Brian Armstrong, CEO of Coinbase, stated that he has “heard rumors” that the Securities and Exchange Commission intends to forbid American citizens from staking cryptocurrencies.
On February 8, Brian Armstrong warned on Twitter that the Securities and Exchange Commission wanted to prohibit retail customers from staking bitcoins.
“I hope that’s not the case as I believe it would be a terrible path for the U.S. if that was allowed to happen,” Armstrong said. “Staking is not a security.”
Staking is the foundation of all Proof-of-Stake blockchains, an eco-friendly alternative to mining like in Bitcoin. Participants in staking lock up their cryptocurrency for a predetermined time in order to aid with the blockchain’s transaction validation. They receive a portion of the benefits in return.
“Staking is a really important innovation in crypto,” Armstrong said. He added:
“It allows users to participate directly in running open crypto networks. Staking brings many positive improvements to the space, including scalability, increased security, and reduced carbon footprints.”
Ethereum, the second most popular blockchain, has switched from a Proof-of-Work mining consensus system to a Proof-of-Stake consensus mechanism. It also stopped a yearly electricity bill the size of a small country.
Gary Gensler, the head of the SEC, implied last year—but did not state explicitly—that Ethereum’s transition may have turned Ether into a security.
He stated during a Senate hearing in September that when people stake cryptocurrency, “the investing public is anticipating gains based on the efforts of others.”
That is crucial in light of the Howey test’s four-part definition of a security established by the U.S. Supreme Court: According to this definition, a security is: (1) an investment in money; (2) participation in a joint venture; (3) anticipation of profit; and (4) benefiting from the labor of others.
Staking has grown significantly as a sector of the decentralized financial industry (DeFi). According to the State of Staking report for Q1 2023, of the total value of all staked assets, including those staked by retail customers, is $42 billion. According to the report, it takes in $3 billion annually. It further said that the typical yield is 11.6%.
Armstrong said that such a ban would only push staking offshore. “We need to make sure that new technologies are encouraged to grow in the US, and not stifled by lack of clear rules.” He added:
“Regulation by enforcement doesn’t work. It encourages companies to operate offshore, which is what happened with FTX.”
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