Coinbase Crypto exchange to the SEC: PoS cryptocurrency assets are not security crypto tokens

3 min

coinbase security token

Yesterday the legendary United States exchange Coinbase Crypto exchange sent the SEC a petition asking that digital currencies according to Proof-of-Stake (PoS) not be considered security tokens.

The petition is addressed to Vanessa A. Countryman, secretary of the United States Securities and Exchange Commission (SEC) in Washington, and is titled “RE: Petition for Rulemaking – “Proof-of-Stake” Blockchain Tech Staking Services.”

This is a comment given by the exchange in response to an earlier petition from July a year ago regarding cryptocurrency regulation.

The petition: Coinbase Crypto exchange asks the SEC to retract the definition of safety token

The petition sent yesterday is an impressive 18 pages long, and is a commentary by Coinbase Crypto exchange in response to a recent SEC action, stated as “surprising,” suggesting that the agency may consider some staking services as constituting an financing contract, and this is why a security.

The action referred to in the petition is the one against Kraken, which forced the major United States cryptocurrency exchange to stop supplying its staking service to all United States users.

In the petition, Coinbase Crypto exchange concentrates on how United States securities law treats services related to block validation in PoS-based cryptocurrency protocols, arguing that staking is not a monolithic operation concept.

Reports by the exchange, some of the models in existence to date essentially could fall under the definition of “ financing contract offerings,” but others clearly do not. In particular, major staking services would not meet the criteria of the Howey test.

What are they and how do securities work?

The Howey test was used in a case before the United States Supreme Court to determine whether a transaction qualified as an “ financing contract” or not.

Reports by the Howey Test, they are true financing contracts when there is an financing of money in a joint deal with a reasonable expectation of profits from the efforts of others.

In this particular case, those who are staking on their own node make profit by validating blocks, meaning not through the efforts of others. Nonetheless, those who instead entrust their crypto tokens to third party validators with the promise that they will validate the blocks obtaining a profit with which to pay a financial return on the crypto tokens staked may essentially be entering into an financing contract.

The key point is the fact that securities in the United States, as indeed in almost all other countries with developed financial markets, can only be offered on the open market with the approval of the authorities. Such authority in the United States is precisely the SEC.

This is why if some PoS-based digital currencies, or some cryptocurrency staking services, do not pass the Howey test, to date they would be found to be sold illicitly.

To be able to be sold lawfully, they would have to apply for and receive approval from the SEC, and this is a scenario few considered likely.

Ethereum (ETH) and other PoS cryptocurrencies

From this reasoning, it would appear to emerge that those staking Ethereum (ETH) on their own node should take no risk. The issue would be for those who entrust their Ethereum (ETH) to a third party node for it to be used for Proof-of-Stake, receiving a financial return in return.

Such staking-as-a-service is provided by numerous intermediaries, including numerous exchanges such as Coinbase Crypto exchange and Kraken.

Right now, excluding staking on its own nodes, the main pool offering this service is the decentralized Lido, followed precisely by Coinbase Crypto exchange, Kraken and Binance.

As far as Lido is concerned, it is quite difficult for the SEC to really intervene, since it is a decentralized platform, but as far as Coinbase Crypto exchange, Kraken and Binance Crypto exchange are concerned, it  can potentially. That is why Coinbase Crypto exchange is concerned.

Additionally, it is important to note that there are other digital currencies that natively allow delegated-Proof-of-Stake (dPoS), which is the protocol-level management of the staking of one’s own crypto tokens on third party validator nodes.

Nonetheless, even in these cases it  may be difficult for the SEC to intervene, since if these are decentralized protocols it would be difficult for the agency to find a so- was known “legal entity” (i.e., an enterprise) to rely on.

Coinbase’s objections: PoS cryptocurrency assets are not security tokens

Reports by Coinbase Crypto exchange, basic staking services would not be investments, because the chance cost of staking would not be an investment, considering users are simply temporarily giving up the alternative use of their crypto tokens, since they retain full and exclusive ownership of them.

Furthermore, in these cases there is not even a joint deal betwixt staker and service provider, causing the very concept of a contract to be dispelled.

Nonetheless, it is important to note that handing over one’s crypto tokens to an intermediary, such as a centralized exchange, takes away the full and exclusive ownership of the crypto tokens from the user.

Whereas on core staking services, where the users do not hand over their crypto tokens to any intermediary, there would not even be an expectation of financial gain, because in fact the profits from staking would simply be payments for block validation services rendered.

The  challenge this is why is complex and still definitely open, with the SEC seeming to want to force the  challenge a little bit perhaps in order in order  to begin a type of negotiation from a stronger position than it would have without this overreach.



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