Coinbase to Limit Digital Asset Staking Service for Retail Clients in Certain US States

On June 6, 2023, the US Securities and Exchange Commission (SEC) filed a lawsuit against Coinbase (NASDAQ:COIN) primarily about a small number of assets listed on their platform, but also their retail staking services.

The same day, state securities agencies in ten states – Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin – instituted their own proceedings “alleging that Coinbase’s retail staking services are securities under state law.”

Coinbase noted in a blog post that they disagree with these decisions/viewpoints.

According to the firm, nothing about Coinbase’s staking services is “an investment at all.”

Rather, staking is a core part of “ensuring that the cryptoeconomy functions for hundreds of millions of users around the globe.” Staking services are “just one part of Coinbase’s existing business. But because staking is so fundamental to the crypto industry, Coinbase is committed to protecting access to staking for everyone.”

A few of the state agencies who “instituted proceedings also issued preliminary orders requiring Coinbase to limit their retail staking services in those states while proceedings move forward.”

Some state laws allow state agencies “to issue preliminary orders like these even before the impacted company has a chance to publicly defend itself.”

Coinbase says they were “disappointed to see some state regulators take this path, as they have offered their staking services transparently, safely, and reliably for nearly four years.”

Coinbase has spent the last several weeks “in active discussions with these state agencies.”

But California, New Jersey, South Carolina, and Wisconsin are “requiring changes to their services before those state proceedings are complete, which means that there will be at least a temporary impact on customers in those states.”

Customers in other states are “not affected — they remain eligible to stake crypto just as they were before.” That means that “the vast majority of Coinbase customers are not impacted by these actions.”

What this means for impacted customers

Due to the actions taken by state regulators in California, New Jersey, South Carolina, and Wisconsin, customers in those states “will be unable to stake additional assets through Coinbase while these actions are pending.”

Customers’ crypto that was staked before these orders “were issued remains unaffected.”

Impacted customers have “received an email with more information specific to their state, and all customers can visit their Help Center to learn more about these actions and the changes they will be implementing in the coming weeks in these four states.”

Although additional actions remain pending in Maryland, Vermont, Kentucky, Illinois, Alabama, and Washington, Coinbase’s staking services in those states “continue to operate as usual at this time.”

Coinbase continues to “make every effort to work with regulators and preserve the opportunity to participate in staking for as many US customers as possible.”

As they have stated before, Coinbase believes their staking services in “no way constitute securities under any state or federal law. ”

It might be the easier path “to simply cut off staking services in the ten states that have initiated proceedings against them, but they believe that would be wrong as a matter of law, wrong for their customers, and wrong for the future of the cryptoeconomy.”

Here’s why they intend to defend staking in court:

Staking is crucial to the survival and growth of the cryptoeconomy

Today, almost every major blockchain “leverages a Proof of Stake model, which means staking is critical to ensuring the accurate, secure, and efficient operation of this increasingly critical part of the global economy and technology ecosystem.”

Staking is used so widely “because it is open, secure, and environmentally friendly.”

This innovation has “led to tremendous growth of the cryptoeconomy, allowing millions of users across the globe to securely access a wide range of financial and non-financial services.”

At its most basic level, staking is the process “by which users can contribute to the network by staking their token to secure the blockchain, facilitating the creation of blocks, and helping process transactions.”

According to Coinbase, users are “not investing.”

Rather, users are compensated “for fulfilling this important role through transaction fees and consensus rewards paid by the blockchain itself.”

With four out of five Americans using digital payments, the US stands “to lose from pushing staking to offshore entities where customers may be less protected.”

Shutting off Coinbase’s and similar staking services “for retail customers in specific states will provide no benefits to those state residents.”

It will simply limit Americans’ ability “to participate safely and benefit economically from the cryptoeconomy, and those benefits will shift to residents of other states, or potentially overseas altogether.”

Americans deserve the right “to secure blockchains and earn income for this work, and they should be allowed to work with trusted, regulated US companies like Coinbase.”

For more details, check here.

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