Is Staking a Security? An Expert Explains

Coinbase claps back at Gary Genslers security claims

A day after Gary Gensler’s $30 million fine for Krakens staking program, Chief legal officer of Coinbase Paul Grewal fires back at the unregistered securities claims.

Give it a read if you have the time, as it’s very well written and calls out several of Gensler’s claims.

Here’s a quick summary:

  • Staking services provided by Coinbase, such as Coinbase Earn, Coinbase Wallet, and Coinbase Cloud, are not considered securities under the US Securities Act or the Howey test.

  • Staking is a process in which a participant contributes to the security of a blockchain network and earns rewards in return.

  • Staking allows users to participate in the verification and security of transactions on a blockchain without a need for a bank or payment processor intermediary.

  • Staking rewards are payments for validation services provided to the blockchain, not a return on investment, and are set by the blockchain protocol.

  • The four elements of the Howey test (investment of money, common enterprise, reasonable expectation of profits, and efforts of others) are not met by staking services.

  • Staking customers retain full ownership of their assets, and their rewards are not tied to those of Coinbase.

  • Staking services provided by service providers are IT services, not investment services.

  • According to Coinbase, staking is not a security offering in any way under US security laws, and Gensler is simply trying to superimpose the laws onto crypto.

    I tend to agree with Coinbase.

    Unfortunately, securities laws are old, outdated, and don’t make sense when you understand crypto, a transcendent, frictionless monetary technology and arguably one of the greatest inventions of the last 1,000 yrs.

    By comparison, fiat is an old, clunky, and inefficient way to measure and store energy, which is essentially what money is when you break it down.

    Coinbase is the hero we need in crypto and the complete opposite of FTX.

    They do everything by the book and back their assets 1:1. Instead of playing those silly “woke games” that SBF refers to and greasing palms, they push back on just about everything the SEC claims.

    And it’s warranted because all the SEC is doing is picking winners and finding easy ways to collect fines.

    While Coinbase wasn’t fined, it did send panic through the exchange as users sold $4.7B in crypto over 24 hours.

I Thought We Were in This Together?

One of the strangest phenomena in crypto is Bitcoin maxi’s cheering on Gensler regulation by enforcement tactics. Depending on the day, you’ll see Bitcoin maxi’s bash institutions, banks, government, and regulators.

A common rallying cry is that they don’t need these institutions, but you’ll see them get excited when there’s evidence of one buying a massive amount of Bitcoin.

On other days, they cheer enforcement that defines any crypto a security besides Bitcoin.

Several prominent voices continued to give their opinion on the matter, including Jason from this week in startups, who commended Gary for the enforcement.

In the replies, you’ll see Brian Armstrong respond, “Disappointing to see you duped by this Jason.”

Co-founder of Kraken Jesse Powell also decided to mockingly chime in about how he could have avoided the $30 million fine if he had filled out the proper paperwork.

Reflecting on the video, you gotta wonder if Goldman Gary is trolling crypto with the types of videos he pushes out. Simply look under anyone of his Tweets, and there are never-ending memes of him as a clown.

Are they funny?

Yes, they are!

However, probably not the best look to troll someone as powerful as Gary when he wields so much power over crypto at this point in time. After all, he nuked the market with one silly little video and fine.

The videos are lame in the same way your dad’s jokes are, and it’s interesting, and it feels like they are talking directly to a retail investor audience. Gary is smart enough to know that group of investors will never fully trust him or buy into his message, so why make them in that format if nothing else but troll the die-hard crypto people?

At the end of the day, all Gary is doing is picking winners.

If he is trying to protect investors, where was he during the whole FTX fiasco?

He understands the power and upside of crypto, and by “cleaning it up,” he means that he wants to clear the runway for his friends. Hopefully, somebody brings him to heel as he appears to be trending toward unhinged territory, and it feels like he has free reign to attack and fine crypto every chance he gets.

Either way, I will monitor this situation as it plays out, especially as more and more chains decide to transition to Proof of Stake. Gary can’t possibly stop them all, and he will have to pick and choose his battles along the way.