Cryptocurrency exchange, Coinbase, states its staking services are not securities and has given its reasons. This comes days after the Securities and Exchange Commission (SEC) released information about staking and penalized Kraken for some staking products.
Announcing this in a Twitter post, Coinbase’s Chief Legal Officer, Paul Grewal, said the SEC had asked misguided questions and he would set the records straight.
The crypto exchange stated the increased adoption of the Proof of Stake (PoS) mechanism over the energy-intensive Proof of Work (PoW) calls for serious regulation. This is because wrong regulation could cause severe damage to the industry’s development in the US.
However, this shift has sparked debates about what staking should be at the regulatory level. A blog post by Paul Grewal has given reasons why staking is not a security.
Grewal claimed staking is not a security under the US Securities Act and the Howey test. In addition, staking does not meet the four elements of the test: investment of money, common enterprise, reasonable expectation of profits, and efforts of others.
According to a statement by Paul,
“Trying to superimpose securities law onto a process like staking doesn’t help consumers at all and instead imposes unnecessarily aggressive mandates that will prevent US consumers from accessing basic crypto services and push users to offshore, unregulated platforms.”
Staking is not an investment of money because users retain full ownership of assets. Moreover, it does not meet the common enterprise since assets are staked on decentralized networks, and stakers connect by blockchain technology.
Also, it needs to meet the reasonable expectation of profit because the rewards are simply payments for validation services. Finally, rewards are independent of people’s effort since the blockchain protocol decides which validator nodes receive the most bonus.
