Responding to Enforcement Actions on the Kraken
On the 20th, major US crypto asset (virtual currency) exchange Coinbase submitted an opinion to the Securities and Exchange Commission (SEC) focusing on the handling of staking services under securities law. /p>
Today, @Coinbase submitted a comment letter to our July 2022 SEC petition for rulemaking. We explain why core staking services–those that serve as a pass-through for rewards–are not securities offerings. https://t.co/Xzz21B9AkS 1/25
— paulgrewal.eth (@iampaulgrewal) March 21, 2023
Coinbase filed a petition in July last year calling for “development of a viable regulatory framework,” and this time, the company’s response to that petition was “the possibility that some staking services could be considered securities.” It has sharply criticized the SEC’s recent actions suggesting that
connection:Coinbase Filed Petition to SEC to Create Crypto Regulations
Specifically, in February this year, Kraken, a major exchange that was prosecuted for violating the Securities Act for “providing staking services equivalent to investment contracts,” reached a settlement with the SEC. Regarding this matter, SEC Chairman Gensler said, “I made it clear to the market that businesses that provide staking as a service are required to register, disclose information and protect investors.” I see it as a problem.
Despite the fact that the SEC had the time and opportunity to reach this settlement, Coinbase said that it could consider the staking service to be an investment contract and a securities offering requiring registration with the SEC. It was pointed out that the company had not communicated to the industry about the nature of the issue, nor had it announced its position that there were concerns.
Moreover, the assertion that the SEC chairman has “expressed new policy positions and legal judgments” on already widespread industry activity through coercive action against a single company, rather than through formal guidance, is “It creates uncertainty for market participants,” he said.
connection:How to view the US SEC’s Kraken indictment, and consider the impact on Ethereum stakinga
Services that do not meet the conditions of the investment contract
Coinbase Chief Legal Officer Paul Grewal has an 18-page opinion piece. “There are different models of staking and it is not monolithic,” Grewal said.
It emphasizes that the core staking service (abbreviated as CSS), which is covered in the book, does not meet the definition of an investment contract. He explained that staking does not meet the following four elements of the “Howie test” to determine whether it is an investment contract.
- to invest money (or value)
- Investment in joint ventures
- have a reasonable expectation of profit
- Derived from the management efforts of others
The Howie test is a test that determines whether a specific transaction falls under one of the definitions of securities trading called “investment contract” in the United States. Derived from the SEC’s lawsuit against WJ Howey. Although this itself is not legally binding, the SEC has filed lawsuits against multiple ICOs (token sales) based on this test.
First, CSS does not involve any financial investment. Coinbase argues that what users temporarily give up when using the staking service is an alternative use of assets, not money. He also pointed out that the ownership of the asset completely belongs to the user, and that it can be disposed of, such as unstaking or selling the asset, regardless of the intention of the service provider.
The staking service is not a joint venture with other staking operators or service providers. Also, staking rewards are consideration for verification services provided to the network, not returns on investment. Therefore, it did not fall under a “reasonable expectation of profit.”
CSS isn’t an investment contract, Grewal puts it, but a software service that lets you “let someone else do the heavy lifting.”
connection:Coinbase Chief Legal Officer Warns SEC Over Staking Controversy
Consequences of Improper Application of Securities Laws
Gensler’s argument creates an economic incentive for staking service providers to leave the U.S., Coinbase said.
First, there is a pervasive view in the industry that there is no basis for staking service providers to register with the SEC. Moreover, the SEC has not offered any actionable remedial measures if a business were to actually attempt to register.
As such, leaving or avoiding the U.S. as a base of operations for a company is “a reasonable response to potential injunctions and financial penalties due to unclear and inappropriate regulatory liability,” Coinbase argues. do.
The cost of expelling “important infrastructure for emerging industries with over $1 trillion and 420 million participants” is “possibly obtained by applying securities laws to blockchain PoS consensus mechanisms.” The opinion emphasizes that it is “much greater” than “the benefits of sexual intercourse”.
The SEC should adhere to its fundamental responsibility, as articulated by Congress and the President, to ensure that the agency’s actions produce social benefits that outweigh the costs.