Crypto exchange Coinbase executive stood up for its crypto staking service, claiming that it cannot be classified as a security, and threatened to bring the matter to court in the United States.
Brian Armstrong, CEO of Coinbase, posted on Twitter that the company will “defend this in court if necessary.” The move follows an agreement reached by crypto exchange Kraken with the Securities and Exchange Commission (SEC) on February 10 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 crypto asset staking-as-a-service program,” for which the commission is now securities. In addition to stopping the service, Kraken agreed to pay $30 million in disgorgement, prejudgment interest and civil penalties.
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
Coinbase’s chief legal officer Paul Grewal weighed in on the issue in a blog post, stating that “staking is not a security under the US Securities Act, or under the Howey test.” Grewal also noted:
“Trying to superimpose securities laws into a process like staking does not help consumers at all and instead imposes aggressive orders that will prevent US consumers from accessing basic crypto services and push users to offshore, unregulated platforms.”
Grewal argued that staking fails to meet the four elements of the Howey test: investment of money, public enterprise, reasonable expectation of profit, and efforts of others. “The Howey test comes from a 1946 Supreme Court case – and there is a separate discussion about whether the test is appropriate for modern assets like crypto,” he said.
“The purpose of securities law is to correct information imbalance. But there is no information imbalance in staking, because all participants are connected in the block and can validate transactions through a community of users with equal access to the same information. .” Further, the executive wrote:
“Blockchain technology can lead to significant economic growth in the US and staking is a secure and critical aspect of the technology. […] But regulation with enforcement that does nothing to help consumers and drive innovation offshore is not the answer. Get it right in the staking matter. “
The SEC’s decision on crypto staking has sparked criticism. In a statement titled “Kraken Down”, Commissioner Hester Peirce publicly rebuked her own agency regarding the shutdown of the Kraken staking service. Peirce argued that regulation by enforcement was “neither an efficient nor a just way to regulate” a growing industry.