Executives at crypto exchange Coinbase are defending their cryptocurrency staking services, claiming that it cannot be classified as a security and threatening to take the matter to US courts.
Coinbase CEO Brian Armstrong 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 on February 10 to stop offering services or engagement programs to clients in the country.
According to the SEC, Kraken failed to “register the offering and sale of its staking program as a service of crypto assets,” which the commission has now classified as securities. Aside from the service outage, Kraken agreed to pay $30 million in repayment, pre-judgment interest, and civil penalties.
Coinbase staking services are not securities. 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 matter in a blog post, claiming that “gambling is not a security under the US Securities Law, 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 onto offshore platforms. not regulated”.
Grewal argues that gambling does not meet the four elements of the Howey test: investment of money, joint venture, reasonable expectation of profit, and the efforts of others. “The Howey test comes from a 1946 Supreme Court case, and there is a separate discussion about whether that test makes sense for modern assets like cryptocurrencies,” he noted.
“The purpose of the securities law is to correct information imbalances. But there is no information imbalance in staking, since all participants are connected to 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. Do well in betting matters. “
The SEC’s decision on cryptocurrency staking drew criticism. In a statement titled “Kraken Down,” Commissioner Hester Peirce publicly rebuked her own agency for shutting down the Kraken engagement service. Peirce argued that enforcement regulation is “not an efficient or fair way to regulate” an emerging industry.
