Coinbase CEO Brian Armstrong has stated that the company will “happily defend” its crypto staking services in court if needed, following the SEC’s decision to shut down Kraken’s staking service.

The executives of Coinbase assert that their staking services cannot be considered a security and are prepared to challenge the matter in the U.S. courts. This comes after Kraken reached an agreement with the SEC on February 10th to discontinue offering staking services or programs to clients in the United States.

Coin base’s chief legal officer, Paul Grewal, has argued in his recent blog that staking is not a security under the US Securities Act or the Howey test. Commissioner Hester Peirce has publicly criticized the SEC’s decision, arguing that regulation by enforcement is not an efficient or fair way of regulating the emerging industry.

Coinbase is standing up for its staking services, claiming they cannot be classified as a security and threatening to bring the matter to the courts in the US.

Staking is not a security under the US Securities Act, nor under the Howey test, which the SEC uses to determine whether an investment contract is a security.

The Howey test comes from a 1946 Supreme Court case – and there is a separate discussion to be had about whether that test makes sense for modern assets like crypto.

Regardless, staking fails to meet the four elements of the Howey test: investment of money, common enterprise, reasonable expectation of profits, and efforts of others. the blog reads.

Grewal further states that staking services offered by Coinbase do not constitute an investment of money. The customers retain full ownership of their assets and staking rewards are payments for validation services provided to the blockchain, not a return on investment. 

Staking services do not meet the “common enterprise” and “reasonable expectation of profits” elements as defined in the Howey test and the fortunes of users are not tied to those of Coinbase. Staking rewards are determined by the blockchain protocol and are the same whether the customer stakes on their own or through an intermediary like Coinbase.

The SEC stated that Kraken failed to register the sale of its crypto asset staking-as-a-service program, which it deemed as securities. As a result, the service was stopped, and Kraken agreed to pay a total of $30 million in penalties, disgorgement, and interest.