In brief
- The SEC has clarified staking rules, excluding self-staking and custodial staking.
- Its corporate finance division emphasized the importance of retaining ownership of assets.
- Commissioner Caroline Crenshaw criticized the SEC guidance, calling the agency’s approach a “‘fake it ’till we make it'” outcome.
The SEC issued new guidance on crypto staking, confirming Thursday that most of the common staking activities aren’t subject to federal securities regulations, as long as specific conditions are met.
Protocol staking involves locking crypto assets that are “intrinsically linked to the programmatic functioning of a public, permissionless network,” the regulator wrote in its latest guidance on Thursday.
The same crypto assets could also be used “to participate in and/or earned for participating in such network’s consensus mechanism,” it added.
Consensus mechanisms are rules that help participants agree on the network’s state and verify transactions.
Staking on specific protocols does “not involve the offer and sale of securities” as defined under the Securities Act of 1933. The non-security status and definition of “Protocol Staking Activities” also extend to the Securities Exchange Act of 1934.
The guidance effectively ends uncertainty following a tumultuous period under former SEC Chair Gary Gensler during the Biden era, who previously labeled most crypto as securities.
“The SEC’s decision-making process is more open and transparent than most regulators, which is a real strength of the U.S. system,” Michael Bacina, an executive in residence from the global policy think tank Global Digital Finance, told Decrypt.
“Given securities laws are designed to protect people from situations where others can mismanage (or steal) their assets, it’s hard to see the policy reasons why non-custodial staking services should be pulled into a regulatory net,” he added.
Under federal laws, a security is any financial instrument, like stocks, bonds, investment contracts, and derivatives, through which people invest money expecting profits derived from the efforts of others.
The SEC’s latest statements come less than a month after major crypto firms urged the agency to provide clear rules on staking, defining it as one “technical function necessary to secure” proof-of-stake networks, not a securities offering or investment scheme.
Types of staking covered
The guidance covers staking crypto on proof-of-stake networks and third-party operators, such as validators and custodians, for earning rewards.
The coverage includes three types of staking: self-staking, where participants stake their own assets; self-custodial staking, where owners delegate staking to node operators but keep ownership; and custodial staking, where custodians stake assets for customers.
However, the guidance does not cover practices like liquid staking and restaking, where providers have control over staking decisions that may still be subject to securities laws.
The staff guidance later claimed in a footnote that this was because the statement addresses protocol staking “generally rather than all of its variations.”
It’s worth noting that the guidance only reflects the views of SEC staff, which means it’s non-binding and does not carry the force of law.
Commissioner disagrees
SEC Commissioner Caroline Crenshaw issued a sharp rebuke on Thursday, declaring crypto staking activities exempt from securities regulation run counter to applicable laws.
The dissenting commissioner also said the new guidance contradicts court precedent, citing two cases involving U.S. crypto exchanges Kraken and Coinbase. She also cited a separate dismissal for Binance, released on the same day.
As a result, Crenshaw said the agency was undergoing a “‘fake it ’till we make it’ approach to crypto.”
“Rather than promote clarity, this approach continues to sow uncertainty around what the law is and what parts of it the Commission is willing to enforce,” she wrote.
Edited by Sebastian Sinclair
Editor’s note: Adds comments from Michael Bacina
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