The U.S. Securities and Exchange Commission’s (SEC) Division of Corporation Finance has provided some guidance regarding crypto staking activities.
It said that certain protocol staking activities on public, permissionless proof-of-stake (PoS) networks are not within the purview of securities regulations. This ruling diminishes regulatory ambiguity over crypto participants, validators, and independent service providers.
The SEC’s statement defines “Protocol Staking” to mean putting crypto assets to use in validating transactions. The crypto assets involved, termed “Covered Crypto Assets,” are essential for the operation and integrity of Proof-of-Stake (PoS) networks.
Participants in those networks, including Node Operators and Validators, are rewarded for validating transactions and securing the network.
The Division has outlined three methods of staking: solo staking, self-custodial staking, and custodial staking with service providers. In solo staking, the users stake their assets under complete control of their private keys.
However, in self-custodial staking, asset owners can authorize third-party Node Operators to have validation rights without transferring ownership or control. In custodial staking, a third party (Custodian) holds the assets being staked while the owners retain legal ownership.
SEC deems protocol staking non-security
Each of these staking types is viewed as administrative or ministerial in nature. The SEC emphasized that these activities do not involve profits from others’ managerial efforts.
Rewards from the PoS protocol are seen as compensation for participation rather than returns on investment. The SEC also talk of ancillary services such as early unstaking, reward scheduling, and slashing protection.
All these services are typically provided by staking providers, and the SEC still ruled that they did not possess the entrepreneurial element necessary for a securities transaction.
Such clarification by the SEC removes a big legal gray area existing in the crypto space. It affirms a regulatory paradigm that differentiates essential technological functions from speculative financial instruments.
Staking participants and developers have much more confidence now that activities supporting networks comply with current federal securities laws.
