This statement aims to provide regulatory clarity for staking participants and support compliant participation in network consensus mechanisms.
Written by: U.S. SEC
Translated by: Felix, PANews
The U.S. Securities and Exchange Commission (SEC) today released a policy statement regarding staking activities in PoS networks, clearly stating that three types of staking activities do not constitute securities offerings, including self-staking, third-party non-custodial staking, and compliant custodial staking. This statement aims to provide regulatory clarity for staking participants and support compliant participation in network consensus mechanisms.
The full text of the statement is as follows:
Introduction
To clarify the applicability of federal securities laws to crypto assets, the Division of Corporation Finance has expressed its views on certain activities referred to as "staking" in networks that use Proof of Stake ("PoS") as a consensus mechanism. Specifically, this statement addresses the staking of crypto assets that are inherently linked to the programmatic operation of public, permissionless networks, which are obtained for participating in and/or as a result of participating in such networks' consensus mechanisms, or for maintaining and/or as a result of maintaining the technical operation and security of such networks. In this statement, we refer to these crypto assets as "Covered Crypto Assets," and staking on PoS networks is referred to as "Protocol Staking."
Protocol Staking
Networks rely on cryptographic and economic mechanisms designed to reduce reliance on designated trusted intermediaries to verify network transactions and provide settlement assurances to users. The operation of each network is governed by an underlying software protocol, which consists of computer code that programmatically enforces certain network rules, technical requirements, and reward distributions. Each protocol contains a "consensus mechanism," which is a method that allows unrelated computers (referred to as "nodes") maintaining a peer-to-peer network to reach consensus on the "state" of the network (i.e., authoritative records of network address ownership balances, transactions, smart contract code, and other data). Public, permissionless networks allow users to participate in the operation of the network, including validating new transactions according to the network's consensus mechanism.
Proof of Stake (PoS) is a consensus mechanism used to prove that participating network node operators ("node operators") have contributed to the network, and that in certain cases, these contributions may be forfeited if their behavior is dishonest. In PoS networks, node operators must stake the network's Covered Crypto Assets to be programmatically selected by the underlying software protocol to validate new data blocks and update the network state. Once selected, the node operator assumes the role of a "validator." In return for providing validation services, validators receive two types of "rewards": (1) newly minted (or created) Covered Crypto Assets programmatically allocated to validators by the underlying software protocol; and (2) a portion of transaction fees paid in Covered Crypto Assets by parties seeking to add transactions to the network.
In PoS networks, node operators must invest or "stake" Covered Crypto Assets to be eligible for validation and rewards, typically implemented through smart contracts. A smart contract is an automatically executing program that performs the necessary operations for network transactions. During the staking period, Covered Crypto Assets are "locked" and cannot be transferred for the duration specified by the applicable protocol. Validators do not possess or control the staked crypto assets, meaning that ownership and control of the crypto assets do not change during the staking period.
The underlying software protocol of each PoS network includes rules for operating and maintaining that PoS network, including methods for selecting validators among node operators. Some protocols specify random selection of validators, while others use specific criteria, such as the amount of crypto assets staked by the node operator. Protocols may also include rules aimed at deterring activities harmful to the security and integrity of the network, such as validating invalid blocks or double-signing (which occurs when a validator attempts to add the same transaction to the network multiple times).
Protocol staking rewards provide economic incentives for participants to use their Covered Crypto Assets to secure the PoS network and ensure its continued operation. An increase in the amount of staked Covered Crypto Assets can enhance the security of the PoS network and reduce the risk of attackers controlling a majority of the Covered Crypto Assets. If not properly controlled, attackers could manipulate the PoS network by affecting transaction validation or tampering with transaction records.
Users holding Covered Crypto Assets can earn rewards by acting as node operators and staking their crypto assets. In the case of self-staking (or solo staking), users always retain ownership and control of their crypto assets and private keys.
