"Senators Push SEC for Staking Clarity in Crypto ETPs"

In a recent development, a group of U.S. senators, led by Cynthia Lummis, has written to the Securities and Exchange Commission (SEC) seeking clarity on the regulator's stance regarding protocol staking in crypto exchange-traded products (ETPs). The senators, in a letter dated February 20, expressed concerns about the exclusion of staking from ETP issuers' S-1 filings, which they believe impacts the competitiveness of U.S. asset managers and limits investors' access to core blockchain functions.

The SEC has approved the registration of multiple digital asset ETPs but has consistently required issuers to remove protocol staking from their filings. The senators have requested that the SEC provide explicit reasoning for its decision to exclude staking from digital asset ETPs. They have posed three key questions regarding the rationale behind the restriction, the risks the SEC identified regarding staking, and whether the regulator would allow staking to be offered within a registered security instrument if the product is seen as an investment contract.

The senators have also argued that increased transparency would help market participants understand the SEC's regulatory position and inform potential legislative action if needed. They have set an April 1 deadline for the SEC to respond to their letter.

The senators contend that the SEC's stance limits the investment potential of these products in the U.S., placing them at a disadvantage compared to similar offerings in Canada, Europe, and the United Kingdom. The latter recently permitted digital asset ETPs with staking, supported by bipartisan backing from Conservative and Labour leadership.

Staking is integral to proof-of-stake (PoS) networks such as Ethereum (ETH) and Solana (SOL). It enables validators to secure blockchain networks by locking up native assets in exchange for transaction fees and newly minted tokens. The letter authors argue that barring staking from ETPs prevents investors from realizing these benefits, reduces their potential returns, and weakens network security.

Discussions on staking are heating up, with the SEC's Crypto Task Force meeting with industry representatives on February 5. The discussion focused on integrating staking into ETP structures while addressing regulatory concerns. The SEC has cited multiple reasons for its hesitation, including redemption timelines that conflict with the T+1 settlement cycle, the tax implications of staking rewards, and the classification of staking-as-a-service as a securities offering.

During the meeting, industry representatives presented