SEC Clarifies Staking Activities Not Securities Offerings

The U.S. Securities and Exchange Commission's Division of Corporation Finance has provided new guidance on the regulatory status of certain staking activities on proof-of-stake (PoS) blockchain networks. The Division has clarified that these activities do not fall under securities offerings, thereby offering much-needed clarity to the industry.

The statement, issued on May 29, specifies that participants in protocol staking activities are not required to register their transactions with the Commission under the Securities Act or seek exemptions from registration requirements. This guidance covers three primary types of staking activities: self (or solo) staking, where node operators stake their own crypto assets; self-custodial staking directly with third parties; and custodial arrangements where a custodian stakes on behalf of asset owners.

The Division's determination is based on the understanding that staking rewards are payments to node operators for the services they provide to the network, rather than profits derived from the entrepreneurial or managerial efforts of others. This distinction is crucial as it aligns staking activities more closely with service provision rather than investment contracts, which are typically subject to securities regulations.

For custodial arrangements, the SEC noted that the custodian acts merely as an agent, executing the staking instructions provided by the asset owners without making independent decisions on the staking process. This further supports the view that custodial staking does not involve the kind of entrepreneurial or managerial efforts that would classify it as a securities offering.

The guidance also addresses various ancillary staking services, such as slashing coverage, early unbonding, alternate rewards payment schedules, and asset aggregation. These services are deemed to be administrative or ministerial in nature, reinforcing the idea that they do not involve the kind of activities that would trigger securities regulations.

This clarification from the SEC is expected to have a significant impact on the crypto industry, particularly for those involved in PoS networks. It provides a clear regulatory framework that can guide future developments and innovations in the staking ecosystem. By distinguishing staking activities from securities offerings, the SEC has helped to reduce uncertainty and potentially foster greater participation and investment in PoS networks.

During a conference in May, crypto industry groups urged the SEC to issue formal guidance on staking, citing regulatory uncertainty for Web3 infrastructure providers. The guidance was welcomed by Republican SEC Commissioner Hester Peirce, who leads the agency’s Crypto Task Force. Peirce stated that the guidance provides clarity for stakers and staking-as-a-service providers in the United States, addressing concerns that regulatory uncertainty had discouraged Americans from participating in staking activities.

However, the guidance was criticized by the SEC’s sole Democrat commissioner, Caroline Crenshaw. Crenshaw argued that the guidance fails to deliver a reliable roadmap for determining whether a staking service is an investment contract under securities laws, as determined by the Howey test. She also expressed concern that the guidance reflects a desire to change the law rather than adhering to existing legal precedents.

Despite the differing opinions, the SEC's clarification on staking activities is a significant step towards providing a clearer regulatory environment for the crypto industry. This guidance is expected to encourage greater participation in PoS networks and foster innovation in the staking ecosystem. However, it is important to note that the statement has no legal force or effect, and other forms of staking, such as liquid staking and restaking, were not addressed in the guidance.