United States-based crypto exchange Coinbase decided to communicate proactively on crypto staking, which had recently attracted regulators’ attention. The company’s petition to the Securities and Exchange Commission (SEC) explains why staking can’t be universally labeled as securities.
The “Petition for Rulemaking” was published by Coinbase on March 20. In an 18-page document, the firm focused on how securities law treats services related to validating proof-of-stake protocols. It was written in response to the SEC’s February crackdown on Kraken’s staking program — the SEC charged the exchange with “failing to register the offer and sale of their crypto asset staking-as-a-service program,” which it qualified as securities.
In the petition, Coinbase argues that staking isn’t a monolith operation concept. While some of the existing models may fall under the definition of investment contract offerings, others clearly can’t. Particularly, it is the core staking services that don’t meet the criteria of the Howey test, the company emphasizes.
Core staking services do not involve an investment of money, as the opportunity cost of staking is not an investment — what the users give up temporarily is the alternative use of their assets, not money.
There is also no common enterprise among stakers or between stakers and service providers. Users retain full authority over their assets, with the ability to unstake them, sell, hypothecate, vote, pledge or otherwise dispose of them independent of the service provider.
According to Coinbase, core staking services also fail to meet the “expectation of profit” standard, given that the rewards users receive are simply payments for services rendered. And finally, core staking services entail ministerial maintenance and not managerial efforts in the sense of traditional investing.
Coinbase cites several historical precedents that can guide SEC on the current regulatory work with crypto staking, namely the 1973 Committee on Special Investment Advisory Services, the SEC’s Regulation Fair Disclosure from 2000 and the Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, from 2017.
The company reminds the regulators about the significant economic consequences of its actions on the digital asset ecosystem, urging it to take a different approach to the treatment of staking services.
Right after the collision with Kraken in February, Coinbase publicly distanced its staking programs as ‘fundamentally different’ from Kraken’s, with the company’s CEO Brian Armstrong expressing his readiness to defend this position in court “if needed.“
Coinbase reiterated to customers that its staking services will continue and “may actually increase” despite the SEC’s actions.