‘Staking Services Are Not Securities’: Coinbase Gearing up to Fight SEC in Court

‘Staking Services Are Not Securities’: Coinbase Gearing up to Fight SEC in Court

  • Coinbase asserts its staking services are not securities. CEO Brian Armstrong said they are ready to fight the SEC in court. 
  • A ban on security services would push users to offshore, unregulated platforms, Coinbase said. 
  • Kraken CEO also pushed back against the SEC after settling a $30 million lawsuit over staking. 
  • Earlier, SEC Chair Garry Gensler said that staking services should fall under federal securities laws. 

As the US Securities and Exchange Commission continues to crack down on crypto exchanges, Coinbase is pushing back. CEO Brian Armstrong said that the exchange would face the agency in court. 

“Coinbase’s staking services are not securities. We will happily defend this in court if needed,” Armstrong tweeted on Sunday. He shared a link to a blog post in which Coinbase makes its case for staking. 

Staking is not a security under the US Securities Act, nor under the Howey test,” said Paul Grewal, Chief Legal Officer of Coinbase. “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,” he added. 

As the crypto ecosystem moves to less energy-intensive proof of stake over proof of work, staking has become critical, he added. “Given the importance of this technology, getting regulation wrong could do serious harm to the development of the crypto industry in the US,” Grewal wrote. 

‘Staking Does not Meet the Howey Test’ – Coinbase

Coinbase’s Chief Legal Officer argued why staking should not fall under securities regulation. “Staking fails to meet the four elements of the Howey Test: investment of money, common enterprise, reasonable expectation of profits, and efforts of others,” Grewal wrote. 

Staking customers retain full ownership of their crypto assets, he said, as well as the right to unstake their coins. He added that they don’t fall under “common enterprise” because the assets are on decentralized networks. He argued that they also don’t meet the “reasonable expectation of profits” criteria. 

“Staking rewards are simply payments for validation services provided to the blockchain, not a return on investment,” Grewal said. Moreover, these are not thanks to the “efforts of others” but a result of the underlying blockchain protocol. 

Kraken CEO Pushes Back Against SEC

Coinbase’s case against a staking ban came after rival exchange Kraken settled a lawsuit with the agency over staking services. Kraken agreed to pay $30 million and cease offering staking services in the US. 

On Friday, SEC Chair said that Kraken did not offer full disclosure to investors. He also said that other exchanges should “take note” and properly disclose and register. 

Kraken CEO Jesse Powell pushed back against Gensler. Powell did not believe that giving full disclosure was all it took to avoid a lawsuit. 

“Oh man, all I had to do was fill out a form on a website and tell people that staking rewards come from staking? Wish I'd seen this video before paying a $30M fine and agreeing to permanently shut down the service in the US. How dumb do I look? Gosh,” Powell said. 

Gensler: Exchanges Should ‘Take Note’ and Comply

On Friday, SEC Chair Gary Gensler explained why the agency went after Kraken. He said that Kraken did not disclose the full extent of the risk to investors.  

“You can take whatever risk you want,” he said. “Companies like Kraken can offer investment contracts and schemes, but they have to have full, fair, and truthful disclosure,” he explained.

Gensler also rejected the argument that staking is just a form of payment for services. “Labels don’t matter,” he said. “It’s about the underlying economics.” 

“Whether you call it lend, or earn, yield, or an APY, that doesn’t matter. If someone transfers their tokens to a platform and that platform goes bankrupt, guess what happens? They stand in line a bankruptcy court,” Gensler said. 

On the Flipside

  • With crypto trading volumes down, staking has become an important source of revenue for crypto exchanges. For Coinbase, blockchain rewards accounted for 11% of the revenue in Q3 of 2022.
  • The SEC is increasingly vigilant over practices by crypto exchanges following the FTX crash. The bankruptcy of a major exchange put pressure on the agency to prevent that from happening in the future. 

Why You Should Care

Staking services are the easiest way for users to help validate proof of stake networks. At the same time, users don’t really know what the exchanges are doing with their tokens.

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