Executives at cryptocurrency exchange Coinbase are defending their cryptocurrency staking services, claiming they cannot be classified as a security, and threatening to take 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 the agreement reached by cryptocurrency 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 its crypto asset staking program as a service,” which the commission has now labeled securities. In addition to the service suspension, Kraken has agreed to pay $30 million in restitution, late-payment interest, and civil penalties.
Coinbase’s staking services are not securities. We will happily defend this in court if needed. https://t.co/GtTOz77YV3
—Brian Armstrong (@brian_armstrong) February 12, 2023
Coinbase staking services are not securities. We will be happy to defend this in court if necessary.
Coinbase’s chief legal officer, Paul Grewal, weighed in on the matter in a blog post, stating that “staking is not a security under the US Securities Act, nor under the Howey test.” Grewal also noted:
“Trying to superimpose securities law on a process like staking doesn’t help consumers at all and instead imposes unnecessarily aggressive mandates that will prevent US consumers from accessing basic crypto services and push users to unregulated offshore platforms”.
Grewal argues that the scam does not meet all four elements of the Howey test: investment of money, joint venture, reasonable expectation of profit, and efforts of others. “The Howey test comes from a 1946 Supreme Court case, and there’s a separate debate about whether that test makes sense for modern assets like cryptocurrencies”he pointed.
“The purpose of the securities law is to correct information imbalances. But there is no information imbalance in staking, since all participants are connected on the blockchain and can validate transactions through a community of users with equal access to the same information. Furthermore, the executive wrote:
“Blockchain technology can spur significant economic growth in the US and staking is a safe and critical aspect of that technology. […] But enforcement regulation that does nothing to help consumers and drive innovation abroad is not the answer. Getting it right when it comes to staking.”
The SEC’s decision on cryptocurrency staking sparked criticism. In a statement titled “Kraken Down,” Commissioner Hester Peirce publicly rebuked her own agency for shutting down the Kraken staking service. Peirce argued that regulation by enforcement is “not an efficient or fair way to regulate” an emerging industry.
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