Regulators Give Staking Clarity, DeFi Breathes Easier

The U.S. Securities and Exchange Commission (SEC) has taken a significant step toward clarifying the regulatory status of liquid staking in the crypto space, signaling potential relief for market participants engaged in decentralized finance (DeFi). In a statement issued by the Staff of the Division of Corporation Finance, the SEC clarified that certain liquid staking activities do not involve the offer or sale of securities under federal securities laws. The statement expands on the agency’s earlier analysis of protocol staking and aims to provide a clearer regulatory framework for a broader range of staking activities and the intermediaries involved. This development is likely to be welcomed by market participants, as it reduces legal uncertainties around the classification of staking receipt tokens and related activities.

According to the Staff’s analysis, liquid staking allows crypto asset holders to retain liquidity by depositing their assets into a staking protocol and receiving staking receipt tokens in return. These tokens represent ownership of the deposited crypto assets and any associated rewards. The SEC emphasized that liquid staking providers typically perform administrative rather than entrepreneurial or managerial functions, and as a result, the issuance of staking receipt tokens does not constitute an investment contract under the Howey test. The Staff also concluded that staking receipt tokens are not securities because the underlying staked crypto assets are not classified as such and because the value of the tokens derives from the crypto assets themselves, not from the efforts of the liquid staking providers.

The regulatory clarification also outlines specific boundaries for what constitutes out-of-scope activities. These include scenarios where liquid staking providers exercise discretion over the staking of assets, provide guarantees or set reward expectations, or issue tokens that offer returns beyond evidence of ownership. The Staff noted that such out-of-scope activities could still be subject to securities laws and may require registration or exemptions. This distinction is crucial for market participants, as it allows for a range of staking activities to proceed with greater regulatory certainty while still preserving oversight for potentially riskier practices.

The broader implications of the Staff’s statement extend beyond liquid staking to the wider DeFi ecosystem. Proponents of DeFi have long argued that protocols should not be subject to the same regulatory treatment as traditional securities offerings. The Staff’s consistent application of the Howey test to both protocol and liquid staking activities suggests a more nuanced approach to regulating digital assets, one that differentiates between core protocol functions and investment contracts. This could pave the way for further regulatory clarity in the DeFi space, potentially encouraging innovation and broader adoption of decentralized financial protocols.

The regulatory shift aligns with broader trends in U.S. crypto policy, including the introduction of the CLARITY Act and the GENIUS Act, which seek to establish a more structured framework for digital assets. The CLARITY Act, for instance, provides a clear path for mature blockchain systems to be classified as digital commodities rather than securities, potentially reducing regulatory friction for certain DeFi and staking activities. Meanwhile, the SEC’s recent approval of spot Bitcoin and Ethereum exchange-traded products (ETPs) indicates a growing openness to integrating crypto assets into traditional financial markets.

Despite these developments, litigation risks remain for liquid staking programs, as the Staff’s statements do not bind the full SEC Commission, and courts could still classify certain staking activities as investment contracts. Additionally, ongoing debates about the future of DeFi regulation highlight the need for continued dialogue between regulators, market participants, and legal experts. While the Staff’s approach appears to favor innovation and market development, it is still too early to conclude that all protocol-based activities are outside the scope of securities regulation. Nevertheless, the recent clarity around liquid staking represents a tangible step forward in the SEC’s evolving approach to crypto markets.

Source:

[1] SEC Staff Clarifies Stance On Liquid Staking (https://www.mondaq.com/unitedstates/commoditiesderivativesstock-exchanges/1672066/sec-staff-clarifies-stance-on-liquid-staking)

[2] The New US Crypto Regulatory Framework: An In-Depth ... (https://m.odaily.news/en/post/5206063)