New SEC position on liquid staking potentially reconfiguring Ethereum ETF structures
SEC Clarifies Regulatory Status of Liquid Staking Services
The United States Securities and Exchange Commission (SEC) has issued a statement clarifying that certain liquid staking activities do not constitute securities under U.S. federal law. This move is part of the SEC's ongoing efforts through 'Project Crypto' to provide clarity in the digital asset sector.
The latest staff guidance follows a similar one for protocol staking in May, establishing that proof-of-staking (PoS) systems are not securities. As a result, liquid staking providers like Rocket Pool [RPL] and Lido [LDO] will not need to register with the SEC, as their tokens are not considered securities.
The SEC views liquid staking providers as agents who issue staked tokens, but do not control the staking process and therefore do not fall under the categorization of 'investment contract.' This distinction is crucial for the development of Exchange-Traded Funds (ETFs) that involve staking services without running afoul of securities laws.
Impact on ETF Staking Approval
The SEC's statement provides regulatory clarity that could pave the way for clearer boundaries for ETFs incorporating staking tokens. By defining Staking Receipt Tokens (SRTs) as utility tokens rather than investment contracts, the SEC reduces the likelihood that these tokens would be subject to securities regulations when used in ETFs.
The emphasis on administrative rather than discretionary roles for staking providers can help ETF sponsors avoid claims that their staking-related activities rely on the "efforts of others" or promise profits, which are key factors in determining an investment contract under the Howey test.
The clarification could boost market confidence in staking services and related financial products, potentially leading to increased innovation and investment in the sector, including ETFs that capitalize on the benefits of liquid staking.
Potential Challenges
While the current guidance provides some clarity, it does come with specific conditions that must be met for liquid staking to avoid being classified as securities. This could complicate the design and approval of ETFs if these conditions are not met precisely.
Furthermore, while the current guidance does not rule out future regulatory actions if staking activities evolve in ways that suggest dependence on the "efforts of others" or expectation of profits, SEC Commissioner Hester Pierce welcomed the update on liquid staking, calling it a 'new solution to an old problem.'
However, SEC Commissioner Caroline Crenshaw dissented against the directive and warned liquid staking providers to have 'little comfort' as it could be reversed.
This clarification on liquid staking has significant potential impacts on the approval of ETF staking products, fast-tracking the process by offering clearer regulatory guidelines, but introducing conditions that must be carefully adhered to by ETF issuers and staking providers.
- The SEC's clarification on liquid staking services could boost market confidence in cryptocurrency finance, potentially leading to increased innovation and investment in the sector, including Ethereum [ETH] and Solana [SOL] based Exchange-Trade Funds (ETFs) that capitalize on the benefits of liquid staking.
- By defining Staking Receipt Tokens (SRTs) as utility tokens rather than investment contracts, the SEC reduces the likelihood that these tokens would be subject to securities regulations when used in ETFs, such as those feasible on the Ethereum blockchain.
- The SEC's staff guidance provides regulatory clarity that could pave the way for clearer boundaries for ETFs incorporating staking tokens, thus allowing liquid staking providers like Rocket Pool [RPL] and Lido [LDO] to avoid registration as securities.
- The SEC's latest update on the status of liquid staking services follows a similar one for protocol staking in May, highlighting that proof-of-staking (PoS) systems are not securities, and thus do not require registration or comply with relevant securities laws.
- While the regulatory clarification on liquid staking offers a new approach to an old problem and provides some relief for crypto technology-based financial services, it does come with specific conditions that must be adhered to carefully by ETF issuers and staking providers, to avoid potential future regulatory actions.
