Crypto exchange Coinbase (COIN) CEO Brian Armstrong recently denied that the company’s staking services are a security under U.S. regulations. The company claims that it is willing to defend its product “in court if necessary.”
Following the recent feud between Kraken and the Securities Exchange Commission (SEC) last week, which was covered by Bitcoinist, the uncertainty around staking programs in the U.S. and whether staking services will be classified as securities in this country.
Can Coinbase’s Staking Programs Survive The Howey Test?
Coinbase’s Chief Legal Officer Paul Grewal, via a blog post, also addressed the issue, stating that the SEC has made several “misinformed assertions” about staking services and asked several “misguided” questions over the past few days. Grewal stated:
Staking is neither a security under the US Securities Act nor the Howey test. Trying to superimpose securities law onto a process like staking doesn’t help consumers. Instead, it imposes unnecessarily aggressive mandates that prevent US consumers from accessing essential crypto services and push users to offshore, unregulated platforms.
For Coinbase, staking is neither a security under the U.S. Securities ACT nor the Howey test, a measure used by regulators in this country to determine if an asset falls under SEC jurisdiction. The latter has sparked discussion about whether it makes sense for modern assets like crypto to be regulated under this instrument.
The Howey test applies to any contract, scheme, or transaction, regardless if it has typical securities characteristics. Federal securities law requires all offers and sales of securities, including those involving a digital asset, to either be registered under its provisions or to qualify for an exemption from registration.
How can Coinbase defend Its staking services? For Coinbase, the staking services do not meet the four elements of the Howey test: investment of money, joint enterprise, reasonable expectation of profit, and effort of others.
For Grewal, staking services do not constitute an investment of money, and staking services do not meet the “common enterprise” under the Howey test. These assets are staked on decentralized networks, with stakers connected only by blockchain technology. Grewal added:
When customers ask us to stake some of their crypto, they aren’t giving up one thing to get something else – they own the same thing they did before. Staking customers retain full ownership of their assets at all times, and the right to “unstaked” those assets is consistent with the underlying protocol.
In addition, Grewal argues that staking services do not satisfy Howey’s “reasonable expectation of profit” element. To determine this, Grewal says that the courts look at whether a customer is attracted to an asset based on the prospect of a return on investment or a desire to use or consume the item purchased. Coinbase Chief Legal Officer Grewal concluded:
The purpose of securities law is to correct imbalances in information. But there is no imbalance of information in staking, as all participants are connected on the blockchain and can validate transactions through a community of users with equal access to the same information.
In short, for Coinbase, blockchain technology can drive significant economic growth in the U.S., and staking is a safe and critical aspect of that technology which has its unique properties. Should the Hoewy Test, created in the 1930s, apply to XXI-century assets? Remains to be seen.
COIN shares are currently trading at $55.90 on the Nasdaq, down 1.74% in the last 24 hours. With a market cap of $14.32 billion, COIN has been following the recent retracement in stocks and the crypto market in recent days in anticipation.
Featured Image from Unsplash, chart from Trading View.