Coinbase Logo

Language and region

Why we stand by staking

TL;DR:

  • On June 6, the SEC filed a lawsuit against Coinbase including allegations that our retail staking services are securities. The same day, ten US states initiated their own proceedings related to Coinbase’s retail staking services.

  • Four of the states – California, New Jersey, South Carolina, and Wisconsin – are requiring Coinbase to prevent retail customers from staking additional assets while their proceedings go forward. In all ten states, Coinbase will vigorously defend our staking services in those proceedings. 

  • We strongly disagree with any allegation that our staking services are securities. But we will fully comply with the preliminary state orders where required, even though that comes before we’ve had an opportunity to defend ourselves.

  • We stand by staking. Today almost every major blockchain relies on staking because it is open, secure, and environmentally friendly. Americans in every state deserve access to the same technology and economic opportunities as people everywhere.

By Coinbase

Product

, July 14, 2023

herothumbnail.png

On June 6, the SEC filed a lawsuit against Coinbase primarily about a small number of assets listed on our platform, but also our 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. We disagree.  

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 our 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. We were disappointed to see some state regulators take this path, as we have offered our 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 our 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 our Help Center to learn more about these actions and the changes we 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. Any additional changes to our staking services will be shared in our Help Center

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 we have stated before (see here and here), we believe our 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 us, but we believe that would be wrong as a matter of law, wrong for our customers, and wrong for the future of the cryptoeconomy. Here’s why we 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. 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. 

Video highlight
Play video

Play

Staking is open and decentralized 

Through staking, anyone can participate in securing the cryptoeconomy. All a user needs to do is contribute assets that back the network, making it inherently more accessible for token holders to engage in securing that network. And there is no requirement to use a staking service provider; blockchain protocols allow anyone with a computer to run a validator and stake independently.

Broad access to staking today has also created a cottage industry of small businesses in the US. Some of these businesses – including node operators, validators, and staking services – further democratize access to staking. No one company or government can control staking, because it is decentralized by design.

Attempts to ban staking in the US only hurt America and do nothing to curtail global blockchain networks. Staking bans push economic opportunity, entrepreneurship, and technical expertise offshore, harming American individuals and businesses.

Staking is environmentally friendly 

Proof of Stake validates blockchain transactions at massive scale and with greater energy efficiency than both the Proof of Work model used on other networks and other traditional methods of aggregating economic value. For example, the entire Ethereum network consumes an estimated 0.0026 TWh/year annually. That is 77,000 times less than global data centers, and 50,000 times less than mining gold. This slim energy profile is a direct result of staking, and it would disappear if the ability to stake is constrained. Less than a year ago, when the Ethereum network used Proof of Work, it consumed about 20,000 times more energy than it does today.

The SEC has urged publicly traded companies like Coinbase to consider the energy impact of their business decisions. So we will be blunt: banning users’ ability to contribute to Proof of Stake blockchains in the US undermines the environmental future of crypto. 

Staking is safe

Staking is not some exotic or complex financial product. In fact, it is not a financial product at all. Whether a user stakes on their own or through a service like ours, they remain the owner of their crypto at all times. Unlike lending, for example, there is no risk that a borrower will fail to repay, because the underlying crypto remains in custody from start to finish.

Whether a user stakes on their own or through a staking service, any risks come from the protocol itself and are extremely small. The primary potential risk is slashing: if validators don’t behave as expected, they can lose some of their staked assets as a penalty in a process known as slashing. As an example of overall slashing rates, only about 0.04% of Ethereum validators have been slashed since ETH staking began in 2020. Moreover, many service providers (including Coinbase) promise to cover these losses, should they occur. No customer has ever lost any crypto when staking with Coinbase. 

Staking is a way that protocols offer stakers a low-risk opportunity to earn income and participate in the crypto ecosystem. This is true however stakers decide to participate – there is no incremental risk to individuals who choose to stake through Coinbase’s software services.

Americans should have the choice to stake how they want 

There are many different ways to participate in staking: some people prefer to configure their own software and hardware at home, while others prefer to outsource some portion of the IT work to a staking service provider (whether to Coinbase, or to one of our many competitors). This diversity strengthens the underlying network, and allows individuals to choose how they contribute. We believe that everyone should be able to stake if they want to, and just as importantly, how they want to.

Millions of people around the globe have these choices. Coinbase offers staking services in more than 100 countries, and regularly engages with governments on staking around the globe. Overall, the reception to our services has been enthusiastic – no doubt because many regulators recognize the environmental, financial, and security benefits of staking. Unfortunately, not all US regulators recognize this. We are being led down a path of regulation-by-enforcement, which limits American participation in the future of staking, stunts American entrepreneurship and innovation in crypto technology, and cuts out a new and meaningful source of income for regular Americans. 

We stand with staking because Americans should have the same economic and technological freedoms as people everywhere. Coinbase’s mission is to increase economic freedom in the world, and that should start right here at home.  

How you can show your support 

It’s more important than ever for the crypto community to come together and advocate for pro-crypto policy. If you want to defend staking in the US, we encourage you to join Stand with Crypto to make your voice heard on crypto policy today. 

At Coinbase, we’re working hard to help update the financial system by building trusted products that expand the utility and adoption of crypto because we believe crypto and blockchain technology have the ability to increase economic freedom and opportunity around the world. Coinbase chose to become a public company in the US because we believe the US would best be served by embracing this fundamental innovation, but we’re also focused on international markets, many of which are moving forward with strategies to become “crypto hubs.” We would like to see the US take a similar approach, but a regulation by enforcement approach in the US is instead leading to a disappointing trend for crypto development in the US. 

Safe Harbor Statement: This blog post contains forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact could be deemed forward-looking, including, but not limited to, statements regarding features of and plans for Coinbase’s staking services. Risks that contribute to the uncertain nature of the forward-looking statements include, among others, risks and uncertainties relating to Coinbase Global, Inc. (the “Company”) listed or described from time to time in the Company’s filings with the Securities and Exchange Commission (the SEC), including the Company’s most recent Annual Report on Form 10-K or 10-Q, which is on file with the SEC. All forward-looking statements are based on information and estimates available to the Company at the time of this blog post. Except as required by law, the Company assumes no obligation to update any of the statements in this blog post. * Bitcoin is the largest blockchain by market capitalization and uses Proof of Work to verify transactions. See this article to learn more about the difference between Proof of Work and Proof of Stake. 

Coinbase logo