Crypto exchange Coinbase (COIN) CEO Brian Armstrong recently did not return whether the company’s staking service is a security under US regulations. The company said it is willing to defend its products “in court if necessary.”
Following the recent conflict between Kraken and the Securities Exchange Commission (SEC) last week, which was covered by Bitcoinist, the uncertainty surrounding the staking program in the US and whether the staking service will be classified as securities in this country.
Can Coinbase’s Staking Program Survive the Howey Test?
Chief Legal Officer Coinbase Paul Grewal, through a blog post, also addressed the issue, stating that the SEC has made some “misinformed statements” about staking services and asked some “misguided” questions over the past few days. Grewal said:
Staking is not a security under the US Securities Act or the Howey test. Trying to apply securities laws to a process like staking doesn’t help consumers. Instead, it imposes an unnecessarily aggressive mandate that prevents US consumers from accessing essential crypto services and pushes users to unregulated offshore platforms.
For Coinbase, staking is not a security under the US Securities ACT or the Howey test, the measure used by regulators in this country to determine whether an asset falls under the SEC’s jurisdiction. The latter has led to a discussion about what it means for modern assets like crypto to be regulated according to this instrument.
The Howey test applies to any contract, scheme, or transaction, regardless of whether it has the characteristics of a security. Federal securities laws require all offers and sales of securities, including those involving digital assets, to be registered under these provisions or eligible for exemption from registration.
How can Coinbase defend its staking service? For Coinbase, the staking service does not meet the four elements of the Howey test: investment of money, joint venture, reasonable expectation of profit, and other effort.
To Grewal, a staking service is not an investment of money, and a staking service does not qualify as a “public company” under the Howey test. The asset is purchased in a decentralized network, with stakers connected only by blockchain technology. Grewal added:
When a customer asks us to share some crypto, they don’t give up to get something else – they have the same thing before. Staking customers retain full ownership of their assets at all times, and the right to “unstake” their assets is consistent with the underlying protocol.
In addition, Grewal argues that the staking service does not satisfy Howey’s “reasonable expectation of profit” element. To determine this, Grewal said the court looked at whether the customer was attracted to the asset based on the prospect of a return on investment or the desire to use or consume the item purchased. Coinbase Chief Legal Officer Grewal concluded:
The goal of securities law is to correct information imbalances. But there is no information imbalance in staking, because all participants are connected in the block and can validate transactions through the user community with equal access to the same information.
In short, for Coinbase, blockchain technology can drive significant economic growth in the US, and staking is a secure and critical aspect of the technology that has unique properties. Should the Hoewy Test, created in the 1930s, be applied to assets of the XXI century? Stay tuned.
COIN shares are currently at $55.90 on the Nasdaq, down 1.74% in the past 24 hours. With a market capitalization of $14.32 billion, COIN has followed a recent retracement in the stock and crypto markets in recent days in anticipation.
Featured Image from Unsplash, chart from Trading View.