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Coinbase Asks SEC to Clarify That Core Pledge Services are Not Securities

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On March 21st, Paul Grewal, Chief Legal Officer of Coinbase, said on Twitter that today, Coinbase submitted a comment letter to our July 2022 SEC rulemaking petition. We explained

Coinbase Asks SEC to Clarify That Core Pledge Services are Not Securities

On March 21st, Paul Grewal, Chief Legal Officer of Coinbase, said on Twitter that today, Coinbase submitted a comment letter to our July 2022 SEC rulemaking petition. We explained why core pledge services are not securities issuance and asked the SEC to clarify the fact that core pledge services are not securities.

Coinbase CLO once again called on the SEC to clarify that pledge services are not securities, and to contact the public before law enforcement

On March 21st, Paul Grewal, the Chief Legal Officer of Coinbase, announced on Twitter that the company had submitted a comment letter to the US Securities and Exchange Commission (SEC) in response to the agency’s July 2022 rulemaking petition. In the letter, Coinbase explained why core pledge services are not securities issuances and urged the SEC to provide clarity on the matter.

Introduction

In recent months, there has been much debate regarding whether or not certain blockchain-based services, such as those offered by Coinbase, should be classified as securities. The SEC defines a security as an investment contract in which a person invests money in a common enterprise with the expectation of profits solely from the efforts of others. However, Coinbase argues that its core pledge services are not securities because they are not investment contracts nor do they involve the expectation of profits solely from the efforts of others.

What are Core Pledge Services?

Core pledge services are a type of staking service offered by Coinbase. Staking involves holding a certain amount of a cryptocurrency, such as Ethereum or Cardano, in a digital wallet and “staking” it on the blockchain network. In exchange for staking, users receive rewards in the form of more coins or tokens. These rewards are often referred to as “staking rewards.”
Core pledge services are different from other staking services because they do not involve delegating coins or tokens to other network participants. Instead, they require users to pledge their own coins or tokens as collateral to support the network. This helps to increase the network’s security and stability, and it also allows users to earn staking rewards without relying on third parties.

The SEC’s Position on Core Pledge Services

In its July 2022 rulemaking petition, the SEC proposed new rules that would require certain staking services to be registered as securities issuers. The agency argued that staking involves the investment of money in a common enterprise with the expectation of profits solely from the efforts of others, which meets the definition of a security under the Securities Act of 1933.
However, Coinbase disagrees with this classification. In its comment letter to the SEC, the company argued that core pledge services are not securities because they do not involve investment contracts or the expectation of profits solely from the efforts of others.

Coinbase’s Argument

Coinbase argues that core pledge services are fundamentally different from traditional investment contracts. Instead of investing money in a common enterprise, users pledge their own coins or tokens as collateral. Additionally, staking rewards are not generated solely from the efforts of others. Rather, they are a product of the network’s inherent inflationary model.
Furthermore, Coinbase notes that the SEC’s proposed rules leave significant gray areas regarding the classification of staking services. The agency’s definition of a staking service is vague and could potentially include a wide range of blockchain-based services beyond what it intended to regulate.

Conclusion

Coinbase’s comment letter to the SEC regarding the classification of core pledge services as securities brings up important questions for the future of blockchain-based services. As cryptocurrencies continue to grow in popularity, it is crucial that regulatory bodies provide clear and consistent guidance for businesses operating in the space.

FAQs

1. Will the SEC’s proposed rules apply to all staking services?
The SEC’s proposed rules regarding staking services are not yet finalized, but they are expected to apply to certain types of staking services. However, it is unclear at this time which services will be subject to these rules.
2. What would happen if core pledge services were classified as securities?
If core pledge services were classified as securities, Coinbase and other companies offering these services would be required to register as securities issuers with the SEC. This would likely involve significant regulatory oversight, which could impact the cost and availability of these services.
3. How will the SEC respond to Coinbase’s comment letter?
It is unclear how the SEC will respond to Coinbase’s comment letter. However, the agency has stated that it is committed to promoting innovation in the blockchain industry while also protecting investors and market integrity.

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