Coinbase CEO Brian Armstrong said the exchange’s staking service does not pass any of the four criteria of the Howie Test and will “happily” defend it in court if required.
The Securities and Exchange Commission (SEC) uses the Howey Test to determine where a transaction qualifies as an investment contract and can be labelled a security.
Coinbase said in a blog post that staking does not qualify as security simply because it is not a security under the U.S. Securities Act. But more importantly, its protocol-based, on-chain staking service Coinbase Earn fails to meet all four criteria of the Howey Test.
How staking fails the Howey Test
The four criteria of the Howey Test are: (1) an investment of money (2) in a common enterprise (3) with a reasonable expectation of profits (4) earned through the efforts of others.
Coinbase said staking is not an investment of money, even under the expanded definition that includes any “specific consideration” that is given up “in return for a separable financial interest.” This is because users who stake crypto do not give up their assets — they maintain full ownership of their crypto.
Secondly, staking services do not meet the second criterion because cryptocurrencies are staked on decentralized blockchains. Users who stake their assets contribute towards validating transactions on the network to maintain its security.
They are only linked by the blockchain and validate transactions through a community of users, which is not the same as a common enterprise, Coinbase said. This is because the staking rewards are determined by the protocol and Coinbase plays no role in it.
Thirdly, staking rewards are like payments for services, according to Coinbase. Users get paid for the validation services provided to the blockchain — it is not a return on investment.
Lastly, staking rewards are not earned through the efforts of others. Staking service providers are not entrepreneurial, managerial, or a significant factor in users receiving rewards or the amount of rewards received.
The blockchain protocol decides which validator nodes receive rewards and how much rewards are to be paid to them, Coinbase said. Staking services validate transactions through publicly-available software and basic computer equipment. This means that staking services simply offer IT services, not investment services, Coinbase said.
Coinbase said that superimposing securities law to staking will prevent U.S. consumers from accessing basic crypto services and push them to offshore and unregulated platforms. It added:
“Coinbase supports sensible regulation in our industry. But regulation by enforcement that does nothing to help consumers and drives innovation offshore is not the answer. Getting it right on staking matters.”
