In a significant development for the cryptocurrency industry, the U.S. Securities and Exchange Commission (SEC) has declared that Coinbase’s cryptocurrency staking service is in violation of securities laws. The indictment, filed on the 5th of June, accuses Coinbase of violating securities laws by offering staking services for five coins: Ethereum (ETH), Cardano (ADA), Solana (SOL), Cosmos (ATOM), and Tezos (XTZ).
The SEC’s ruling is based on its interpretation of securities laws, which define security as “anything that creates an expectation of earning a profit from someone’s conduct.” According to the SEC, Coinbase’s staking service falls under this definition and is considered a securities product sale.
The SEC highlighted several key points to support its indictment. Firstly, Coinbase has been providing staking services since 2019, allowing investors to earn financial returns through Coinbase’s managerial efforts. This aligns with the securities law definition of a security.
Secondly, investors who participate in staking entrust their coins to Coinbase, which are then stored in the Coinbase wallet and staked on their behalf. Coinbase charges a commission of 25-35% for its services. The SEC views this arrangement as an investment in securities since Coinbase acts as an intermediary, making staking easier and more efficient for individuals.
Thirdly, investors were aware that Coinbase would utilize its experience and expertise to generate staking revenue. Each staking program for the five cryptocurrencies offered by Coinbase can be seen as an investment contract and, therefore, falls under the category of a security.
The SEC also criticized Coinbase for failing to submit relevant documents to the SEC and neglecting to provide important information about the staking service to investors. These actions were deemed violations of the Securities Act of 1933, which safeguards investor interests.
While the SEC did not assess the securitiesability of the individual staked coins, it did mention that Solana and Cardano are listed as Crypto Asset Securities in other sections of the indictment. Cosmos was also included as a crypto asset security in the SEC’s indictment against Binance. Notably, Ethereum was not listed as a crypto asset security in either the Binance or Coinbase indictments.
With the SEC’s ruling, staking services on centralized exchanges for proof-of-stake (POS) coins like Ethereum are expected to face significant repercussions. Currently, major exchanges such as Binance, Coinbase, and Kraken offer staking rates close to 30% for Ethereum. As the SEC starts regulating Ethereum staking on centralized exchanges, the landscape of stake composition ratios is poised to undergo rapid changes.
The indictment against Coinbase’s staking service marks an important step by the SEC in providing regulatory clarity for the cryptocurrency industry. It signals a stricter approach to the classification of various crypto-related activities under securities laws. Market participants will now need to reassess their staking offerings and ensure compliance with the SEC’s guidelines to avoid potential legal consequences.
Read more:
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