Breaking: Coinbase argues core staking services are not securities in its letter to SEC

• Coinbase submitted a comment letter to the US financial regulator asking for clarification on core staking services. 
• The exchange explained that staking services fail every single prong of the Howey test, therefore, cannot be treated as securities. 
• Coinbase argues that the exchange provided detailed presentations on staking services as early as 2019, leaving ample room for formal guidance. 

US-based crypto exchange Coinbase sought clarification regarding the crypto staking services via its letter to the US Securities and Exchange Commission (SEC). The letter dated March 20, 2023, addresses key pain points that many service providers in the crypto industry are facing.

Coinbase urges SEC to provide clear rules on crypto staking

Coinbase asked the SEC to provide rules and guidelines to staking and other complex aspects of the cryptocurrency industry in its recent letter. The exchange noted that.

Staking services are not a monolith. A number of different models exist and while some might be categorized as offering an investment contract, core staking services that we describe in this letter are not."

The poster child for crypto exchanges in the US further argues that staking services do not fit the definition of a securities offering “when applying the analysis laid out in the Supreme Court case, SEC v. W. J. Howey Co. and as refined over the years.”

Additionally, the letter clarifies that, 

both the black letter law of the "Howey test" as well as the policy and regulatory concerns underlying that analysis we find that core staking services neither meet the test as a matter of law, nor present the risks the federal securities laws were designed to mitigate.

In its efforts to help the Commission, Coinbase notes its efforts made on December 18, 2019, July 14, 2020, on August 20, 2020, in explaining how these staking services work and why they do not constitute securities. The exchange also notes that there are staking services that are not securities, and there are some that could be viewed as securities.

The US-based exchange adds that there are "no established" processes or regulations that squarely fit the staking services. Hence, Coinbase urges the SEC to provide a "path to workable registration" and encourages the SEC to consider how that "framework should apply to any staking services that do constitute an offering of securities."

The exchange also references its previously submitted petition that deeply implored the "Digital Asset Securities Regulation" topic.

This response from Coinbase comes after the cryptocurrency industry suffered major turmoil, including the collapse of multiple well-established projects and institutions. The contagion from the fall of Terra, 3AC and FTX combined with SEC's crackdown on stablecoin issuers like Paxos or levying fines on Kraken exchange explains this move from Coinbase.

The exchange's executive previously voiced his opinion on SEC's crackdown of staking services.

Read more: Coinbase stands up against SEC: “Stablecoins are not securities,” guidance is important, not litigation threats

Coinbase’s letter to the US SEC

In the letter, the exchange explained that there was ample time when it started sharing detailed presentations about staking services in December 2019, before taking the company public in 2021. While the US financial regulator is looked upon for formal guidance and direction in terms of enforcement, there was no clarification in this regard up until February 2023, when the SEC slammed Kraken for sale of unregistered securities, addressing “staking-as-a-service.” 

Kraken settled with the SEC for $30 million, but staking is not a security

In February 2023, the SEC hit San Francisco-based cryptocurrency exchange Kraken with a $30 million fine for violating securities laws. The regulatory body announced that the firm had failed to register the offer and sale of their crypto asset “staking-as-a-service” program. 

Kraken, one of the leading cryptocurrency exchanges in the ecosystem, settled the SEC’s allegations against it with the payment of $30 million. However, Kraken’s settlement does not imply that “staking constitutes a security.” 

As Jake Chervinsky, Chief Policy Officer at Blockchain Association explains, settlements are not the law. While the US SEC thinks that “staking-as-a-service” is a security, Kraken didn’t admit or deny it, instead the exchange chose to settle the matter with a fine. 

Why staking services are not investment contracts

Ari Good, a Blockchain lawyer with clients that include cryptocurrency exchanges and payment companies explains the difference between staking arrangements and investment contracts. Good agrees with Coinbase’s Chief Legal Officer Paul Grewal in that merely serving as an intermediary does not render the underlying economic relationship an “investment contract.” 

The US SEC has not entertained the difference between service providers and counterparties in its allegations against Kraken. Serving as a custodian of a fungible asset, especially where such a custodian holds collateral on a 1:1 basis to back every customer account, is a discreet service. 

Kraken, Coinbase or any other “staking-as-a-service” providers' rewards do not improve or decline based on the performance of the intermediary. While there should be a clarity on rules and regulations for custodians, the service itself is not a security.

Amidst the ongoing banking crisis and the rise in SEC’s regulation by enforcement cases, Coinbase continues to defend its staking services and seeks clarity from regulators.

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