Amid the ongoing lawsuit between Coinbase and the US Securities and Exchange Commission (SEC), the exchange had paused staking services in several areas. Following this, analysts have assessed Coinbase’s standings in the case.
The exchange has ceased its staking services for retail customers in California, New Jersey, South Carolina, and Wisconsin following orders from state regulators amid the legal proceedings. To this, equity analysts at Berenberg Capital Markets say that exchange’s suspension of staking in four states illustrates the stock’s regulatory risk and could open the door to scrutiny over its so-called Earn product.
Announcing the news of suspension, Coinbase said retail clients in four states will no longer to be able to add new assets to its staking product while numerous legal proceedings carry on.
Berenberg said this news reflects the regulatory risk around Coinbase’s stock that may have been forgotten after a federal judge issued a split decision in the SEC’s case against Ripple Labs last week. The analysts at the firm wrote:
We believe this news served as a reminder to investors who may have viewed COIN’s risk profile as significantly improved after last week’s court ruling on Ripple Labs and the XRP cryptocurrency that the company’s challenges on the U.S. regulatory front remain significant while appearing far from being resolved.
Notably, Coinbase is recognized as one of the most significant institutional staking service providers, accounting for almost 10% of all staked Ethereum. Additionally, ten states including Alabama, Illinois, Kentucky, Maryland, New Jersey, Vermont, and Washington, among many others, initiated legal action against Coinbase. They claimed that Coinbase’s retail staking services constituted securities under state law. To this, the analysts comment:
We believe Coinbase Earn, the securitized product through which COIN offers staking rewards to retail customers, appears particularly vulnerable to being defined as a security within the context of the judge’s ruling.
However, Coinbase has staunchly disputed the accusations that its staking services qualify as securities. The firm has argued that staking does not qualify the necessary security criterion under the US Securities Act or the Howey Test.
The SEC versus Coinbase lawsuit has been full of twists and turns as both the entities imply their theories to win. As the SEC has been on an enforcement spree, Coinbase is not the only crypto exchange fighting battles over staking services. Reportedly Kraken, another US-based firm, paid a $30 million fine in February and suspended its staking services for American customers.
However, in the pre motion hearing, things don’t seem to look too good for the SEC as reflected from the judge’s behaviour. The judge questioned SEC’s arguments and highlighted lack of clarity.