The Securities and Exchange Commission (SEC) yesterday that most staking services don’t involve securities, resolving a major uncertainty that has hung over the crypto industry. The guidance provides regulatory clarity for major platforms like Coinbase, Kraken, and Lido, which collectively handle billions in staked assets.
The ruling removes a regulatory cloud that has limited institutional adoption of staking services. Without this clarity, staking service providers faced potential enforcement action and costly compliance requirements designed for traditional securities.
Blockchain staking typically involves locking tokens to secure the network and earning a reward in return. The least contentious option would be someone who operates a node themselves, keeping custody of their assets and staking directly.
However, there’s been a major question mark hanging over staking-as-a-service, in which a third party performs the staking on behalf of the token owner. This is hugely popular because on Ethereum the minimum staked amount is 32 ETH (over $80,000 at current prices) and doing it yourself requires appropriate hardware and technical knowledge.
How the SEC reached its decision
For assets that aren’t obviously securities, the Howey legal test is used to establish whether there’s an “investment contract.” A key test is whether the return is dependent on the entrepreneurial efforts of someone other than the investor.
Applying this test to staking services, the SEC concluded that the staking service provider is simply providing an “administrative or ministerial activity” rather than an entrepreneurial one and doesn’t set the rate of return earned by the investor, although they deduct fees.
The SEC takes the same view whether the investor retains custody of their tokens or the service provider additionally provides custody. If a custodian is involved, the note only covers the situation where the investor chooses how much to stake.
However, the devil is in the details. For example, the opinion does not cover liquid staking (where the token holder receives another token while the main tokens are locked), re-staking or liquid re-staking.
One commissioner strongly disagrees
This interpretation faces significant pushback from Democrat Commissioner Caroline Crenshaw, who noted that these are simply staff opinions and don’t affect the law. She went as far as saying that in authoring the note, the Division of Corporate Finance was channeling the adage “fake it ’till you make it.”
In her view, the note inadequately justified the legal interpretation and she believes the conclusions conflict with the law. However, she acknowledged that certain bare bones staking programs may not involve an investment contract.
Since the change in administration, the SEC has published several staff notes related to digital assets, the first of which clarified that solo and pooled mining for proof of work blockchains will generally not be considered to involve securities.
While this is staff guidance rather than formal regulation, it signals the SEC’s likely enforcement approach under the new administration. It marks a significant shift in how crypto staking will be regulated, though the strong dissent suggests this interpretation could face challenges if the political landscape changes again.
The newly proposed digital asset legislation, the CLARITY Act, doesn’t explicitly cover staking. However, it includes explicit regulatory relief regarding blockchain-linked tokens, making such guidance less vulnerable to future political shifts by providing statutory protections for digital commodities that meet specific criteria.