Additionally, users holding Covered Crypto Assets can participate in the PoS network's validation process through third-party non-custodial staking without running their own nodes. Users holding crypto assets grant their validation rights to third-party node operators. When using third-party node operators, users receive a portion of the rewards, while service providers also receive a portion of the rewards for their services in validating transactions. When directly engaging in non-custodial staking through a third party, users holding crypto assets retain ownership and control of their crypto assets and private keys.
In addition to self-staking (or solo staking) and direct non-custodial staking through third parties, the third form of protocol staking is known as "custodial" staking, in which a third party ("custodian") holds the owner's crypto assets and facilitates the staking of such crypto assets on behalf of the owner. When the owner deposits crypto assets with the custodian, the custodian stores the deposited crypto assets in a digital "wallet" controlled by the custodian. The custodian stakes the crypto assets on behalf of the owner to earn an agreed-upon share of the rewards, which can be done through a node operated by the custodian or through third-party node operators selected by the custodian. Throughout the staking process, the deposited crypto assets remain under the custodian's control, while the owner retains ownership of their crypto assets. Furthermore, the deposited crypto assets: (1) may not be used for the custodian's operations or general business purposes; (2) may not be lent, pledged, or re-pledged for any reason; and (3) must be held in a manner that does not expose them to third-party claims. To this end, the custodian may not engage in leveraged trading, speculation, or other activities with the deposited crypto assets.
Department's View on Protocol Staking Activities
The department believes that "Protocol Staking Activities" related to protocol staking do not involve the issuance and sale of securities as defined in Section 2(a)(1) of the Securities Act of 1933 (the "Securities Act") or Section 3(a)(10) of the Securities Exchange Act of 1934 (the "Exchange Act"). Therefore, the department believes that parties participating in Protocol Staking Activities are not required to register these Protocol Staking Activities with the Commission under the Securities Act, nor are they subject to the provisions regarding registration exemptions in the Securities Act.
Protocol Staking Activities Covered by This Statement
The department's views apply to the following Protocol Staking Activities and transactions:
Staking Covered Crypto Assets on PoS networks;
Activities conducted by third parties related to the protocol staking process (including but not limited to third-party node operators, validators, custodians, delegators, and nominators ("Service Providers")), including their roles in earning and distributing rewards;
And providing ancillary services (as defined below).
This statement only discusses Protocol Staking Activities related to the following types:
Self-staking (or solo staking), which refers to node operators staking the crypto assets they own and control using their own resources. Node operators can be individuals or groups of individuals operating a node and staking their crypto assets.
Non-custodial staking through third parties, which refers to node operators obtaining validation rights from crypto asset owners according to the terms of the protocol. Rewards can flow directly from the PoS network to the crypto asset owners or indirectly through the node operators to the owners.
Custodial staking, which refers to custodians staking on behalf of the owners of crypto assets, for example, a crypto asset trading platform can stake such crypto assets on a PoS network that allows clients to delegate and with client consent. Custodians can stake using their own nodes or choose third-party node operators.
Discussion on Protocol Staking Activities
Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act define the term "security" by enumerating various financial instruments, including "stocks," "notes," and "bonds." Since crypto assets do not fall within any of the financial instruments explicitly listed in the above definitions, we analyze certain crypto asset transactions involving protocol staking under the "investment contract" test established in SEC v. W.J. Howey Co. The "Howey Test" analyzes arrangements or instruments not listed in the statutory terms based on their "economic realities."
When assessing the economic realities of a transaction, the key is whether there is an investment of money in a common enterprise, and that this investment is based on a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others. Since the Howey case, federal courts have interpreted that the requirement of "efforts of others" in Howey is satisfied when "the efforts made by persons other than the investor are undeniably significant efforts that affect the success or failure of the enterprise." Federal courts have also noted that administrative and ministerial activities do not constitute managerial or entrepreneurial efforts that satisfy the "efforts of others" condition in Howey.
