Cryptocurrency staking appears to be coming under the scrutiny of the US Securities and Exchange Commission (SEC), according to Brian Armstrong, co-founder and CEO of exchange Coinbase, a company that has been listed on Nasdaq since April 2021.
Staking is the process where token holders deposit and pledge their money in exchange for some form of “interest”. The length of time of the staking varies depending on the token and the circumstances. It is the period during which they cannot liquidate them into fiat or convert them into other cryptocurrencies. For their contribution, token holders receive a reward and some other privileges over the network’s decision making.
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According to Armstrong, staking is an important innovation, as it allows crypto users to directly participate in the operation of open networks, contributing to scalability, security and energy consumption.
Hopefully this is not the case, he continued. We need to ensure that new technologies are encouraged to develop and not stifled by a lack of clear rules that protect consumers while preserving innovation and protecting U.S. national security interests.
A Press release from SEC, confirmed though that the SEC shut down Kraken’s staking program and counted it as a win for investors.
The time is ripe for legislation
Reports indicate that following the collapse of FTX, the SEC has made cryptocurrencies and digital assets its top priority for 2023. The fact is that we have reached the point where lawmakers need to get started in order to make the appropriate regulations.
Don’t think it’s an easy task, as there are many offshoots. There are for example tokenized shares or futures on tokens, which could potentially be called securities. And of course where they have already focused their interest, the stablecoins.
Gary Gensler, the head of the SEC, singles out the need for legislation in two different categories: tokens and intermediaries. If indeed the majority of tokens do fall under securities legislation, then it follows that exchanges that trade in securities must register with the SEC in some capacity.
This is why the classification of tokens is so important. Either way, of course, it is not a bad idea to have strict rules on exchanges to protect investors as far as possible from fraud, manipulation, front-running and a whole host of other unfair practices.
The SEC has been saying this constantly for the last 5 years in no uncertain terms. But just because many don’t like the message doesn’t mean that if they ignore it, they are exorcising the problem.
The SEC’s perspective
The crucial point concerns the categorization of tokens. If a cryptocurrency is classified as a commodity (as seems to be the case with Bitcoin), then it does not fall under the SEC’s jurisdiction. If it is classified as a security, however, then it should fall under its control.
The truth is that the vast majority of cryptocurrencies have the characteristics of stocks. The main similarity between them is that investors hope to profit from their acquisition. Indeed, altcoins are more like technology companies, which own and develop digital applications, more or less useful.
What is the difference between a security and a commodity? A barrel of oil, a bar of gold, a ton of lumber, a Bitcoin, are assets. But they do not qualify as securities because a small group of people cannot control the quantity offered. Oil, gold, logs, Bitcoin, can be found everywhere. Sometimes easier and sometimes harder.
You can’t benefit by taking advantage of your position on the board of a company. There are legal restrictions there. That’s because you could collude with the other members and issue more shares. You could be informed of business developments before the public. You have direct power both over their issuance – he can’t get it elsewhere – and over influencing the price.
That’s why there are strict rules regarding stock market advice and internal reporting. Laws that protect those who want to buy it from those who issue the securities. Although as we know, the existence of the laws does not ensure that they will be avoided.
The price of Bitcoin may go up. It may not. But when someone urges someone else to acquire Bitcoin, it is like advising them to buy gold or a farm or a house. He has no direct interest. He is expressing a simple opinion on an asset. There is no entity that controls Bitcoin. If you wish to file a lawsuit against Bitcoin, it is like wanting to sue forests or gold.
Bitcoin VS Altcoins
The key criterion that differentiates a commodity from securities, according to the SEC’s rationale, is whether the returns are achieved through the efforts of third parties. According to this, Bitcoin is a commodity.
Perhaps so is Ethereum, as it is sufficiently decentralized. Although with the change that took place after the Merge upgrade, with the change in the consensus model from proof-of-work (PoW) to proof-of-stake (PoS), some believe it undermines this property.
Bitcoin, however, undoubtedly has all the characteristics of a commodity, only in digital form. It has rules, but no rulers. It does not operate under any human law, but only on the basis of mathematical rules, which must be observed by everyone who participates in the network.
No group of people or administration has the power to control, stop or restrict anyone from entering the system. Either as a Bitcoin producer or as a transaction-user. Just as no one can stop it from operating.
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