This is one of the things at issue, but far from the only one.

And Coinbase does not provide delegated staking in the way that Kraken did, for example, where funds were pooled and rewards distributed proportionally.

The difference is technical and detailed, but very important.

Yes, the way Kraken was doing it was super sketchy. Basically you give them your money, and they give you some regular APY. Very reminiscent of a ponzi scheme.

Coinbase did it right, structuring it as a staking service. Staking is something that anyone can do, but it's a pain in the ass. Coinbase make it easy by letting you stake assets, and they run/monitor the staking nodes for you, and as service fees, they take a cut of the rewards (which fluctuate moment to moment).

The Howey test sets out four points:

* An investment of money - check (into the staking pool)

* In a common enterprise - check (the staking pool)

* With the expectation of profit - check (obviously)

* To be derived from the efforts of others - check (the manager of the pool)

It's a security.

Does my putting money in a certified deposit at a bank count as a security? Note that that one is interesting, as their are brokered cds, and those are definitely treated as securities. And then their are plain interest bearing savings accounts, and those are not? (Or are they all, nowadays?)

(And yes, this is no different than a loan that you give out not being a security, but loans can be wrapped up in forms that are considered securities.)

I suppose you can argue it is one of scale? If I loan money to some friends in the condition that they pay me back with interest, nobody cares. If I set up an exchange so that many people can do this, it gets interesting.

From Coinbase's page about staking:

> Staking requires assets to be locked on the protocol in order to earn rewards.

This is not true for my savings account.

As for loans, Reves v. Ernst & Young established that "a note is presumed to be a security unless it bears a strong resemblance, determined by examining four specified factors, to one of a judicially crafted list of categories of instrument that are not securities". That list of exemptions includes mortgages.

But non-brokered CDs are also locked, and are not considered securities.

You have Marine Bank v. Weaver (and FDIC insurance) to thank for that.

> We see, therefore, important differences between a certificate of deposit purchased from a federally regulated bank and other long-term debt obligations. The Court of Appeals failed to give appropriate weight to the important fact that the purchaser of a certificate of deposit is virtually guaranteed payment in full, whereas the holder of an ordinary long-term debt obligation assumes the risk of the borrower's insolvency. The definition of "security" in the 1934 Act provides that an instrument which seems to fall within the broad sweep of the Act is not to be considered a security if the context otherwise requires. It is unnecessary to subject issuers of bank certificates of deposit to liability under the antifraud provisions of the federal securities laws, since the holders of bank certificates of deposit are abundantly protected under the federal banking laws. We therefore hold that the certificate of deposit purchased by the Weavers is not a security.

Doesn't this just show that the "easy 4 question test" is not sufficient?

Or is that largely considered a mistake in interpretation nowadays?

That's where the 'decades of caselaw' bit comes in.

The "decades of caselaw" specifically includes instruments that "failed" the test but were still judged to be non-securities. So, it makes sense to push for a legislative/regulatory judgement.

The test still applies. So do the exemptions to it (some established by Congress, others by judicial action). There's no exemption for cryptocurrency staking pools.

Perhaps Coinbase's eventual appeals will establish one, but I doubt it.

This feels very hand wavy, to me. The test applies. Except where it was challenged and exemptions were codified.

Is the argument that it did apply in those situations before the exemptions?

> This feels very hand wavy, to me.

This is how the system works. "Code is law" does not apply to actual law; it's a long history of interpretation, wiggle room, precedent, legislative intent, and common sense being applied in various amounts. It works pretty well, all things considered; far more than trying to explicitly write down every little edge case.

Ah, completely agreed. But we can't lean on "it is easy, the Howey test explains all" without a huge caveat.

I will note that this particular path is treading on the "lets write down every edge case." As such, it would be better to have a slightly stronger guideline than that. Specifically, when the law is "this test, except for specific carve outs that all fail the test", that is a pretty bad law. Unless there is some unification of the carve outs other than "we decided these don't apply."

> This is not true for my savings account.

I'd say that "locked on the protocol" is functionally equivalent to having money in a bank account, so yeah it is true for your savings account. You can still take it out (aka "unlock" it) at any time. The staking/unstaking process is just an on-chain event that requires the staker to have custody over the ETH. No different from a deposit or withdrawal from a bank account.

This is different than a lot of other DeFi which does not require any external custody.

> In a common enterprise - check (the staking pool)

I'd take issue with this one. Is the "common enterprise" here supposed to be Coinbase, or the Ethereum network itself?

The Ethereum network offers financial incentives for supporting the distributed infrastructure. In order to ensure good behavior, an amount of "stake" is required to keep people honest, such that dishonest people get their stake slashed. Coinbase provides a nice handy UX where Ethereum holders can stake their assets using validator nodes operated and maintained by Coinbase for a small cut of the staking rewards.

> Is the "common enterprise" here supposed to be Coinbase, or the Ethereum network itself?

Coinbase, and Coinbase's pool(s). As you cite, "using validator nodes operated and maintained by Coinbase". Coinbase and the staking users are engaged in a common enterprise for mutual profit.