Crypto Staking is not securities, perhaps “steaking”.

There is a debate about whether or not crypto-stake products are considered securities.

Brian Armstrong, CEO of Coinbase, has defended the company’s input product and said in a Bloomberg interview that it is not a certainty. Armstrong also mentioned that customers never entrust their assets to Coinbase and that stake is not a security under the US Securities Act or the Howey test used by the Securities and Exchange Commission (SEC) to determine whether an investment contract is a security.

However, Coinbase has allegedly received investigative subpoenas from the SEC regarding staking, stablecoin and yield-generating products. Nevertheless, Coinbase’s legal director claims that the staking service is different and is not a security.

Crypto staking refers to the process of holding a certain amount cryptocurrency to participate in the validation of transactions and earn rewards in return. It is a process where an individual can hold and unlock their cryptocurrencies in a wallet or other digital platform, and participate in the consensus mechanism of a blockchain network to earn rewards. The consensus mechanism used in staking is usually proof of stake (PoS), which allows validators to be elected based on the number of coins they have and have unlocked in their wallets.

Validators are then responsible for creating new blocks and verifying transactions on the network. In return for their participation, validators earn a percentage of the block rewards in the form of additional cryptocurrency. Staking is seen as a way to help secure a blockchain network, as it encourages users to hold onto their coins and participate in the network’s governance.

Betting on centralized exchanges can involve risk. Centralized exchanges control the stakes and may not always distribute rewards fairly. Also, centralized exchanges are more prone to hacks and security breaches, which can lead to the loss of assets that have been staked.

In February, the SEC cracked down on cryptocurrency firms and centralized exchanges. The SEC aims to protect investors by enforcing securities laws, imposing fines and promoting transparency. Kraken, a cryptocurrency exchange platform, has paid one $30 million settlement to the SEC after being charged with violating securities rules by offering an unregistered securities program known as staking. The SEC alleged that Kraken marketed the betting platform as an investment opportunity and generated nearly $15 million in net income from US-based users with revenue of $45.2 million.

As a result of the settlement, Kraken has stopped offering wagering programs in the United States. The company has also agreed to pay $30 million in disgorgement, prejudgment interest and civil penalties as part of the settlement. The settlement highlights the need for companies to comply with securities regulations and register their betting services as securities offerings with the SEC.



A question that often arises in relation to staking is whether it is considered a security under US securities law.

According to Coinbase, bets are not considered a security under the US Securities Act or the Howey Test, which the SEC uses to determine whether an investment contract is a security. The Howey test, which comes from a 1946 US Supreme Court case, requires that an investment contract involve; an investment of money; in a joint enterprise; with an expectation of profit; and solely from the efforts of others. A transaction qualifies as an investment contract if it meets all four elements. However, staking fails to satisfy any of these points.

First, wagering does not qualify as an investment of money as customers do not give up any assets to receive wagering rewards. Delivery of input services does not involve the exchange of assets or the transfer of ownership. Customers retain full ownership of their tokens and can remove them at any time.

Second, staking does not meet the common business stick of the Howey test. Stakers on a blockchain network are not connected through a common enterprise or central authority. Instead, they are part of a decentralized network that relies on consensus mechanisms to validate transactions. Stakers do not share profits or losses and are not part of a joint venture.

Third, the effort does not meet the reasonable expectation of profit element of the Howey test. While stakers earn rewards for validating transactions, these rewards are not counted as profit. The rewards are predetermined by the blockchain protocol and are not affected by market conditions or the actions of service providers. Stakers do not have an expectation of profit beyond the rewards for validation services.

Finally, efforts do not involve efforts by others, a requirement under the Howey test. Service providers who offer betting services do not perform managerial or entrepreneurial activities. Instead, they offer technical services that allow customers to participate in the validation process. Service providers do not influence the rewards or the decision-making process on the blockchain network.

In staking as mentioned above, customers hold and control their assets and participate in the network’s validation process, which is considered an essential function of the cryptocurrency system. Thus, the SEC’s definition of a security does not apply to stakes, as the rewards earned through stakes are considered an inherent property of the cryptocurrency network rather than solely from the stakes of others.

It is important to note that the SEC has recently cracked down on cryptocurrency-related activities, including crypto lending and betting, and it is possible that their interpretation of the US Securities Act may change in the future. Other countries may have different regulatory frameworks, so it is important to be aware of local regulations and seek professional advice when engaging in cryptocurrency activities.

New York Attorney General Letitia James filed a lawsuit against KuCoin, a Seychelles-based cryptocurrency exchange, for allegedly violating securities laws by offering tokens that meet the criteria for securities without registering with the attorney general’s office. The lawsuit also alleges that KuCoin misrepresented itself as an exchange and lacked registration for that function as well. The lawsuit claims this is the first time a regulator has claimed Ether is a security in court. The lawsuit specifically cites SEC v. Ripple as a precedent.

As an alternative, some investors may prefer decentralized exchange (DEX) platforms for staking, as they offer greater privacy, lower fees and operate on a peer-to-peer network method. Crypto betting on a centralized exchange involves depositing and holding crypto assets to participate in betting activities, but that comes with risk and regulatory scrutiny. Investors should weigh the pros and cons and consider alternative options such as DEX platforms. I want to see what the SEC can do with decentralized exchanges and its line of Defi products.

I tend to agree with Gary Gensler when he said, “What does beef have to do with our securities laws?”