Coinbase to defend against staking services ban in court

Brian Armstrong, the CEO of Coinbase, made a remark on Twitter where he declared that Coinbase’s staking services are not securities.

Armstrong also added that the company would gladly defend this position in court if necessary after rumors of a staking ban made rounds.

The US Securities Act and the Howey test, which the SEC employs to determine whether an investment contract is a security, do not consider taking a form of investment that constitutes a security, according to Coinbase, whose stocks plunged after the ban rumor made rounds.

The Howey test is based on a decision made by the Supreme Court in 1946. However, there is a debate about whether this test applies to current assets such as cryptocurrency. In any case, the staking method does not satisfy the requirements of the Howey test, which require an investment of money, a joint enterprise, a reasonable expectation of profits, and other people’s efforts.

Coinbase: Consumer ownership retention declassifies staking as an asset

To begin, the firm asserts that the provision of staking services does not qualify as an investment of monetary value, even according to an enlarged meaning of the term “investment” that includes any particular compensation that is surrendered “in exchange for a distinct financial interest.”

The firm added that when clients ask them to stake part of their cryptocurrency, they are not giving up anything in exchange for anything else. Instead, they continue to own the exact item they did before they asked us to stake their cryptocurrency. Customers who stake their assets always maintain full ownership of such assets and the ability to “unstake” those assets following the protocol that underpins the staking process.

Secondly, according to Coinbase, staking services do not qualify as a “common business” under Howey because assets are staked on decentralized networks. Validation of transactions is performed by a decentralized network of users known as “Stakers” rather than a central organization. Coinbase customers’ fortunes are not dependent on the company since staking rewards are predetermined by the protocol and not by the actions of Coinbase. Thus, according to precedent, this does not constitute a joint venture.

Staking does not meet the asset’s financial gains classifications

As for the firm’s third point, staking services do not have a “reasonable prospect of profits,” as required by Howey. Courts consider whether a buyer is drawn to an asset because of the possibility of financial gain or the buyer’s need or desire for the product in question. Staking incentives are not a return on investment but compensation for validating blockchain transactions. Staking via a third-party service like Coinbase does not affect these fees since the blockchain protocol predetermines them. The only difference is that customers who bet via Coinbase pay a fee to the firm for it to purchase and maintain a dedicated computer on their behalf. In contrast, users who stake independently may need to do so.

Finally, stake services do not provide compensation for “efforts made by others,” according to Coinbase. The staking services provided by service providers have little entrepreneurial, managerial, or material impact on whether or not consumers obtain staking incentives or how much those benefits are. Which validator nodes get paid and how much they get paid by the corresponding blockchain protocol determines each token staked. To carry out validation services, service providers rely only on freely accessible software and low-end computing hardware. These are not financial advisory services but rather IT services.