- Coinbase has said that it will defend its staking program in court
- Kraken settled with the SEC for $30 million and agreed to scrap its staking service for U.S. users
- Coinbase has argued that staking does not meet the Howey test for securities
Coinbase has set itself up for a court date with the Securities and Exchange Commission (SEC) after formally stating that it will legally defend the concept of staking. The statement, issued Friday, is about as clear a ‘come and get us’ invitation as Coinbase could issue, and comes hot on the heels of Kraken deciding it would rather settle than fight the issue after the SEC came for it over the same issue.
Crypto Space Primed for Staking Battle
The issue of staking was known to be on the SEC’s radar after chair Gary Gensler warned in September last year that Ethereum’s switch to a proof-of-stake consensus mechanism meant that the ETH tokens issued to stakers could be considered securities, and the first sign of action over this was taken with the Kraken case, which actually started some time ago but was resolved with Kraken agreeing a $30 million settlement.
This came after Armstrong had warned that the SEC was coming after staking, and with many asking him if Coinbase would take the same path as Kraken, Armstrong has clarified the exchange’s position on the matter.
Staking Doesn’t Meet Howey Criteria, says Coinbase
In a blog post published on Friday, Coinbase stated in no uncertain terms that, “Staking is not a security under the US Securities Act, nor under the Howey test,” which the SEC argues that it is, and gave three reasons why this is so:
- Stakers are not giving up their money to a staking platform or protocol, partly because cryptocurrency is not actually considered money and also because the crypto they pledge is still theirs.
- Staking services do not meet the “common enterprise” element of the Howey test because assets are staked on decentralized networks, with the fortunes of users not tied to those of Coinbase. Therefore, Coinbase, and other platforms, are not running a common enterprise
- Staking is not conducted with a “reasonable expectation of profits”, with rewards instead being payments for validation services provided to the blockchain, not a return on investment.
Of course, it’s not for this outlet to make such legal distinctions, but the third point is an especially dubious one – of the 10 million ETH submitted to the Ethereum 2.0 staking protocol, are we really supposed to believe that none of them submitted their ETH in order to simply help run the network? No, they expected to profit from the venture – that much is obvious.
The first two points however are certainly those that need discussion in court, and hopefully the SEC will take Coinbase up on its offer and this issue can get decided once and for all. Because let’s face it, regulation by enforcement is all that the SEC knows how to do, so we’ll never get it any other way.