Brian Armstrong, the CEO of crypto exchange Coinbase, said that although the U.S. Securities and Exchange Commission (SEC) has fined another crypto company for not registering its staking services as a security, he believes staking services are not securities, and he is willing to go to court if necessary to defend that claim.
"Coinbase's staking services are not securities," Armstrong said in a statement. "We will happily defend this in court if needed."
On Feb. 9, the SEC announced a $30 million fine against Kraken for not registering its staking service, which enables users to freeze or "stake" their tokens to be used as part of a blockchain validation process in exchange for additional tokens, according to a release.
“Whether it’s through staking as a service, lending or other means, crypto intermediaries, when offering investment contracts in exchange for investors’ tokens, need to provide the proper disclosures and safeguards required by our securities laws,” said SEC Chair Gary Gensler. “Today’s action should make clear to the marketplace that staking-as-a-service providers must register and provide full, fair and truthful disclosure and investor protection.”
The SEC is responsible for regulating securities, which include stocks and bonds, but were given a broader definition by the 1946 Supreme Court case Howey vs. SEC, according to Investopedia. The court case led to the "Howey Test," which lays out four criteria an investment must meet to be regulated as a security: Money must be invested; the money must be invested into a "common enterprise"; the investment is expected to result in a profit; and the profit is a result of the actions of a third party.
Armstrong shared a Coinbase blog post, which states that staking services do not meet any of the four criteria of the Howey Test. Staking does not involve investing money, according to the blog post, because Coinbase customers "aren’t giving up one thing to get something else – they own exactly the same thing they did before. Staking customers retain full ownership of their assets at all times, as well as the right to 'unstake' those assets consistent with the underlying protocol." Staking services do not constitute an investment into a "common enterprise" due to the decentralized nature of crypto. Staking also does not stem from an expectation of making a profit, because "staking rewards are simply payments for validation services provided to the blockchain, not a return on investment," according to the post. Earnings from staking are a result of blockchain technology, not the managerial actions of a third party, therefore it does not meet the fourth prong of the Howey Test, according to the post.
"Blockchain technology can spur significant economic growth in the U.S. and staking is a safe and critical aspect of that technology," the post read. "Coinbase supports sensible regulation in our industry, but regulation by enforcement that does nothing to help consumers and drives innovation offshore is not the answer. Getting it right on staking matters."
Staking is part of a proof-of-stake process, which is a validation system aimed at providing more transparency and security for crypto customers, according to Nerd Wallet.
Other crypto companies have recently taken strides to increase security and transparency through validation processes, such as Binance's new Proof of Reserves (PoR) system, which uses zero-knowledge proof protocols to demonstrate that all user assets are backed 1:1, plus reserves, Globe Banner reported.
Binance, the world's largest crypto exchange, explained in a Feb. 10 blog post that after crypto exchange FTX collapsed in November, the industry experienced a "crisis of trust" that the Binance development team has been working to overcome. The goal of the new PoR system is to restore trust by proving to the public that Binance backs all user funds 1:1, plus additional reserves. Binance made its code open-source so that any other crypto exchange can follow suit and generate proof of reserves for its users and assets.
"We hope this will be instrumental in pushing the transparency of the digital asset industry to a new level," the blog post said.
Binance said it looks forward to receiving feedback from the community so it can improve upon this first version of the new technology.
