The significant shift in the regulatory stance of the Securities and Futures Commission (SFC) aims to provide structural norms for staking activities.

Written by: Mankun

The Hong Kong Securities and Futures Commission (SFC) recently issued a notice regarding licensed virtual asset trading platforms (VATPs) providing staking services, introducing a clear regulatory framework for Hong Kong's virtual asset ecosystem, which will have a significant impact. This move marks a notable shift in the SFC's regulatory stance, aiming to provide structural norms for staking activities while responding to the growing demand for policy clarity from investors and market participants.

Understanding the Staking Mechanism

Staking refers to the commitment or "locking" of virtual assets within a blockchain protocol to support its verification process (typically based on a Proof of Stake (PoS) consensus mechanism). By staking assets, participants assist in verifying transactions and maintaining blockchain security, and in return, they typically receive rewards issued in the form of additional tokens.

Although staking provides investors with a way to earn passive income, it comes with multiple risks: stakers may face penalties such as "slashing" (i.e., the confiscation of a portion of staked assets due to mismanagement or misconduct by validators). Additionally, staked assets are usually required to be locked for a fixed period, leading to liquidity risks for investors.

SFC's Staking Guidelines

The recent circular issued by the SFC outlines its regulatory guidelines for VATPs wishing to offer staking services to customers. The guidelines focus on establishing clear standards for platforms providing staking services while ensuring that investor protection remains a core concern. Here are the key points of the guidelines:

1. Control and Safeguarding of Client Assets

VATPs must maintain control over the virtual assets involved in staking, ensuring that they are not held by third-party service providers. This restriction aims to minimize the risks of mismanagement or fraud, safeguarding client assets within a regulated environment.

2. Operational Control and Risk Management

VATPs must develop effective policies to detect errors, mitigate risks, and protect client assets. Platforms must ensure they have the necessary internal control measures to manage the operational complexities of providing staking services, including addressing potential conflicts of interest.

3. Transparency and Information Disclosure

One of the key regulatory requirements is that VATPs must provide clear and detailed information disclosures regarding staking services, including explanations of associated risks (such as slashing, lock-up risks, blockchain errors, and the possibility of validator negligence). Platforms must also disclose fee structures, lock-up periods, withdrawal processes, and the involvement of third parties in staking services.

4. Due Diligence on Blockchain Protocols and Third Parties

VATPs must conduct rigorous due diligence when selecting staking blockchain protocols and outsourcing any staking-related services to third-party providers. This ensures that platforms can assess the associated risks and choose protocols that align with their operational capabilities and risk management strategies.

5. Prior Approval from the SFC

VATPs intending to offer staking services must first obtain written approval from the SFC. The SFC will attach specific conditions to the platform's license to ensure compliance with regulatory requirements related to staking. This adds an additional layer of oversight and accountability for platforms entering the staking market.

Business Motivation for Providing Staking Services

Exchanges and trading platforms gain clear business benefits by introducing staking products:

First, staking creates new revenue streams. Exchanges can take a commission or "service fee" from the rewards users earn by staking tokens through the platform (for example, Coinbase charges about 25% of ETH staking rewards, Binance about 20%, and Kraken about 15-20%, depending on the asset). This effectively turns idle client assets into a recurring revenue source for the platform.

Second, staking locks up client assets and enhances user "stickiness." When users delegate or lock tokens to earn rewards, these assets cannot be immediately withdrawn or traded, anchoring client balances (and network effects) on the platform.

Third, staking services create a differentiated competitive advantage for exchanges. By promoting passive income products, exchanges can attract a broader user base (including those more interested in long-term staking returns rather than active trading) and signal their provision of comprehensive crypto ecosystem services (trading, custody, yield, etc.). In a highly competitive crypto market, offering staking (and related yield products) has become a common means for major platforms to compete and enhance perceived value.

Staking and Global Regulatory Trends

Global regulators are striving to define the positioning of staking within the existing legal framework.

