Coinbase Global, Inc. has urged the U.S. Securities and Exchange Commission (SEC) to clarify the regulatory status of staking services as non-securities. The cryptocurrency exchange filed a comment in response to its July 21, 2022 petition for rulemaking on digital asset securities regulation.
Surprising commission action
Coinbase’s comment was in response to a recent SEC action that suggested that the SEC might consider some staking services as constituting an investment contract and, therefore, a security.
The SEC’s settlement with Kraken regarding its staking services is seen by Coinbase as providing no guidance about what aspects of staking services may be of concern to the SEC nor providing a path for remediation if needed.
Coinbase points out that staking services are not a monolith, and a number of different models exist. Core staking services do not fit the definition of a securities offering when applying the analysis laid out in the Supreme Court case, SEC v. W. J. Howey Co., as refined over the years. Coinbase argues that core staking services neither meet the test as a matter of law nor present the risks the federal securities laws were designed to mitigate.
For those staking services that may constitute an investment contract, Coinbase asks the SEC to provide a path to workable registration. Coinbase recognizes that there are features of investment contracts involving digital assets that do not squarely fit within existing regulation.
In developing a regulatory framework for the offering of investment contracts involving digital assets, Coinbase would encourage the SEC to also consider how that framework should apply to any staking services that do constitute an offering of securities.
Coinbase warns that getting the regulatory treatment of staking services wrong could unnecessarily stifle financial innovation and harm the 20 percent of Americans who own crypto and the three-quarters of Americans who believe that the current financial system is unfair and needs an update.
Coinbase’s mission is to support more economic freedom by making financial products and services more accessible, faster, and cheaper. The exchange says it is advancing this purpose by building the most trusted products, tools, and services, here in the US, with a commitment to help transform our current system, designed before the computer even existed, into one that is digitally native.
Coinbase suggests public engagement
Coinbase believes that pursuing public engagement instead of using enforcement actions to impose regulatory requirements across a new industry is the more prudent approach.
Enforcement actions that target one market participant but otherwise implicate all market participants put industry in an untenable position.
Coinbase recommends that the SEC engage with the public through its two standing SEC Committees—the Investor Advisory Committee and Small Business Capital Formation Advisory Committee.
Alternatively, the SEC could host an industry roundtable, and commission staff could make themselves available in public forums.
Collaborative engagements such as these would put the SEC and its staff in a position to better understand digital asset technology and its potential implication on securities laws.
This would help the Commission and SEC better assess an appropriate path to addressing any residual market concerns, which for staking services, Coinbase believes would have been better addressed, if at all, through notice and comment rulemaking.
