The staking service offered by cryptocurrency exchange Coinbase is “fundamentally different” from that offered by peer exchange Kraken – which recently came under fire from the United States securities regulator – according to Coinbase’s chief lawyer.
Paul Grewal, Coinbase’s chief legal officer, made the comments in response to shareholder questions about staking services during a Q&A session on the exchange’s fourth quarter results, noting:
“The staking product offered at Coinbase is fundamentally different from the yield product described in the enforcement action against Kraken. The difference is significant.”
The first point of difference Grewal highlighted is that Coinbase users retain ownership of their cryptocurrencies at all times.
In its last user agreement updated on December 15, 2022, Coinbase stated that it was only “facilitating[s] staking the asset for you,” but cannot replace the Ether (ETH) lost for slashing – which refers to the blockchain’s mechanism to punish bad behavior by reducing validator tokens.
Grewal also suggested that another difference is that customers have a “right of return”, as the company cannot “just decide not to pay a return.
He pointed to the exchange’s registration as a publicly traded company as another critical point, which allows customers to have “deep transparent insight into our finances.”
In comparison, the complaint of the Securities and Exchange Commission (SEC) against Kraken alleged that users have lost control of tokens that by offering to Kraken’s staking program and investors are offered “outsized returns untethered to any economic reality” with Kraken also being able to pay “no. return entire.”
But Grewal reiterated his call for regulatory clarity on staking services in the US that shows the SEC reflects expectations in court complaints rather than through clear regulations, noting:
“A rule that spells out those differences will provide real clarity and we think the public won’t have to settle for a complaint in federal court to know what the regulator wants.”
related: Coinbase beat Q4 earnings estimates amid declining transaction volume
In a tweet on February 13, Grewal had argued that staking itself is not a security transaction, using the analogy of an orange harvest to explain his position.
If I grow my own oranges and harvest them myself, the oranges are not a guarantee. If I grow my own oranges and harvest them with a contractor who charges a fee, the oranges are still not guaranteed.
— paulgrewal.eth (@iampaulgrewal) February 13, 2023
After SEC Chairman Gary Gensler called on the company to register its products with the regulator, Grewal stated that Coinbase has no problem registering its products with the SEC “appropriately,” but added:
“I think it’s fair to say that at this point, the way to register products and services that can become securities has not been opened, or at least not easily or easily opened.”
Coinbase is currently facing an SEC investigation into the same product that resulted in Kraken settling with the regulator for $30 million and being banned from offering staking services to US clients.
Coinbase intends to put up a fight, however, with the CEO and co-founder, Brian Armstrong, suggesting that the company will be willing to challenge the regulator and take the matter to court.
Coinbase’s staking service is not a security. We will be happy to defend this in court if necessary.https://t.co/GtTOz77YV3
— Brian Armstrong (@brian_armstrong) February 12, 2023