The core controversy (especially in the U.S.) revolves around whether the returns from staking services are akin to interest on securities (i.e., whether they constitute an "investment contract" under the Howey test). The SEC, under Chairman Gary Gensler, has taken an aggressive stance:

Kraken Settlement

As one of the first major exchanges in the U.S. to offer "staking as a service," Kraken supports multiple PoS chains (such as Ethereum, Polkadot, Cosmos), allowing customers to delegate tokens through its validation nodes. In February 2023, Kraken agreed to pay a $30 million fine and shut down its U.S. staking program to settle charges from the SEC. The SEC contended that Kraken's staking services constituted the sale of unregistered investment contracts. Under the settlement agreement, Kraken ceased offering staking services to U.S. customers but continued operations overseas.

Coinbase Warning

Coinbase provides staking services on its retail platform (supporting staking for tokens like ETH, Algorand, Tezos) and its institutional business line (Coinbase Prime). In a lawsuit against Coinbase in 2023, the SEC specifically pointed out that its "staking" yield program constituted an unregistered securities offering. Coinbase publicly refuted this characterization, arguing that staking is a "legitimate business model" not subject to traditional securities law requirements. The lawsuit against Coinbase's staking services highlights regulatory risks: the SEC views staking as a service that may qualify as an "investment contract" under the Howey test. (Notably, in February 2025, Coinbase announced that the SEC had withdrawn its lawsuit, which was seen as a signal of a shift in regulatory attitude, but as of 2024, the controversy remains unresolved.)

However, there are exceptions, such as Binance.

The world's largest exchange, Binance, offers staking services through its "Binance Earn" suite (supporting flexible/term staking for dozens of tokens). Binance's staking model is similar: customers lock tokens on the platform and receive the protocol's annual percentage yield (APY). Although Binance faces extensive regulatory scrutiny regarding its licensing, as of early 2025, U.S. authorities had not directly charged it regarding its staking products (Binance has removed staking services in certain regions to comply with local laws). Nevertheless, Binance's staking business demonstrates the scale of this operation: cryptocurrencies staked through mainstream exchanges often reach billions of dollars, with the platform attracting funds by promoting competitive yields.

Meanwhile, the SEC's viewpoint is also contentious. For example, in early 2025, a bipartisan group of U.S. senators urged the SEC to allow crypto exchanges to engage in staking for exchange-traded funds (ETFs), arguing that staking is essential for the security of many blockchain protocols. In other words, U.S. enforcement policy treats staking yields as akin to bond interest, but some legislators and industry groups believe this stance stifles innovation and investor interests.

Regions outside the U.S. are taking different paths: the EU's Markets in Crypto-Assets Regulation (MiCA) does not prohibit staking; in fact, crypto asset service providers (which under MiCA include custodians and exchanges) are generally required to report how they manage client assets (including assets used for staking) to regulators. MiCA explicitly regulates token issuance and stablecoins but primarily leaves non-security tokens and related services to be managed by national regulators and anti-money laundering/know your customer rules. In practice, staking as a service in the EU may require providers to obtain a crypto asset service provider (CASP) license under MiCA/EMD2 or equivalent national licenses, which means compliance costs may rise, but the likelihood of outright prohibition is low.

Other jurisdictions vary: for example, Singapore's regulators implement a licensing regime for digital asset brokers and custodians but do not prohibit staking, while countries like China and India generally take a harsher anti-crypto stance (indirectly limiting exchange staking by prohibiting retail crypto trading).

In this context, Crypto.com, Gemini (Gemini Earn), Kraken's overseas branches, and numerous smaller exchanges/custodians are also providing staking or yield services (for example, Crypto.com allows users to stake CRO tokens for higher rewards; Gemini Earn—terminated after its partner Genesis went bankrupt—was a crypto lending product, indicating that yield products may also involve lending rather than pure staking), but each platform faces unique challenges: Gemini Earn halted payouts after Genesis froze customer funds; Singapore's KuCoin launched staking tokens in collaboration with validation node companies.

