SNEAK PEEK
- Coinbase has responded regarding a petition filed by it in July 2022 emphasizing on the need for rulemaking to regulate digital asset securities.
- Coinbase has been providing knowledge about staking services to the public since December 2019.
- Engaging with the public, taking feedback, being active in public forums, etc. are some ways for the SEC and its staff to understand the role of digital asset technology for securities laws.
Coinbase is prepared to file a comment as a response to its July 21, 2022, petition for rulemaking in terms of regulation of digital asset securities.
Regulatory questions based on practices going on in the digital asset space could be tricky. However, the U.S. Securities and Exchange Commission works for the public by addressing these complications and seeking market participant input to create as well as share logical policies and guidelines based on them.
The Administrative Prospect Act’s essence is to encourage coherent decision making by administrative agencies by requiring them to adopt a smooth rulemaking procedure that is comprehensive of input from the stakeholder.
Coinbase has commented to respond to a recent and quite surprising Commission action that suggested that from now on, the Commission may view certain staking services as establishing an investment contract and hence a security.
The SEC Chair, while explaining the recent settlement of the SEC with Kraken in terms of staking services, said:
“Today’s action should make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection.”
Before this settlement, the Commission never mentioned considering staking services for the purpose of establishing an investment contract; thus, a securities offering that needs registration with the SEC. Furthermore, despite many opportunities to involve both the crypto industry and its participants, the SEC never made this position known earlier.
Since December 18, 2019, Coinbase has been providing in-depth presentations on staking services, their meaning and way of work. Also, Coinbase time and again explained its own staking services during its entire S-1 process when it transformed into a public firm almost two years ago.
Multiple models of staking services exist. Upon reviewing the black letter law of the “Howey test” along with the policy and regulatory concerns that form the basis of the analysis, Coinbase found that key staking services don’t meet the test like a matter of law and don’t put forward the risks that were to be curbed by the federal securities laws.
When talking about the staking services that may form an investment contract, the SEC must offer a path to possible registration. There are features of investment contracts with digital assets that the current regulation does not exactly accommodate.
To create a regulatory framework to offer investment contracts with digital assets, the SEC must take into account the way that particular framework should apply to a staking service that forms an offering of securities.
The Commission must also make it clear the way it views several aspects of staking services. It must also ask for input from the public on such views.
The regulatory treatment of staking services is important and must be set right. The unsuitable application of securities laws in the matter of the transaction confirmation process negatively impacts the 20% of Americans who have crypto, besides the three-quarters of Americans who think that the existing financial system isn’t justified and requires it to be upgraded.
Coinbase encourages economic freedom by making financial products and services even quicker, more accessible, and more affordable. To achieve the goal, it is creating the most trusted tools, products, and services in the US with an aim to support the transformation of the present-day system, established before the existence of computers, into a digitally smart one.
Referring the SEC back to its December 6, 2022, comment, where Coinbase offered detailed suggestions as to how the SEC might make a move towards a practical registration process for investment contracts that include digital assets. Markets have gone digital, and therefore, the relevant regulation must be right.
For the PoS consensus mechanisms that allow Layer 1 blockchains to record transactions as well as maintain the public ledgers in the digital asset space, this is quite important.
To promote an enforcement action that enacts policy on a large market practice, the SEC has avoided a rulemaking process that has served Americans well for decades. By avoiding the logical decision making process encouraged by the Administrative Procedure Act and other enacting statutes, it is now risking the competitiveness of America on a worldwide level.
Coinbase wishes that the Commission opts for some other way regarding the treatment of staking services. New technologies and practices can make the SEC and other similar agencies feel a sense of necessity to discover a way that fits them into the current regulatory frameworks. However, using public engagement rather than enforcement actions to apply regulatory requirements in a new industry is an even more careful move.
The Commission can interact with the public via its standing SEC committees, the Investor Advisory Committee and the Small Business Capital Formation Advisory Committee, and find out more about staking and other digital asset-based technologies. Another way is to organize an industry roundtable, which refers to a tool that’s been used by past commissions to learn about market practices from the industry.
Being available in public forums, speaking at industry, government, and academic events, and sharing views and taking feedback are some other great ways.
Such collaborative engagements will allow the SEC and its staff to better understand digital asset technology and its significance for securities laws. As a result, the Commission and SEC will get to better assess a suitable path to acknowledge residual market concerns, which should have been addressed for staking services via notice and comment rulemaking.
