The enforcement action taken against the crypto exchange Kraken by the Securities and Exchange Commission (SEC) in the previous week has thrown the future of the practice of crypto staking in doubt.
Coinbase, the crypto exchange based in the US, is prepared to launch its own crypto staking services after the incident.
The CEO
On Sunday, the chief executive of Coinbase, Brian Armstrong, tweeted that crypto staking services do not qualify as securities.
The CEO asserted that they were prepared to defend their stance in court if required. The statement comes after a fine of $30 million was imposed on the Kraken crypto exchange.
This was because the company not registering its staking-as-a-service product before offering it to the public.
Armstrong had warned before the announcement that there were rumors of a crackdown taking place against crypto staking in general.
Coinbase and staking
Staking is defined as a practice where crypto holders are willing to see their holdings locked up for a period of time in order to keep the blockchain operational and they are given rewards in exchange.
Users have the option of participating directly in the practice, or they can also use intermediaries for this purpose, such as Coinbase and Kraken.
However, since the decision of the SEC came to light, Coinbase has made an effort to distinguish its own staking services from that of Kraken.
Paul Grewal, the chief legal officer at Coinbase, had said in the previous week that the product that Kraken was offering was essentially a yield product.
He said that the staking services that Coinbase offers are quite different and cannot be categorized as securities.
On Friday, he expanded on the topic in a blog post, which had also been shared by the CEO when he made his promise of defending the exchange’s staking services in court.
The arguments
Grewal mentioned in the post that staking does not meet the definition of security, as defined in the Howey test, which is a key tool used for evaluation by the SEC.
The test has four elements, which are a monetary investment, common enterprise, and others making the efforts and expectations of generating profits.
Grewal stated that the aim of securities law is to address any imbalances that may exist in information.
However, he added that staking does not involve any such imbalance because everyone can validate transactions on the blockchain via a community of users and everyone has access to the same information.
His argument was that staking fails the Howey test in all of the four elements because it is not an investment, as the staker does not give up something they own to get something else.
He said that their holdings remain the same. As far as profits are concerned, he said that the payments are not a return on investment, but payments given for validating transactions on the blockchain.
The last point could be difficult to sell, given the market considers the rewards generated via staking as returns.
