Crypto staking is a critical activity that underpins the operation and security of many blockchain protocols, such as Ethereum and Solana. Despite the maturation of the digital asset market, regulatory clarity surrounding staking remains ambiguous.
Recent publications from the Swiss Financial Market Supervisory Authority (FINMA) and the US Securities and Exchange Commission (SEC) have provided valuable frameworks for analyzing staking activities, offering insight into the regulatory landscape.
In this article, Nicola Massella, Partner & Head of Legal at STORM Partners, conducts a comparative analysis of these two regulatory positions to shed light on the evolving regulatory environment.
Swiss Regulatory Framework: Prioritizing Prudential Oversight and Risk Management
FINMA’s Guidance 08/2023 addresses staking through the lens of prudential regulation and bankruptcy law following the enactment of Switzerland’s DLT Act. The central question revolves around the segregation of staked cryptoassets in the event of a custodian’s bankruptcy.
Staking features like lock-up periods and slashing introduce legal ambiguity, prompting FINMA to establish an interim practice for supervised entities. This practice outlines strict conditions for offering staking services without being subject to capital requirements.
The key conditions include specific customer instructions, unambiguous asset allocation, transparent risk disclosures, operational risk mitigation measures, and the preparation of a Digital Assets Resolution Package for crisis scenarios.
FINMA’s framework provides a roadmap for Swiss-regulated entities to engage in staking activities responsibly.
US Regulatory Perspective: Analyzing Staking Activities Under Federal Securities Law
The SEC’s Division of Corporation Finance, in its May 2024 statement, evaluates staking activities through the lens of US federal securities law. The analysis centers on whether staking constitutes an “investment contract” under the Howey test and thus qualifies as a security.
The Division’s statement clarifies that Protocol Staking Activities do not meet the “efforts of others” prong of the Howey test, as node operators’ functions are deemed administrative rather than entrepreneurial. Rewards are viewed as compensation for validation services, not profits from third-party management.
This perspective applies to various staking forms, including self-staking, self-custodial staking with a third party, and custodial arrangements. Ancillary services like slashing coverage do not change the administrative nature of the activity.
Key Implications for Market Participants
The guidance from FINMA and the SEC staff marks a significant milestone in regulatory clarity for the digital asset industry. While their approaches differ, both frameworks offer practical pathways for staking activities.
Market participants in Switzerland must focus on operational risk management and transparent disclosures to comply with FINMA’s requirements. In the US, structuring staking programs as non-discretionary, administrative services is crucial to navigating securities law implications in Protocol Staking scenarios.