• Staking can offer attractive excess returns for long-term crypto investors
• SEC banned staking on crypto platform Kraken
• Coinbase CEO promises passionate defense of staking
The legal status of staking is the subject of hot debates in the US. According to the US Securities and Exchange Commission (SEC), the Kraken crypto exchange’s staking services fall under the US Securities Act. But what exactly is staking? And why is classification under the US Securities Act so feared among crypto exchanges?
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Staking: Rewards by holding proof-of-stake cryptocurrencies for the long term
Crypto staking is the act of holding and locking a specific amount of cryptocurrency in a wallet to help run a blockchain network and receive rewards in return. This is a popular variant of long-term capital accumulation for many crypto investors. However, this is only possible with cryptocurrencies that use the proof-of-stake process. Ethereum has also been part of this group since mid-September. With this type of cryptocurrency – which incidentally does not include Bitcoin, which works via the proof-of-work process – existing coins are used as a validation basis for setting further blocks in the blockchain. A protocol randomly determines which coin is used to verify the next block. The more coins you use, the higher the probability of a win or a reward.
SEC bans staking on crypto exchange Kraken
In this sense, staking can in a way be called the interest rate in the crypto market. The exact legal classification is highly controversial. That is why the decision by the US Securities and Exchange Commission on February 10 to ban staking on the Kraken crypto exchange caused great criticism from the crypto community. The SEC justified its move by citing Kraken’s “failure to register the offering and sale of its crypto asset staking-as-a-service program,” Cointelegraph quoted the agency as saying. The SEC now classifies this program as a security, so the lack of registration by the crypto exchange Kraken has these consequences. Aside from shutting down the service, Kraken agreed to pay $30 million in refunds, prepayment interest, and civil penalties.
This is how Coinbase wants to defend staking
Coinbase CEO Brian Armstrong now wants to do everything in his power to prevent such a staking ban on Coinbase. Two days after Kraken’s staking program was banned, he tweeted his belief that Coinbase’s staking services should not be considered securities, which he would “happily defend in court if necessary.”
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
Paul Grewal, Coinbase’s chief legal officer, agreed with Armstrong, underscoring that Coinbase’s staking program is not covered by the US Securities Act or the 1946 Howey Test. He therefore views the SEC’s decision to ban staking at Kraken extremely negatively: “The attempt to overlay a process like staking with securities law does not help consumers at all and instead leads to unnecessarily aggressive regulations that US Preventing consumers from accessing basic crypto services and pushing users towards unregulated offshore platforms,” he wrote in a blog post published on Coinbase’s website.
In Grewal’s opinion, the main intention of legal control under the US Securities Law is to prevent information imbalances in the market. When it comes to staking, however, there is “no information imbalance, since all participants are connected on the blockchain and are able to validate transactions through a community of users with equal access to the same information,” Grewal explained. Whether the court agrees with this argument will have to be seen in the coming weeks.
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