Coinbase has argued against the SEC’s recent ruling that staking is a disguised security.
The Chief Legal Officer Paul Grewal of Coinbase, the largest U.S. cryptocurrency exchange, has emphasized that its staking product, known as Coinbase Earn, is not a security, in response to the new ruling. here by the US Securities and Exchange Commission (SEC).
The above comment was posted by Mr. Grewal in an article opposing the SEC after it fined Kraken exchange $ 30 million for providing a cryptocurrency staking product, claiming it to be a disguised security. SEC Chairman Gary Gensler later said that the Kraken case should be viewed as a “warning” for US crypto companies that are offering similar products, including Coinbase.
At the beginning of the article, Mr. Paul Grewal affirmed that Coinbase’s staking service is not a security.
“Staking is not a security under the U.S. Securities Act, nor is the Howey Test, the methods used by the SEC to assess whether an investment contract is a security.”
@secgov has made a number of misinformed assertions about staking over the past few days, and asked a number of misguided questions. Let’s set the record straight point by point–there’s a lot of FUD to cover. https://t.co/2CBT8mdKke
— paulgrewal.eth (@iampaulgrewal) February 10, 2023
The Howey test is a well-known security valuation method commonly used by the SEC, whereby an asset is considered a security if it is:
- An investment in money;
- The investment of money in a joint business;
- There is an expectation of return on investment;
- That profit comes from the business of the organization selling the investment or a third party.
Accordingly, since staking users “maintain full ownership of assets at all times, as well as the right to withdraw funds”, the related services cannot be considered a monetary investment.
In addition, staking users do not invest in “a common business” because assets are contributed to a decentralized network, interconnected via the blockchain network. Staking rewards are also determined by the blockchain, rather than Coinbase.
In terms of investment returns, Coinbase believes that staking participants only use their own funds to ensure the security and operation of the blockchain network, in return for receiving staking rewards in the form of “remunerations” for providing services. Users can also staking themselves without going through Coinbase, but will incur additional equipment costs and risk of technical complexity.
Finally, staking generates rewards from “one party’s efforts”. A staking provider like Coinbase cannot decide on the reward that the protocol pays to the staking. Coinbase is only an IT service provider, not an investment service.
Mr. Grewal concluded:
“Staking is not a security. The imposition of securities regulations on staking does not help investors, but instead creates additional barriers to prevent US investors from accessing basic crypto services and pushes users away. to foreign platforms, which are not fully regulated.”
Earlier in the week, Coinbase CEO Brian Armstrong revealed that there are rumors that the SEC is preparing to ban cryptocurrency staking. This comment comes just a day before the SEC’s decision to penalize Kraken.
Coinbase Earn currently offers interest-based staking and deposit services for many cryptocurrencies, with annual interest rates ranging from 1.5% to 6%.
Notably, the exchange is holding up to 11.44% of the total staking pool of Ethereum, which is locking ETH worth more than 25 billion USD and is about to be unlocked after the Shanghai upgrade, which is expected to be implemented. next March.
Coinbase’s COIN share price has dropped nearly 20% this week because of the SEC ruling regarding staking as securities in disguise.