Overall, leading trading platforms are actively launching staking services to meet customer demand, despite ongoing scrutiny from regulators. The global regulatory trend is also showing a tug-of-war: points of contention include investor protection, the potential concentration risk of staking pools, and legal classification. U.S. regulators have so far signaled that staking products may fall under "securities" under current laws, while other regulators are still formulating clear guidelines or taking a more lenient view of the economic role of proof-of-stake networks.

Key Risks and Operational Challenges

Staking services pose multiple risks to platforms and clients:

1. Custody and Cybersecurity Risks

To facilitate client staking, exchanges must take control of user private keys or delegate staking to validation nodes. This significantly increases the value of assets held by the platform, making it a high-value target for hackers. Security vulnerabilities (or internal theft) could lead to substantial losses. Furthermore, since the platform effectively controls the staked tokens, bankruptcy or fraudulent activities (as evidenced by past incidents in the crypto industry) could jeopardize the staked funds. (Regulators have pointed out that staking services involve the custody of client assets, implicating custody regulations and audit requirements.)

2. Technical/Operational Risks

Operating and maintaining validation nodes involves operational complexities. If a node fails (due to software defects, cloud service interruptions, configuration errors) or is compromised, it may be unable to participate in the consensus mechanism. For most proof-of-stake networks, this could trigger slashing penalties, permanently destroying a portion of the staked assets (e.g., due to double-signing or prolonged offline status). Therefore, staking platforms must establish robust redundant validation node infrastructure. Significant network events (such as hard forks or upgrades) during downtime will pose additional risks: platforms must stay in sync with protocol changes, or they may lose rewards or funds.

3. Liquidity and Market Risks

Staked tokens typically require a lock-up period or at least a withdrawal delay (for example, Ethereum has a minimum exit queue of 2 weeks). If clients suddenly request to withdraw or sell their crypto assets, immediate action will not be possible. This poses liquidity risks for both users and platforms. Some platforms offer "liquid staking" derivatives or internal IOUs to provide superficial liquidity, but this introduces counterparty risk and potential mismatches. During a market crash, the value of staked assets may plummet like other crypto assets, and the inability to exit quickly may exacerbate losses.

4. Regulatory / Legal Risks

As mentioned earlier, staking services exist in a regulatory gray area. The platform's business model depends on the outcome of litigation or changes in rules (for example, if regulators suddenly determine that staking yields are considered "interest" that requires registration, the platform may be forced to suspend services or register as a securities entity). This legal uncertainty itself is an operational risk.

5. Business and Competitive Risks

Providing staking services typically requires sharing yields with clients (as yield rates are transparent and driven by protocols). If an exchange's reward commission is too high, clients may turn to higher-yield competitors or decentralized protocols. Conversely, low fees will squeeze platform revenues. Additionally, staking services have become commoditized: platforms lacking competitive yield rates or user-friendly staking options may cede market share to competitors that possess these advantages.

Summary by Lawyer Mankun

Although staking services can yield substantial profits and attract clients, platforms must manage complex technical infrastructures and navigate an evolving legal framework. Successful staking operations require robust custody security measures, clear risk disclosures, and flexibility to adapt to regulatory changes—all aimed at ensuring that promised yields do not expose the exchange (or its users) to undue risks.

For Hong Kong, the SFC's new staking guidelines reflect the dynamic evolution of local virtual asset regulation. By establishing rules for the provision of staking services, the SFC seeks to balance the development of the virtual asset ecosystem with investor protection. While the guidelines provide much-needed clarity, the inherent risks of staking remain. Both platforms and investors must engage in staking activities with a full understanding of the potential pitfalls. The regulatory framework established by the SFC lays the foundation for the future development of the virtual asset sector, and closely monitoring the evolution of these regulations will be crucial as the industry continues to mature.

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