- Liquid staking transactions do not require SEC registration.
- Receipts of tokens are not securities, but staking assets.
- Permits innovation and liquidity in the crypto markets.
The American Securities and Exchange Commission (SEC) has issued a landmark announcement in which it clarifies that not all crypto liquid staking operations constitute a securities offering. This statement is an extension of the SEC’s continued attempt to give more clarity to the regulation of digital assets.
A protocol-based staking provider or third party can take over the staking of crypto assets and issue staking receipt tokens to owners instead of the owners themselves in a process known as liquid staking.
The tokens represent a claim of ownership and privilege of reward without withdrawing staked crypto. Imperatively, the Division of Corporation Finance asserts that these tokens and activities, under specified conditions, are not securities according to federal rules.
Why the SEC’s View Sparks Curiosity and Industry Buzz
The SEC stance confounds the general supposition that every crypto staking product is under securities regulations. It draws a clear line that liquid staking providers do not take part in administration or custodial activities.
Instead of entrepreneurial or managerial inputs, the element that is critical to determining a security under the Howey Test. Historically, according to the Howey Test, a security is a financial investment in a shared company where the only way to make money is through the work of other people.
The specific examination by the SEC concludes that it is merely an agent of the liquid staking provider. The rewards of staking are protocol-driven, and they neither guarantee nor control them.
This subtle position is interpreted so that the liquid staking receipt tokens are considered as not investment contracts, but only as proof of ownership. The value of the tokens is pegged against the value of the crypto assets that are to be deposited and not on the management of the third party. This allows for innovation to flourish without being stifled by excessive regulations.
What This Means for Crypto Investors and Markets
According to the statement, participants in liquid staking will not be required to file transactions with the SEC, simplifying aspects of regulation. The ruling is an indication of a less restrictive atmosphere on crypto staking protocols and could speed up institutional activity and products such as liquid staking ETFs.
SEC Chairman Paul Atkins listed this as a positive move toward clarifying the jurisdiction of the SEC regarding crypto activities. This clarity may drive liquidity and innovation in the space because the total locked value in liquid staking has been increasing to a current total of $67 billion, primarily on Ethereum.
The SEC warns, however, that liquid staking arrangements that go beyond administrative functions or investment contracts in the underlying assets may still give rise to securities laws. This leaves in place a few guardrails and enables numerous liquid staking activities to take a step forward without encumbrance.
