The SEC’s Division of Corporation Finance released guidance last Thursday that could allow crypto platforms whose users lend their tokens to help secure the platform – a process known as “staking” – to avoid registering their activities with the Commission.
“It is the division’s view that ‘protocol staking activities’ (as defined below) in connection with protocol staking do not involve the offer and sale of securities,” according to the guidance, which lays out the types of activities that don’t need to register with the agency.
A few SEC commissioners issued statements about the guidance, including the SEC’s sole Democrat, Caroline Crenshaw, who criticized the move as being in conflict with a pair of court decisions the agency won.
The new stance was widely viewed as a major win for the crypto industry. To be sure, in April, the Crypto Council (CCI) for Innovation’s Proof of Stake Alliance project led a coalition of almost 30 organizations to submit a detailed letter to the SEC’s Crypto Task Force, outlining that a non-custodial or custodial staking service provider is “distinct from investment contracts.” Staking is a core part of how modern blockchains operate, not an investment contract, the CCI and others have argued.
Protocol staking activities
Staking concerns the “proof of stake” validation protocols used by certain blockchains. It is a process in which investors lock up (or stake) their crypto tokens with a blockchain validator with the goal of being rewarded with new tokens when their staked crypto tokens become part of the process for validating data for the blockchain.
The Staking Statement describes the three types of “protocol staking” as:
- A node operator self-staking their own native digital asset;
- A holder of the native digital asset granting their validation right to a third-party node operator while continuing to maintain complete custody of the digital asset (for example, self-custodial staking); and
- A holder of the native digital asset transferring control of the digital asset to a third-party custodian.
The Staking Statement is applicable to persons who self-stake certain crypto assets, as well as non-custodial and custodial staking-as-a-service providers that facilitate this type of staking on behalf of others. And the statement explains that the pairing of certain ancillary services together with non-custodial or custodial staking services, does not make the provision of staking services a securities offering.
Significance
Under former SEC Chair Gary Gensler, enforcement actions were brought against industry participants alleging that staking activities fall within the parameters of the definition of “security” under the federal securities laws.
The significant takeaway from this new Staking Statement is that the agency now views custodial staking arrangements as generally not constituting securities offerings, even when accompanied by certain ancillary services, because the custodian acts in an administrative or ministerial capacity and merely provides a service to the owner as its agent.
The SEC’s statement may open doors for the SEC’s approval of staking exchange-traded funds (ETFs). Crypto investors are still waiting for the approval of the first ether staking ETFs; on May 21, the SEC delayed its decision on Bitwise’s application to add staking to its ether ETF.
Interestingly, the SEC issued the Staking Statement on the same day it asked a judge to dismiss its lawsuit against crypto exchange Binance. In that case, the SEC had accused the company and its founder, Changpeng Zhao, of operating an unregistered exchange, artificially inflating its trading volume, and misleading investors about its surveillance and controls.
The Staking Statement is the latest in a line of SEC statements providing regulatory clarity on how federal securities laws apply to digital asset-related activities and is a part of the SEC’s overall effort to shift its approach to the crypto industry by reexamining Biden-era rules, dismissing cases against some crypto firms, and inviting feedback from industry participants via the SEC’s Crypto Task Force.
Statements from Peirce and Crenshaw
Republican Commissioner Hester Peirce, who heads the newly created Crypto Task Force at the agency, said that the SEC’s past views on staking “artificially constrained participation in network consensus and undermined the decentralization, censorship resistance, and credible neutrality of proof-of-stake blockchains.”
Peirce said she expects that the Division and Crypto Task Force will continue to develop views about the status (as securities or not) for other activities, products, and services involving participation in network consensus.
But Commissioner Crenshaw focused on the legal fundamentals, saying the guidance ignores court rulings that the agency won declaring that some staking services do fall under the SEC’s purview – including a ruling against Binance – again, whose case the agency just asked to a court to dismiss.
“The staff’s analysis may reflect what some wish the law to be, but it does not square with the court decisions on staking and the longstanding Howey precedent on which they are based,” Crenshaw said, referring to a well-known Supreme Court case that outlines how to decide if a transaction constitutes an investment contract. Abandoning some prior enforcement actions does not erase the underlying court decisions, Crenshaw observed.
