Statement Summary
The Division of Corporation Finance has issued a statement clarifying how federal securities laws apply to “protocol staking” activities on proof-of-stake (PoS) networks. Specifically, it emphasizes that staking of “Covered Crypto Assets” does not constitute an offer or sale of securities under existing laws. The statement details the roles of Node Operators, third-party custodians, and self-custodial arrangements in the staking process, asserting that participants usually maintain ownership and control of their assets. Reward mechanisms are linked to administrative actions within these networks rather than the entrepreneurial efforts of others, which aligns with the legal definition of an investment contract. Therefore, individuals and entities involved in these staking activities are not required to register with the SEC under the Securities Act.
Original Statement
Statement on Certain Protocol Staking Activities
Division of Corporation Finance
Introduction
As part of an effort to provide greater clarity on the application of the federal securities laws to crypto assets, the Division of Corporation Finance is providing its views on certain activities known as “staking” on networks that use proof-of-stake (PoS) as a consensus mechanism (“PoS Networks”). Specifically, this statement addresses the staking of crypto assets that are intrinsically linked to the programmatic functioning of a public, permissionless network, and are used to participate in and/or earned for participating in such network’s consensus mechanism or otherwise used to maintain and/or earned for maintaining the technological operation and security of such network. We refer in this statement to these crypto assets as “Covered Crypto Assets” and their staking on PoS Networks as “Protocol Staking.”
Protocol Staking
Networks rely upon cryptography and economic mechanism design 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, consisting of computer code, that programmatically enforces certain network rules, technical requirements, and rewards distributions. Each protocol incorporates a “consensus mechanism,” which is a method for enabling the distributed network of unrelated computers (known as “nodes”) that maintain the peer-to-peer network to agree on the “state” (or authoritative record of network address ownership balances, transactions, smart contract code, and other data) of the network.
Public, permissionless networks allow users to participate in the network’s operation, including the validation of new transactions to the network in accordance with the network’s consensus mechanism. PoS is a consensus mechanism used to prove that operators of nodes (“Node Operators”) participating in the network have contributed value to the network that, in some cases, can be forfeited if they act dishonestly.
In a PoS Network, a Node Operator must stake the network’s Covered Crypto Asset to be selected programmatically by the network’s underlying software protocol to validate new blocks of data to, and update the state of, the network. When selected, the Node Operator serves as a “Validator.” In exchange for providing validation services, Validators earn “rewards” of two types: (1) newly minted Covered Crypto Assets and (2) a percentage of the transaction fees paid in Covered Crypto Assets by parties who are seeking to add their transactions to the network.
While staked, Covered Crypto Assets are “locked-up” and cannot be transferred for a period of time under the terms of the applicable protocol. The Validator does not take possession or control of staked Covered Crypto Assets, which means that ownership and control do not change while they are staked.
Division’s View on Protocol Staking Activities
It is the Division’s view that “Protocol Staking Activities” do not involve the offer and sale of securities within the meaning of Section 2(a)(1) of the Securities Act of 1933 or Section 3(a)(10) of the Securities Exchange Act of 1934. Accordingly, participants in Protocol Staking Activities do not need to register with the Commission transactions under the Securities Act.
Types of Protocol Staking Activities
The Division’s view pertains to the following Protocol Staking activities:
- staking Covered Crypto Assets on a PoS Network;
- activities undertaken by third parties involved in the Protocol Staking process;
- providing Ancillary Services.
Discussion of Protocol Staking Activities
Because a Covered Crypto Asset does not constitute any financial instruments specifically enumerated in the definition of “security,” the analysis of certain transactions involving Covered Crypto Assets in the context of Protocol Staking is conducted under the “investment contract” test set forth in SEC v. W.J. Howey Co. The “Howey test” analyzes arrangements or instruments not listed in those statutory sections based on their economic realities.
Self (or Solo) Staking: A Node Operator’s Self (or Solo) Staking is not undertaken with a reasonable expectation of profits derived from entrepreneurial efforts of others. Rather, Node Operators contribute their own resources and stake their own assets, which enables them to qualify for rewards issued by the PoS Network. The expectation to receive rewards is derived solely from administrative operations.
Self-Custodial Staking Directly with a Third Party: Similarly, where an owner of a Covered Crypto Asset grants validation rights to a Node Operator, there is no expectation of profit derived from the efforts of others. The Node Operator’s service remains administrative in nature.
Custodial Arrangements: In a custodial arrangement, the Custodian does not provide entrepreneurial efforts to Covered Crypto Asset owners. The Custodian simply acts as an agent in connection with staking the deposited Covered Crypto Assets on behalf of the owner.
Ancillary Services
Service Providers may provide administrative or ministerial services such as:
- Slashing Coverage;
- Early Unbonding;
- Alternate Rewards Payment Schedules and Amounts;
- Aggregation of Covered Crypto Assets.
These services do not involve entrepreneurial efforts, and are thus considered ancillary to the Protocol Staking process.
For further information, please contact the Division’s Office of Chief Counsel.
This statement only addresses certain activities involving Covered Crypto Assets that do not have intrinsic economic properties or rights.
