All eyes in the crypto community have been on the SEC and its decision to pursue certain cryptocurrency stake offerings in the United States.
After Kraken, many believe that Coinbase will be next to settle with the regulator, which is why the largest US-based exchange decided to take up the matter.
Our Products Are Not Securities: Coinbase
The exchange’s legal director, Paul Grewal, said in the blog post that the company’s participation services do not meet the criteria of the Howey test, and therefore should not be considered securities. The SEC uses four characteristics to determine whether an investment asset falls into the Howey category of securities: efforts by other parties, investment of money, earnings expectations, and joint venture.
According to Grewal, crypto staking and the Coinbase product, in particular, do not meet either of those. It is not a money investment because clients retain full ownership of the crypto funds and “own exactly the same as they did before.”
As crypto assets are staked on decentralized platforms, Grewal argued that they also do not meet the common business element. And, because staking rewards “are simply payments for validation services provided to the blockchain, not a return on investment,” they fall outside the reasonable expectation of the earnings criteria.
Lastly, these rewards are not based on the efforts of others, as the engagement providers’ services are not “business, managerial, or a significant factor” in whether clients receive them.
Consequently, the Coinbase executive highlighted the need for appropriate regulations that do not stop the development of the sector. If the US does not do so, the country risks losing users to offshore jurisdictions.
“… [T]here there is no imbalance of information in the staking, since all the participants are connected in the chain of blocks and can validate transactions through a community of users with equal access to the same information”.
COIN crashes hard
As the SEC went after Kraken and rumors spread that the crackdown could further intensify for local businesses, Coinbase shares plummeted. They plunged 14% in one trading session, the biggest daily price drop in COIN history.
On a weekly scale, the shares are down about 22% and are trading below $60. They hit an all-time low earlier this year at around $32 before rising back to $80 amid bitcoin’s rally.
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