Brian Armstrong, Coinbase’s CEO, has expressed concerns about the SEC’s potential move to ban Ethereum staking for retail investors. Let’s try to understand what this is all about.
Does the SEC have a grudge against Ethereum
Last night, Brian Armstrong, the CEO of cryptocurrency platform Coinbase, posted a thread in which he expressed his concerns about what the Securities and Exchange Commission (SEC) would have in store for Ethereum (ETH) staking:
1/ We’re hearing rumors that the SEC would like to get rid of crypto staking in the U.S. for retail customers. 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.
– Brian Armstrong (@brian_armstrong) February 8, 2023
According to rumours he has heard, the SEC would like to get rid of Ethereum staking among retail investors. This follows regular statements arguing that ETH is allegedly a security since its transition from proof of work to proof of stake.
While there is still a lack of substance to judge what is really going on, this case is reminiscent of a reverse situation in Europe, when the MiCA regulation initially envisaged a ban on cryptocurrency mining.
In reality, such measures only apply to countries where such laws are in force. This means that even if the SEC were to ban ETH staking, the decentralised nature of Ethereum would not prevent the network from functioning normally, and only Americans would be penalised.
Moreover, it is worth questioning how this hypothetical law would be applied. Indeed, if it is easy to prohibit platforms like Coinbase from offering staking services on their application, nothing prevents investors from creating their own validation node if they have the means and skills, or more simply from delegating their ETH directly on-chain to the service of their choice.
The eternal debate of Howey’s test
Of course, while Ethereum is used as an example here, the issue relates to all cryptocurrencies operating with consensus using proof of stake.
The famous Howey test is often put forward by the SEC in an attempt to qualify cryptocurrencies as securities. Here are the four conditions necessary to recharacterise an asset as such:
- Requiring a cash investment;
- Allow for a possible profit;
- To represent an investment in a joint venture;
- Seeing one’s performance linked to the actions of others.
While legal experts are more competent to judge whether or not ETH meets these conditions, we can nevertheless make up our own minds.
The first two points of the test could, according to the opinions, be validated, but staking on Ethereum is, for example, not an investment in a joint venture. And for good reason, while the validators seem to work together to keep the network running smoothly, they are all independent of each other.
The case of performance linked to the actions of others is also debatable. Of course, the validator to whom the ETHs are delegated must do his or her job properly, but the allocation of rewards depends not only on the actions of the validator, but on many parameters of the consensus itself.
With Coinbase staking 13.2% of the network, it is understandable that Brian Armstrong would be concerned about possible SEC decisions.