- Coinbase CLO Paul Grewal announced that the company provided details to the SEC about why staking services are not securities
- Grewal saw the SEC’s perspective on software services as unclear due to a lack of knowledge of the technology
- He said that staking rewards are only service fees based on the protocol paid to the owner of the asset as proof of compensation
Coinbase’s Chief Legal Officer, Paul Grewal, has taken a bold stance against the US Securities and Exchange Commission’s (SEC) recent statement on staking-as-a-service providers. In a comment letter to the SEC, Grewal argued that core staking services are merely software services and not securities offerings, exempting them from the same regulations as securities.
Last month, the SEC released a statement during Kraken crypto exchange’s regulatory settlement, indicating that staking-as-a-service providers must register and disclose full details to investors. However, Grewal believes this statement does not apply to any staking services apart from those already offered by Kraken.
Grewal explained that core staking services fail every prong of the Howey test, which determines whether an investment is a security. He added that staking rewards are service fees determined by the protocol paid to the asset owner as compensation, not profits.
Then, he took to Twitter with a mega-thread regarding Coinbase’s stance against SEC’s perspective on software services.
In one of the posts, he said,
“Core staking services are not an offering of securities; they’re just software services. Paying someone a fee to take a chore off your hands doesn’t make something a securities transaction.”
While the SEC has the power to enforce rules on staking-as-a-service providers, Grewal suggests other approaches than leading with enforcement.
This move by Coinbase’s Chief Legal Officer is a significant stride in the ongoing debate about cryptocurrency regulation and its services. Coinbase and other staking-as-a-service providers will be closely monitoring the SEC’s response to Grewal’s remarks.
Coinbase CLO’s Explanation in a Nutshell
Paul Grewal confidently explained how none of the services are considered securities. According to him, core staking services “fail every single prong of the Howey test.”
The Howey test is used to determine whether an asset is a security or not. It requires that there be an investment of money and risk, a common enterprise among all investors, and an expectation of profit from the managerial or entrepreneurial efforts of others.
Grewal argued that when users engage in core staking services, they are simply staking their own assets and are not investing in any common venture with other investors. There is no financial risk involved as users retain ownership of their staked assets regardless of the performance of the service provider.
Furthermore, any rewards earned for providing these services are equivalent to service fees paid to asset owners as compensation rather than profit. Lastly, as core staking services merely provide software services with no managerial or entrepreneurial efforts involved, they cannot be classified as securities investments.
He believes none of these activities constitute a securities offering and has stated that it will continue to defend customers’ rights to leverage core staking without having it classified as investing in securities.
