Kraken Ends Staking in US After SEC Attack; Coinbase Vows to Fight

Crypto’s least favorite government agency is back at it.

The SEC and its chair, crypto public enemy #1 Gary Gensler, have put staking, the process of locking up crypto to secure the blockchain in return for coin rewards, firmly in their crosshairs.

The Kraken Settlement

The debacle began on February 9th with the news that the SEC and Kraken reached a settlement that would see the exchange end its staking program in the US while paying a $30 million fine.

Under the terms of the agreement, Kraken is un-staking all of its US customers’ assets save for ETH, which will be un-staked following the Shanghai upgrade. US customers will then not be able to stake new assets going forward.

The basis of the SEC’s case against Kraken was that staking is a security, and because Kraken did not register their staking services with the SEC, they violated the law.

As Gensler put it:

This settlement, obviously, is not ideal for any US exchange offering staking services, as the SEC is trying to set a precedent.

But while Kraken settled, Coinbase – whose shares dropped 15% on the news – is not giving in so easily.

The Coinbase Response

Coinbase vehemently disagrees with the SEC’s assertion that staking is a security on the basis that staking fails the Howey Test.

The Howey Test states that an investment contract is a security if it is an investment of money in a common enterprise with a reasonable expectation of profit to be derived from the effort of others. Coinbase believes that staking fails these standards:

• Staking is not an investment of money.

• There is no common enterprise in staking because assets are staked on decentralized networks.

• Staking rewards are payments, not a return on investment.

• And these rewards are not “derived from the effort of others”.

Thus, staking is not a security.

Now, to be fair, they do have a pretty big financial incentive to keep staking out of the SEC’s claws, as staking revenue accounts for 10% of their business. But, that doesn’t change the fact their logic is sound.

Looking Ahead

Gensler has decided to go nuclear on crypto in 2023, and the fact that he was able to get Kraken to suspend its staking services was a strong start on his ultimate goal of bringing crypto under his thumb.

But, Coinbase isn’t going to go down so easily.

Coinbase CEO Brian Armstrong has already said that Coinbase is prepared to fight for staking in court.

The US stopping crypto staking would be a huge loss not just for retail investors, but for the entire US crypto market and the economy at large. We should encourage innovation, not drive it away.

Maybe one day the SEC will realize that.