Coinbase Pauses Staking Services in Several US States Amid SEC Lawsuit

Coinbase, the US-based cryptocurrency exchange, has temporarily paused its staking services in four states in response to legal proceedings from Securities and Exchange Commission (SEC).

In a blog post on July 14, Coinbase announced that it was temporarily suspending its retail staking service in California, New Jersey, South Carolina, and Wisconsin. 

This decision comes in response to the US Securities and Exchange Commission (SEC) filing a lawsuit against the crypto exchange in June for offering unregistered securities. 

In addition to the SEC lawsuit, regulatory bodies in 10 US states initiated legal proceedings, suspending certain services.

1/ As you might have heard, on June 6, 10 US states initiated proceedings related to Coinbase’s retail staking services. Let’s dig into what this means for our customers. pic.twitter.com/pQidr0Ijc9

— Coinbase 🛡️ (@coinbase) July 14, 2023

“We strongly disagree with any allegation that our staking services are securities,” Coinbase wrote. “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.”

However, it is essential to note that only the regulatory actions in California, New Jersey, South Carolina, and Wisconsin require a pause in staking additional assets. 

These states have requested changes to the staking services while the legal proceedings related to such services are ongoing. 

Cryptocurrencies that were staked before the issuance of these orders will remain unaffected by the temporary suspension.

Users based in Alabama, Illinois, Kentucky, Maryland, Vermont, and Washington will continue to be eligible to stake their crypto as before the regulatory actions were taken.

Coinbase vs. SEC Hearing Sheds Light on Litigation Tone and Industry Impact

A pre-motion hearing between the US SEC and Coinbase, initially scheduled for August but held on July 13, offered insights into the litigation’s tone and potential impact on the broader crypto industry.

During the hearing, which lasted over two hours, Judge Katherine Polka Faila of the US District Court for the Southern District of New York posed questions to the SEC and Coinbase on various topics.

These included the definition of staking, Coinbase’s initial public offering (IPO) filings, and the application of the major questions doctrine. 

Also, the major questions doctrine, which was recently invoked by the U.S. Supreme Court to invalidate President Biden’s proposal for student loan forgiveness, was presented by Coinbase lawyers as part of their defense against the SEC’s complaint.

The hearing also had a brief recess to allow both parties to consider a federal judge’s ruling on the SEC’s separate lawsuit against Ripple.

This case is closely watched not only because it involves the securities regulator of the world’s largest economy and a well-established crypto company but also because it could set precedents in securities law, market structure, and the regulatory powers of the SEC. 

The conference primarily focused on procedural and administrative matters. 

Coinbase sought early dismissal of the SEC’s complaint by arguing that the tokens in question do not meet the securities criteria under the Howey test. 

In response, the SEC accused Coinbase of disregarding long-standing legal principles and attempting to redefine the definition of an investment contract.