A crackdown on crypto staking from the SEC has weighed on shares of Coinbase (COIN) this week following charges levied at competitors and a cryptic tweet from CEO Brian Armstrong.
Shares of Coinbase were down over 4% on Friday following a 13% plunge Thursday that has seen the stock forfeit roughly half of its year-to-date rally. Still, shares of Coinbase are up more than 60% in 2023.
Concerns from investors come after competitor exchange Kraken paid $30 million to settle charges levied by the U.S. Securities and Exchange Commission the company offered unregistered securities through its staking program.
As part of the settlement, Kraken agreed to shutter its staking program for U.S. customers while neither admitting nor denying the SEC’s allegations.
The SEC’s settlement with Kraken came just hours after Coinbase CEO Brian Armstrong warned Wednesday night of “rumors that the SEC would like to get rid of crypto staking in the U.S. for retail customers.”
Ether and other cryptocurrencies that use staking, such as Cardano and Solana, were down by at least 6% in the last 24 hours. For the same period, the total market capitalization for crypto assets has shed 4.6% or $49 billion.
Staking is an alternative method to crypto mining used by blockchain protocols to verify transactions which requires investors fork over capital into a protocol’s programmable smart contracts. In return, investors reap the chance to receive blockchain rewards of varying size for their work.
Coinbase made $63 million, or about 11% of its total revenue, from staking in the third quarter. The company is set to report fourth quarter results on Feb. 21.
On the company’s third quarter earnings call, Coinbase CFO Alesia Haas told investors the company’s users “are increasingly engaging in staking and reward-generating products amid this massive reduction prices and lower crypto price volatility.”
Despite the SEC’s announcement on Thursday and Kraken’s decision to close its staking program for U.S. users, Coinbase’s chief legal officer Paul Grewal said in a statement, and later reiterated in a conversation with Yahoo Finance, the company has no plans to shutter its staking program.
Grewal argued Coinbase’s staking program is “fundamentally different” from what Kraken had run, and does not meet the Howey test’s criteria of a security. The Howey test says an investment contract exists if investors have a “reasonable expectation” of earnings profits from the work of others.
“We deduct a commission that we disclose in our terms of service. There’s no magic or there’s no mystery about how that works. It’s fully transparent,” Grewal said Thursday night.
Shortly after the enforcement action against Kraken, SEC Commissioner Hester Pierce said in a dissenting opinion that “more transparency around crypto-staking programs like Kraken’s might well be a good thing,” but added “staking services are not uniform.”
In August, Coinbase disclosed it had received several subpoenas from the SEC for various activities, including related to its staking program.
Asked whether Coinbase would fight any charges from the SEC directed to its staking program, Grewal said while it would be premature to say anything until the company faced such charges, it’s seeking “a more transparent public process” to iron out rulemaking for the crypto activity. A source familiar with the situation told Yahoo Finance the company would plan to fight any staking-as-a-service charges from the agency.
“We are eager to cooperate and to share information about how our product services work,” Grewal said. “We believe that the rule of law needs to be respected and you know, if and when it becomes necessary to assert those rights under law. We will do so.”
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