Coinbase CEO Brian Armstrong has said the exchange’s crypto-staking services are not securities, adding that he is willing to defend this in court.
“Coinbase’s staking services are not securities. We will happily defend this in court if needed,” Armstrong said in a Twitter post on Sunday. The post also links to a Coinbase blog that dives deep into crypto staking and why it is not a security under the US Securities Act, nor under the Howey test.
The Howey test, which comes from a 1946 Supreme Court case, is used by the SEC to determine whether an investment contract is a security. The test basically considers four elements: investment of money, common enterprise, reasonable expectation of profits, and efforts of others.
Coinbase argued that crypto staking does not meet any of the four prongs of Howey. In the first place, staking is not an investment because users don’t give up their digital assets to get something else. They own exactly the same thing they did before and they always have the option to “unstake” their assets.
“Second, staking services do not meet the “common enterprise” prong of Howey because assets are staked on decentralized networks,” the Coinbase blog said, adding that stakers validate transactions through a community of users, not a common enterprise.
Furthermore, staking does not meet the “reasonable expectation of profits” element as rewards are not a return on investment – rather, they are payments for validation services provided to the blockchain.
And finally, staking services use publicly-available software and computers to perform validation services. Therefore, staking does not pay rewards based on the “efforts of others” and thus it fails to meet the fourth element of the Howey test. Coinbase noted:
“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.”
The move by Armstrong and Coinbase follows the agreement reached by crypto exchange Kraken with the SEC 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 cryptoasset 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.
Meanwhile, Coinbase shares, which have lost almost 90% of their value compared to all-time highs, fell another 4% on Friday amid the news.
Notably, the exchange has also faced some regulatory scrutiny recently. Earlier this year, Coinbase agreed to shell out a total of $100 million to settle a complaint relating to “certain historical shortcomings” in its regulatory compliance work.
In another blow to Coinbase, S&P Global, one of the largest credit ratings providers, downgraded the crypto exchange’s debt one position from “BBB” to “BB-,” moving it from “investment grade” to “speculative grade” back in January.
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