Self-Staking (or Solo Staking)
Node operators' self-staking (or solo staking) is not based on a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others. Instead, node operators contribute their own resources and stake their own crypto assets to secure the PoS network and facilitate the operation of the network by validating new blocks, which qualifies them to receive rewards under the underlying software protocol of the PoS network. To earn rewards, the activities of node operators must comply with the protocol rules. By staking their own crypto assets and participating in protocol staking, node operators are merely engaging in an administrative or ministerial activity to secure the PoS network and facilitate its operation. The expectation of rewards for node operators does not stem from any third-party managerial or operational efforts upon which the success of their PoS network relies. Rather, the expected economic incentives of the protocol derive entirely from the administrative or ministerial nature of protocol staking. Therefore, rewards are compensation paid to node operators in exchange for the services they provide to the network, rather than profits derived from the entrepreneurial or managerial efforts of others.
Non-Custodial Staking Through Third Parties
Similarly, when crypto asset owners grant their validation rights to node operators, the crypto asset owners do not have expectations of profits derived from the entrepreneurial or managerial efforts of others. The services provided by node operators to crypto asset owners are essentially administrative or ministerial, rather than entrepreneurial or managerial, for the same reasons discussed above regarding self-staking (or solo staking). Whether node operators are staking their own crypto assets or obtaining validation rights from other crypto asset owners does not change the nature of protocol staking in the Howey analysis. In either case, protocol staking is an administrative or ministerial activity, and the expected economic incentives arise solely from such activities, not from the success of the PoS network or other third parties. Furthermore, node operators do not guarantee or otherwise set or fix the amount of rewards to be paid to crypto asset owners, although node operators may deduct their fees from that amount (whether fixed fees or a percentage of that amount).
Compliant Custodial Staking
In compliant custodial staking, custodians (whether or not they are node operators) do not provide entrepreneurial or managerial efforts for the crypto asset owners who receive their services. These arrangements are similar to the aforementioned situation where crypto asset owners grant their validation rights to third parties, but also involve the owners granting custodial rights over their deposited crypto assets to third parties. Custodians do not decide when, whether, or how much of the owners' crypto assets are staked. Custodians merely act as agents, staking the deposited crypto assets on behalf of the owners.
Furthermore, the custodial actions taken by custodians regarding the deposited crypto assets and, in some cases, the selection of node operators, are insufficient to meet the "efforts of others" requirement in the Howey test, as these activities are essentially administrative or ministerial in nature and do not involve managerial or entrepreneurial efforts. Additionally, custodians do not guarantee or otherwise set or fix the amount of rewards to be paid to crypto asset owners, although custodians may deduct their fees from that amount (whether fixed fees or a percentage of that amount).
Ancillary Services
Service providers may offer the following services ("Ancillary Services") to crypto asset owners to complement protocol staking. Each of these ancillary services is essentially administrative or ministerial in nature and does not involve entrepreneurial or managerial efforts. They are part of the overall activity of protocol staking, which itself does not possess entrepreneurial or managerial characteristics.
Slashing Coverage: Service providers compensate or reimburse staking clients for losses incurred due to slashing. This protection against node operator errors is similar to the guarantees provided by service providers in many traditional business transactions.
Early Unbonding: Service providers allow the return of crypto assets to owners before the end of the unlocking period specified by the protocol. This service merely shortens the effective unlocking period of the protocol, providing convenience to crypto asset owners and alleviating the burden of the unlocking period.
Alternative Reward Payment Schedules and Amounts: Service providers deliver rewards at different paces and amounts than those set by the protocol, or the timing of reward payments is earlier than specified by the protocol or the payment frequency is lower than specified by the protocol, provided that the reward amounts are not fixed, guaranteed, or exceed the amounts granted by the protocol. Similar to early unbonding, this is simply an optional convenience provided to crypto asset owners in the management of reward distribution and delivery.
Aggregation of Crypto Assets: Service providers offer crypto asset owners the functionality to aggregate their crypto assets to meet the minimum requirements for protocol staking. This service is part of the validation process, which is itself administrative or ministerial in nature. Aggregating the owners' crypto assets to facilitate staking is also administrative or ministerial in nature.
Whether provided individually or as a group of services, any or all of these services offered by service providers do not possess managerial or entrepreneurial characteristics.
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