PoS stake lifting regulatory shackles, the US SEC declares that these three types of activities do not constitute securities transactions.

Author: U.S. SEC

Compiled by: Felix, PANews

The U.S. Securities and Exchange Commission (SEC) issued a policy statement today regarding staking activities on PoS networks, clearly stating that three types of staking activities do not constitute securities issuance, including self-staking, third-party non-custodial staking, and compliant custodial staking. The statement aims to provide regulatory clarity for stakeholders participating in staking, supporting compliance in participating in network consensus mechanisms.

The following is the full statement:

Introduction

To clarify the applicability of federal securities laws to digital assets, the company's finance department has expressed its opinion on certain activities referred to as "staking" in networks that use proof of stake ("PoS") as the consensus mechanism ("PoS networks"). Specifically, this statement addresses the staking of digital assets that are intrinsically linked to the programmatic operation of public, permissionless networks, which are obtained through participation in and/or due to participation in the consensus mechanism of such networks or obtained for maintaining and/or due to maintaining the technical operation and security of such networks. In this statement, we refer to these digital assets as "Covered Crypto Assets," and staking on PoS networks is referred to as "protocol staking."

Protocol Staking

The network relies on cryptography and economic mechanisms to reduce dependence on designated trusted intermediaries for verifying network transactions and providing settlement guarantees to users. The operation of each network is managed by an underlying software protocol, composed of computer code that enforces certain network rules, technical requirements, and reward distributions through programming. Each protocol includes a "consensus mechanism," which is a method that enables unrelated computers (referred to as "nodes") maintaining a peer-to-peer network to form a distributed network and reach agreement 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 node operators participating in the network ("Node Operators") have made contributions to the network, which may be forfeited in certain circumstances if they act dishonestly. In a PoS network, node operators must stake the network's compliant crypto assets before they can be programmatically selected by the network's underlying software protocol to validate new blocks of data and update the network state. Once selected, the node operator takes on the role of "validator". In return for providing verification services, validators receive two types of "rewards":(1) newly minted (or created) compliant cryptoassets that are programmatically distributed to validators in accordance with the underlying software protocol of the network; and (2) a percentage of transaction fees paid by parties seeking to add transactions to the network, paid in the form of compliant cryptoassets.

In a PoS network, node operators must invest or "stake" compliant cryptocurrencies to be eligible for validation and rewards, generally implemented through smart contracts. A smart contract is an automatically executed program that can perform the actions required for network transactions automatically. During the staking period, the compliant cryptocurrencies are "locked" and cannot be transferred within the timeframe specified by the applicable protocol. Validators do not possess or control the staked cryptocurrencies, meaning that ownership and control of the cryptocurrencies do not change during the staking period.

The underlying software protocols of each PoS network include the rules for operating and maintaining that PoS network, including the methods for selecting validators among node operators. Some protocols specify random selection of validators, while others use specific criteria to select validators, such as the amount of cryptocurrency assets staked by the node operator. The protocols may also include rules aimed at curbing 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).

The staking rewards from the agreement provide economic incentives for participants to use their compliant crypto assets to secure the PoS network and ensure its continued operation. An increase in the amount of compliant crypto assets staked can enhance the security of the PoS network and reduce the risk of an attacker controlling a majority of the compliant crypto assets. If mismanaged, attackers could manipulate the PoS network by influencing transaction validation or tampering with transaction records.

Users holding compliant crypto assets can earn rewards by serving as node operators and staking their own crypto assets. In the case of self-staking (or solo staking), users always own and control their crypto assets and private keys.

In addition, users holding compliant crypto assets can participate in the PoS network's validation process through third-party non-custodial staking without having to run their own nodes. Users holding crypto assets delegate their validation rights to third-party node operators. When using third-party node operators, users receive a portion of the rewards, and the service provider also receives a share of the rewards for their services in validating transactions. When directly participating in non-custodial staking through third parties, users holding crypto assets retain ownership and control of their crypto assets as well as their private keys.

In addition to self-staking (or alone) and non-custodial staking directly through a third party, the third form of protocol staking is so-called "escrow" staking, in which a third party ("custodian") takes custody of the owner's crypto assets and facilitates the staking of such crypto assets on behalf of the owner. When the owner deposits the crypto assets with the custodian, the custodian holds the deposited crypto assets in a digital "wallet" controlled by the custodian. The custodian stakes crypto assets on behalf of the owner in order to receive an agreed share of the reward, either in the form of a node operated by the custodian or a third-party node operator chosen by the custodian. Throughout the staking process, the deposited crypto assets remain under the control of the custodian, while the owners of the crypto assets retain ownership of their crypto assets. In addition, deposited crypto assets: (1) may not be used for the custodian's operational or general business purposes; (2) It shall not be lent, pledged or re-pledged for any reason. and (3) held in a manner that would not expose it to third-party claims. To this end, the custodian is not allowed to use the deposited crypto assets to engage in leverage, trading, speculation, and other activities.

The department's views on the agreement pledge activities ###

The department believes that the "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 (referred to as the "Securities Act") or Section 3(a)(10) of the Securities Exchange Act of 1934 (referred to as the "Exchange Act"). Therefore, the department holds 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.

This declaration covers the agreement staking activities.

The department's perspective applies to the following protocol staking activities and transactions:

• Stake compliant digital assets on the PoS network;
• 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 provide auxiliary services (as defined below).

