SEC Staff releases statement on protocol staking activities

The recent statement from the staff of the Securities and Exchange Commission’s Division of Corporation Finance has offered much-needed clarity on the regulatory treatment of certain “protocol staking” activities in the realm of proof-of-stake (PoS) networks. This newfound guidance has reaffirmed that staking crypto assets on such networks does not constitute a securities offering under federal securities laws, provided certain conditions are met.

It’s essential to understand that while this statement serves as guidance for industry participants, it does not hold legal binding and leaves room for potential legal risks, including private litigation and enforcement actions beyond the outlined facts. Additionally, one SEC Commissioner has expressed dissent regarding the statement, highlighting ongoing discrepancies in regulatory perspectives on staking practices.

Protocol staking serves as a pivotal mechanism for PoS networks, enabling participants, also known as “node operators,” to validate transactions and uphold network integrity by staking crypto assets. In exchange for providing validation services, participants receive rewards in the form of newly minted tokens and a portion of network transaction fees.

The Staff’s analysis focused on three primary staking models:

– Self (or Solo) Staking: crypto asset owners manage their validator nodes and directly stake the assets they control.
– Self-Custodial Staking with a Third Party: asset owners maintain custody and private keys but delegate validation rights to a third-party operator.
– Custodial Staking: a custodian holds and stakes customer assets without utilizing them for other purposes or exercising discretion over the staking process.

Under the Howey test, which determines an “investment contract” and thus the presence of a security, the Staff concluded that these Protocol Staking Activities do not meet the criteria for a securities offering. The activities were deemed administrative or ministerial rather than entrepreneurial or managerial, failing to satisfy the “efforts of others” requirement essential for an investment contract. The involvement of third-party operators was viewed as operational, not entrepreneurial, further distancing staking activities from securities offerings.

The Statement also addressed ancillary services connected to protocol staking, such as slashing coverage, early unbonding, modified reward payment timing, and aggregation services. These services were classified as ministerial and not transforming the staking relationship into an investment contract. However, if a custodian were to have discretion over the staking process, their actions would fall outside the scope of the Statement.

In practice, this guidance marks a significant shift in the SEC’s stance on staking activities. While it provides clearer boundaries for industry participants, potential litigation risks remain, particularly for custodial staking practices. Notably, liquid staking and restaking were not addressed in the guidance, highlighting the need for further clarification in these areas. Custodial stakers are advised to ensure their terms of service do not imply managerial discretion to mitigate potential legal conflicts.

In conclusion, the SEC’s recent guidance on protocol staking has set a new tone for the industry by clarifying the regulatory landscape surrounding staking activities on PoS networks. While this development offers important insights, it does not eliminate all legal risks, emphasizing the need for continued diligence and compliance within the evolving crypto landscape.