Coinbase CEO Brian Armstrong Said The exchange’s staking service does not pass any of the four Howie test criteria and is “willing” to defend itself in court when necessary.
The U.S. Securities and Exchange Commission (SEC) uses the Howey test to determine where transactions qualify as investment contracts and can be labeled for security.
coinbase is blog post The stake does not qualify as a security simply because it is not a security under the US securities laws. But more importantly, Coinbase Earn, a protocol-based on-chain staking service, fails to meet all four of his Howey Test criteria.
Why Staking Fails the Howey Test
The four Howey test criteria are: (1) Investment of money (2) Investment in general enterprise (3) Reasonable expectation of profit (4) Profit obtained through the efforts of others.
Coinbase said staking is not an investment of money, even under an expanded definition that includes a “specified consideration” that is waived “in exchange for a separable financial gain.” This is because users who stake crypto do not give up their assets. The user maintains full ownership of the crypto.
Second, since cryptocurrencies are staked on decentralized blockchains, staking services do not meet the second criterion. Users who bet assets contribute to validating transactions on the network to maintain security.
They are linked only by a blockchain and validate transactions through a community of users, which is unlike a typical company, Coinbase said. This is because staking rewards are determined by the protocol and Coinbase is not involved.
Third, according to Coinbase, staking rewards are like payments for services. Users are rewarded for verification services provided to the blockchain. This is not a return on investment.
Finally, staking rewards are not earned through the efforts of others. The Staking Service Provider is not entrepreneurial, administrative, and does not significantly influence the rewards you receive or the amount of rewards you receive.
According to Coinbase, the blockchain protocol determines which validator nodes receive rewards and how much. Staking services use publicly available software and basic computer equipment to validate transactions. This means that the staking service simply provides an IT service, not an investment service, Coinbase said.
Coinbase said layering securities laws on staking would prevent U.S. consumers from accessing basic crypto services, forcing them to offshore, unregulated platforms. It added:
“Coinbase supports smart regulation in our industry. But forced regulation that does nothing for consumers and drives innovation offshore is not the answer. It’s important to get your staking right.”
