Staking Success: SEC's Sensible Stance Finally Stakes Out Clarity

The SEC's Division of Corporation Finance has dropped some surprisingly sensible guidance on liquid staking that has the crypto world cautiously optimistic. After years of regulation by enforcement under former Chair Gary Gensler, the SEC under new Chair Paul Atkins has acknowledged what many have been arguing all along: not every crypto mechanism is a security under US law.

The 5 August statement clarifies that certain liquid staking activities should not fall under the SEC’s jurisdiction when they're truly protocol-driven without active third-party management or return guarantees, even when the staking is offered by a third-party.  This means that participants in those activities are not required to register their transactions under existing federal securities laws. The latest statement follows earlier guidance that covered protocol staking, including self-staking, self-custodian staking through third parties and custodial staking.

This is bright line guidance which previously was absent (and in many countries remains absent). Gone are the days when projects were told they just needed to ‘come in and register’ when it was impossible to survive the process, as the current SEC is on track with ‘Project Crypto’ to give the industry clear guidance.

Liquid what?

Liquid staking lets users lock up their crypto for staking rewards while receiving in return receipt tokens they can use elsewhere, such as in other DeFi smart contracts. These tokens serve as proof of the depositor's ownership of the staked assets and entitle the holder to any staking rewards that accrue. Receipt tokens are issued on a one-for-one basis and are redeemable for the underlying crypto assets and accrued rewards. The key feature of liquid staking is that it allows token holders to retain liquidity while their assets remain locked in staking.

The new guidance suggests that when these mechanisms are purely protocol-based—think algorithmic rather than actively managed—they ought to escape securities regulation entirely in the US. The SEC's position hinges on the application of the Howey test, which determines which transactions constitute an "investment contract" and would be subject to US securities laws. Under that test, an arrangement qualifies as a security where there is an investment of money in a common enterprise premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.

The Division found that the "efforts of others" prong is not satisfied because liquid staking providers do not offer entrepreneurial or managerial efforts to depositors. Instead, their activities are administrative or ministerial in nature and do not guarantee or set rewards. However, the statement specifically excludes liquid staking provider activities that go beyond administrative and ministerial activities, or the offer, sale or issuance of staking receipt tokens that are inconsistent with the descriptions set out in the statement.

The crypto community's reaction has been mixed but largely positive. Lido Finance, one of the biggest liquid staking protocols, said:

This guidance provides much-needed clarity for the liquid staking ecosystem. We're encouraged by the SEC's nuanced approach to protocol-driven activities.

Jesse Pollak, co-founder of Kraken, referenced a previous $30 million settlement with the SEC in relation to its custodial staking service, saying:

Can I get a $30M refund?

Although the statement has no legal force, US SEC Commissioner Caroline Crenshaw has criticised the statement saying it only "muddies the waters". According to Crenshaw, the statement relies on several factual assumptions that creates what she calls a "wobbly wall of facts without an anchor in industry reality".

The Devil's in the Details

Of course the guidance comes with plenty of caveats. The agency emphasizes this is not a formal rule or binding decision—rather it is more like regulatory tea leaves that industry participants need to interpret carefully.

Key points include, from the guidance:

In a Liquid Staking arrangement, the Liquid Staking Provider (whether a Node Operator or not) does not provide entrepreneurial or managerial efforts to Depositors for whom it provides this service. These arrangements are similar to those discussed in the Protocol Staking Statement with respect to “Custodial Arrangements.” The Liquid Staking Provider does not decide whether, when, or how much of a Depositor’s Covered Crypto Assets to stake and is simply acting as an agent in connection with staking the Covered Crypto Assets on behalf of the Depositor. 

The key factors seem to be:

• A Staking Receipt Token is not a security, because the thing for which it is a receipt, what the SEC calls a Covered Crypto Asset, is itself not a security.

  
  

• Protocol-driven operations without human intervention remove managerial efforts which would trigger the Howey test.

TradFi Strikes back

Naturally crypto clarity in regulation doesn't come without the criticism with the former chief-of-staff of the SEC making a wild comparison to Lehman Brothers rehypothecation:

The SEC's latest crypto giveaway is to bless the same type of rehypothecation that cratered Lehman Brothers - only in crypto it's worse because you can do it without any SEC or Fed oversight.

Austin Campbell of Zero Knowledge Consulting politely said:

They live in a world that is centralized and intermediated, because that was the only way to do things effectively in the 1970s when these systems were designed...[t]hey don't realize that they think of everything as centralized, so automated systems really throw them.

Joe Doll of Magic Eden was more brutal, calling the statement a deliberate mischaracterization, and saying:

I'm always happy to provide "swift backlash" to those leveraging their pedigree to LARP as experts to impede technological innovation and regulatory progress.

What comes NXT?

For staking providers and DeFi platforms, this guidance offers a roadmap but also requires careful compliance work. Projects will need to review their offerings against the criteria set by the SEC, noting that it does not have the force of law, so plaintiff lawyers are still at liberty to allege that liquid staking is a security. In addition, foreign laws may still apply to liquid staking services which means the SEC guidance will provide only limited comfort.

The broader direction of this statement and ‘Project Crypto’ are real, practical and largely sensible bright line guidance which the industry can rely on to grow.  With the UK clarifying that staking is not a collective investment scheme earlier this year, regulators are doing the hard work to draw lines, while others continue a regulation by enforcement position, often with mixed results.

The liquid staking sector, which has grown to billions in total value locked, can finally operate with a degree of clarity in the United States. More clarifications from Project Crypto are expected in the US, and as the largest financial market, these policy directives are likely to have significant influence in global development and may persuade other regulators to adopt fit for purpose rules and guidance over time. By Michael Bacina with Steven Pettigrove and Emma Assaf