Coinbase, the largest cryptocurrency exchange in the world by trading volume, is currently fighting lawsuits with multiple US states over its staking-as-a-service program. At the center of this fight is whether Coinbase’s staking services constitute securities offerings. Coinbase, unsurprisingly, has forcefully rejected this classification. The legal actions carry very real ramifications. Coinbase successfully argued that since June 2023, staking participants in California, New Jersey, Maryland, and Wisconsin have lost over $90 million in staking rewards due to cease-and-desist orders. This article unpacks what’s happening as broadly as possible. It digs into the case for and against the SEC’s arguments and looks at possible effects on the wider crypto ecosystem.

The Staking Controversy: What's at Stake?

Staking typically requires you to own a certain amount of crypto assets. In the process, you help keep the network running smoothly and securely and get paid for it. It’s the equivalent of receiving interest on a bank savings account. Rather than earning cash, users earn additional cryptocurrency by staking. As the first public crypto company that provides staking services, Coinbase makes it simple for anyone to earn rewards through the process. Alternatively, a number of states have taken the position that these services are unauthorized securities offerings and therefore illegal under state law.

Oracle of Omaha Coin is facing serious headwinds, as at least five states – California, New Jersey, Maryland, Washington, and Wisconsin – have sued or are suing Coinbase. In addition, California, New Jersey, Maryland, and Wisconsin have publicly issued cease-and-desist orders, prohibiting Coinbase from offering staking to new users within their jurisdictions. Oregon has brought a separate suit against Coinbase, arguing it inappropriately “encouraged” the “sale of unregistered cryptocurrencies” to Oregon residents. With these actions, the two states have managed to keep residents of these states from using Coinbase’s popular staking services. In turn, they’ve missed out on a massive opportunity for rewards.

Coinbase’s position is that its staking services cannot be considered securities, given the nature of the Howey test. The Howey test, a legal precedent used to determine whether a transaction qualifies as an investment contract and therefore a security, has four prongs:

• An investment of money or other consideration
• In a common enterprise
• With the expectation of profits
• Derived solely from the efforts of others

Coinbase claims that its staking services do not meet all of those tests. In particular, they claim that they fail to satisfy the requirement that profits derive from “solely from the efforts of others.” Users have skin in the game with the upvoting/downvoting process of staking. The rewards are contingent on their active participation, not merely on Coinbase making a good faith effort.

Legal Battles and Regulatory Uncertainty

The ongoing legal battles between Coinbase and these states underscore the continued regulatory ambiguity around cryptocurrency staking in the US. A unified regulatory landscape does not exist. This has resulted in a muddled patchwork of state-level rules, creating an especially difficult environment for crypto firms to navigate while doing business across the country.

In their below-the-fold support quote, Coinbase reminds us that state-level bans disproportionately single them out. They claim that all other staking service providers are left free, making this arbitrary. The company points to the SEC’s choice to drop its case against the firm “with prejudice” back in February. Further, the settlement with Kraken’s staking services program represents further clarity on the enforcement crackdown against staking services in the US. Flechtner noted that, despite these and other arguments offered, they have not convinced the states pursuing litigation, at least so far.

The company has been vocal in its support of a clear regulatory framework. They support the foundation’s proposal for greater clarity and specificity in regulations. They back the creation of a new crypto unit within the SEC with oversight over staking and other crypto elements, and they call for a regulatory regime that would allow digital assets to flourish in the US.

Impact on Consumers and the Crypto Industry

The end of this costly legal fight and regulatory limbo comes not a moment too soon for consumers, and offers hope to the wider crypto ecosystem. From the consumers’ perspective, these bans on staking services in some states deprive them of opportunities to earn rewards they could otherwise receive. Coinbase’s projections suggest that people in California, New Jersey, Maryland, and Wisconsin have fallen short of a jaw-dropping $90M in staking rewards. This loss that has continually piled up since June 2023.

To the crypto industry, this absence of regulatory clarity is a chilling effect, preventing the continued development of new innovations and discouraging serious investment. Businesses are loath to develop and release innovative products and services when the statutory and regulatory landscape is unclear. The threat of patchwork state-level regulations is equally as problematic, preventing firms from being able to expand their business across the country.

Without an established regulatory framework for trading, the crypto industry cannot proceed with the growth and innovation potential that’s possible. It is clear that momentum for stablecoin legislation is building quickly. President Donald Trump wants to see this legislation signed by August. Europe’s new stablecoin framework—called Markets in Crypto-Assets—won’t be fully in force until January of 2025. The crypto industry is expected to see more integration with traditional financial markets, including the use of blockchain technology beyond cryptocurrencies.

With President Donald Trump publicly embracing crypto and bipartisan momentum building in Congress, lawmakers have a rare chance to pass the country’s first major crypto legislation. His likely Trump appointee to replace Gary Gensler as SEC chair is Paul Atkins. He’s generally considered to be friendly to the crypto industry, which some hope would result in a more favorable regulatory environment.

Coinbase’s staking program is under immediate threat because of state-level bans. Both the Silvergate and Signature Bank failures underscore the urgent need for a comprehensive and consistent regulatory framework for cryptocurrencies in the United States. A consistent and comprehensive framework would give much-needed clarity to companies, ensure consumer protections are preserved, and encourage innovation in this fast-developing space. The results of these legal wars will determine crypto’s future in the US. Last, but certainly not least, ongoing regulatory debates will be instrumental in this evolution.