has since deemed to be a form of security. Kraken also consented to pay $30 million in disgorgement, prejudgement interest, and civil penalties in addition to ceasing the service.
The news also caused Coinbase shares, which have lost over 90% of their value from all-time highs, to drop another 4% on Friday.
Notably, the exchange has recently been the subject of some regulatory attention. Coinbase agreed to pay a total of $100 million earlier this year to resolve a claim about “some previous deficiencies” in its regulatory compliance activities.
Another setback for Coinbase came in January when one of the biggest credit rating agencies, S&P Global, downgraded the cryptocurrency exchange’s debt position from “investment grade” to “speculative grade” and from “BBB” to “BB-.”