1/5 These are the four key points of the#Howeytest used by the#SECto determine whether a security is a security or not. If all of them pass, it is a security. In response to the recent#SECpunishment of #Kraken, Coinbase, which also has a staking business, has put forward the argument that its service is not a security. It is worth studying carefully when doing tokenomics design to avoid future regulatory uncertainties.
2/5 First, the staking service does not constitute an investment of money, even under the expanded definition of any “specific consideration” that includes “in exchange for a separable financial benefit.” When a client asks us to stake some of their crypto, they are not giving up one thing in order to get something else — they own the exact same thing they had before. Staking clients always retain full ownership of their assets, as well as the right to “unstake” their assets.
3/5 Second, staking services do not meet the “ordinary business” prong because assets are staked on a decentralized network. Stakers are connected only through blockchain technology, and they validate transactions through a community of users, not an ordinary business. Users’ rewards are independent of Coinbase’s decisions, because staking rewards are determined by the protocol, not by anything Coinbase does. Therefore, this does not meet the case law definition of an ordinary business
4/5 Staking services fail to meet the “reasonable expectation of profit” element. To determine this, courts look at whether customers are attracted to the asset based on the prospect of a return on investment or a desire to use or consume the item. Staking rewards are simply payments for validation services provided to the blockchain, not returns on investment. They are set by the blockchain protocol and are the same whether customers stake on their own or through an intermediary like Coinbase.
5/5 Staking services do not pay rewards based on "the efforts of others". The staking service of the service provider is not a business, management, or a significant factor in whether or not a client receives staking rewards or the amount of rewards received. The relevant blockchain protocol governs which validators receive rewards and the amount of rewards paid for each token staked by that node. The service provider does not perform any management work. These are IT services, not investment services.