Introduction to Staking and Regulatory Uncertainty
The US Securities and Exchange Commission (SEC) has engaged in discussions with Everstake, a leading non-custodial staking provider, to explore clearer regulatory definitions surrounding staking in blockchain networks. This meeting, which included the SEC’s Crypto Task Force, is significant as it comes at a time when over $193 billion in digital assets are staked across major proof-of-stake (PoS) networks. Despite the massive scale of participation, staking remains in a legal gray zone in the US, with regulators grappling with its classification under existing securities law.
Background on Staking and SEC Actions
The previous SEC administration took enforcement actions against major players such as Kraken, Coinbase, and Consensys due to their staking services. However, under the current pro-crypto administration, these enforcement actions have been dismissed. The SEC’s stance on staking has been evolving, with the agency seeking input from industry stakeholders to understand the nuances of staking and its implications for regulatory frameworks.
Everstake’s Position on Non-Custodial Staking
During the meeting, Everstake argued that non-custodial staking should not be classified as a securities transaction. The company emphasized that users maintain full control over their digital assets throughout the staking process and do not transfer ownership to a third party. Everstake views staking as a technical function, not an investment product, highlighting that users delegate only validation rights while maintaining ownership of their digital assets. The staking rewards are algorithmically distributed by the blockchain network itself, with Everstake providing merely the technical infrastructure.
Regulatory Clarity for Staking Models
Everstake has called for regulatory clarity, submitting a letter to the SEC’s Crypto Task Force in which it asked the agency to extend regulatory clarity to non-custodial staking, as well as custodial and liquid staking models. The letter responded to Commissioner Hester Peirce’s call for input on the regulatory treatment of blockchain services, arguing that non-custodial staking should not be considered a securities offering. It claimed that non-custodial staking does not involve the pooling of assets or the expectation of profits from managerial efforts, key factors in determining a securities offering.
The Howey Test and Non-Custodial Staking
The letter detailed why non-custodial staking fails each prong of the Howey test, a legal test used to determine whether a transaction constitutes an investment contract. Users do not make an investment of money in a common enterprise, do not expect profits from Everstake’s efforts, and are not dependent on the company’s management for financial returns. Instead, rewards come from network-level incentives and fluctuate with the market value of the underlying asset. Everstake proposed specific criteria that should exempt non-custodial staking from securities classification, including user asset control, absence of pooled funds, permissionless unstaking, and the provision of purely technical services.
Implications and Future Directions
Margaret Rosenfeld, Everstake’s chief legal officer, emphasized that treating non-custodial staking as a securities offering undermines the decentralized model and risks chilling innovation in the blockchain sector. The SEC has withheld a definitive stance but continues to engage with industry stakeholders. In an effort to push for clearer guidelines, nearly 30 crypto advocate groups led by the Crypto Council for Innovation (CCI) have asked the SEC for clear regulatory guidance on crypto staking and staking services. The ongoing dialogue between regulatory bodies and industry players like Everstake is crucial for establishing a clear and supportive regulatory environment for blockchain and staking services.
Conclusion
The discussions between the SEC and Everstake represent a significant step towards clarifying the regulatory status of staking in the US. As the blockchain and cryptocurrency sector continues to evolve, the need for clear and comprehensive regulatory guidelines becomes increasingly pressing. The outcome of these discussions will not only impact the future of staking and blockchain services in the US but also set a precedent for regulatory approaches in other countries. By understanding the technical and operational aspects of non-custodial staking, regulators can develop frameworks that support innovation while protecting investors. Ultimately, the goal is to create a regulatory environment that fosters growth, transparency, and compliance, allowing the full potential of blockchain technology to be realized.
