The CEO of Coinbase, Brian Armstrong, is willing to make his argument in court if the United States Securities and Exchange Commission (SEC) classified Coinbase staking services as securities. Armstrong published a lengthy blog post in which he gave several reasons why staking services are not securities.
Coinbase CEO to defend staking services in court if needed
The SEC has been cracking down on crypto staking services. The regulatory body imposed a $30M fine against Kraken and ordered the exchange to shut down its crypto staking services within the US. However, it appears that Coinbase is not willing to shut down these services without a fight.
Armstrong explained that staking is not a security as it does not pass the Howey test. The Howey test includes four elements: investment of money, common enterprise, reasonable expectation of profits, and efforts of others.
Coinbase's staking services are not securities. We will happily defend this in court if needed.https://t.co/GtTOz77YV3
— Brian Armstrong (@brian_armstrong) February 12, 2023
He noted that staking was not an “investment of money” because customers did not relinquish their assets’ ownership. Instead, they retained their rights over these assets, and they had the option to “unstake” according to the specifications of the underlying protocol.
Additionally, staking did not qualify as a “common enterprise” because of the decentralized nature of the process. Stakers were only linked by blockchain technology, with transaction validation being done by users and not a common enterprise. Moreover, Coinbase did not determine the staking rewards; instead, the protocols did this, which failed to meet the definition of a common enterprise.
Armstrong has also argued that stakers did not have a “reasonable expectation of profits” because the rewards were paid for validation services and were not a return on investment. These rewards remained the same whether a user staked on their own or through an intermediary such as Coinbase. The protocol determines the rewards, with Coinbase being paid a fee for facilitating the process.
Staking also failed to meet the fourth element under the Howey test because the rewards were not based on the effort of others. Blockchain protocols determine the validator nodes that get rewards, with the amount determined by the number of staked tokens.
“Trying to superimpose securities law onto a process like staking doesn’t help consumers at all. Instead, unnecessarily aggressive mandates will prevent US consumers from accessing basic crypto services in the US and push users to offshore unregulated platforms,” Armstrong said.
SEC goes after Binance USD
It appears as if the SEC’s crackdown in the crypto industry is not exclusive to staking. The SEC recently issued a wells notice against Paxos, the company that issues BUSD, saying that the stablecoin is an unregistered security.
The New York Department of Financial Services has also ordered Paxos to halt the issuance of BUSD, which is the third-largest stablecoin in the market. The CEO of Binance, Changpeng Zhao, has issued a statement saying that while the stablecoin’s market cap will drop, Paxos will continue honoring redemptions.
#BUSD. A thread. 1/8
In summary, BUSD is issued and redeemed by Paxos. And funds are #SAFU!
— CZ Binance (@cz_binance) February 13, 2023
Crypto Twitter has reacted to the SEC’s scrutiny over BUSD, with some arguing that a stablecoin could not pass the Howey test because there was no expectation of profit.
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