This statement only discusses agreement staking activities related to the following types:

• Self-staking (or solo staking) refers to node operators using their own resources to stake the cryptocurrency assets they own and control. Node operators can be one person or a group of people jointly operating a node and staking their cryptocurrency assets.
• Non-custodial staking through third parties refers to the verification rights obtained by node operators based on the terms of the agreement with the owners of the crypto assets. Reward payments can flow directly from the PoS network to the crypto asset owners or can flow to the owners indirectly through the node operators.
• Custodial staking refers to the process where a custodian stakes on behalf of the owner of the crypto assets. For example, a cryptocurrency trading platform can stake such crypto assets on a PoS network that allows clients to delegate and has the client's consent. The custodian can stake using their own nodes or choose third-party node operators.

Discussion on the protocol staking activity

Section 2(a)(1) of the Securities Act and Section of the Exchange Act 3(a)(10) defines the term "security" by enumerating various financial instruments, including "stocks", "notes" and "bonds". Because cryptoassets are not among the financial instruments explicitly enumerated in the above definition, we analyze certain cryptoasset transactions involving protocol pledges based on the "investment contract" test set forth in SEC v. W.J. Howey & Co. The "Howey Test" may analyse arrangements or instruments not listed in the above statutory provisions on the basis of its "economic realities".

When assessing the economic reality of a transaction, the key is whether there is a capital contribution to a common enterprise, and that such contribution 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 the Howey case is met when "the efforts made by persons other than the investors are undeniably significant efforts, which are key managerial efforts that affect the success or failure of the enterprise." The federal courts have also noted that administrative and operational activities do not fall under the managerial or entrepreneurial efforts that satisfy the "efforts of others" requirement in the Howey case.

self-staking (or solo staking)

Node operators' self-staking (or alone) staking is not based on the expectation of a reasonable profit from someone else's entrepreneurial or managerial efforts. Instead, node operators secure the PoS network by contributing their own resources and staking their crypto assets, and facilitate the operation of the network by validating new blocks, which makes them eligible for rewards based on the PoS network's underlying software protocol. To be rewarded, the activity of the node operator must comply with the rules of the protocol. By staking their crypto assets and participating in protocol staking, node operators are simply engaging in an administrative or transactional activity to secure and facilitate the operation of the PoS network. The expectation that node operators will be rewarded is not derived from any third-party management or operational efforts on which the success of their PoS network depends. Conversely, the economic incentives expected by the protocol derive solely from the administrative or transactional act of protocol staking. As such, rewards are paid to node operators in exchange for services they provide to the network, rather than profits from the entrepreneurial or managerial efforts of others.

non-custodial staking through a third party

Similarly, when the owner of a crypto asset grants its validation rights to a node operator, the owner of that crypto asset has no expectations of the benefits that come from the entrepreneurial or managerial efforts of others. The services provided by node operators to cryptoasset owners are administrative or transactional in nature, rather than entrepreneurial or administrative, for the same reasons as discussed above about self-staking (or alone). Whether node operators stake their own crypto assets or receive validation rights from other crypto asset owners does not change the nature of protocol staking in Howey's analysis. In either case, protocol staking is an administrative or transactional activity, and the expected economic incentives come only from such activity, not from the success of the PoS network or other third parties. In addition, the Node Operator does not guarantee or otherwise set or fix the amount of rewards payable to the Crypto Asset Owner, but the Node Operator may deduct its fees (whether a fixed fee or a percentage of that amount) from that amount.

compliant custody staking

In compliant escrow staking, the custodian (whether node operator or not) does not provide entrepreneurial or managerial efforts to the owners of crypto assets receiving their services. These arrangements are similar to the situation described above, where the owner of a cryptoasset grants its verification rights to a third party, but also involves the owner granting custody of the cryptoassets they deposit into a third party. The custodian does not decide when, if, and how much of the owner's crypto assets are used for staking. The custodian simply acts as a proxy and stakes the deposited crypto assets on behalf of the owner.

In addition, the custodian's actions of holding the deposited crypto assets and, in certain cases, selecting node operators are insufficient to meet the "efforts of others" requirement in the Howey test, as these activities are essentially administrative or transactional and do not involve management or entrepreneurial efforts. Furthermore, the custodian does not guarantee or otherwise establish or fix the amount of rewards payable to the crypto asset owners, but the custodian may deduct its fees from that amount (whether a fixed fee or a certain percentage of that amount).

auxiliary services

Service Providers may provide the services described below ("Ancillary Services") to Crypto Asset Owners in conjunction with Protocol Staking. Each of these ancillary services is administrative or transactional in nature only and does not involve entrepreneurial or managerial efforts. They are part of the overall activity of protocol staking, which is not entrepreneurial or managerial in and of itself.

• Slashing Coverage: Service providers compensate or reimburse staked 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 their owners before the unlock period specified in the agreement ends. This service simply shortens the effective unlock period of the agreement, providing convenience for crypto asset owners and alleviating the burden of the unlock period.
• Alternative reward payment schedule and amounts: Service providers deliver rewards at a different pace and amount than the schedule set by the agreement, or the reward payment time is earlier than stipulated by the agreement or the payment frequency is lower than stipulated by the agreement, provided that the reward amount is not fixed, guaranteed, or higher than the amount granted by the agreement. Similar to early unlocking, this is merely an optional convenience provided for crypto asset owners in terms of reward distribution and delivery management.
• For the aggregation of crypto assets, the service provider provides crypto asset owners with the ability to aggregate their crypto assets to meet the protocol staking minimum requirements. This service is part of the validation process and is inherently administrative or transactional in nature. Aggregating the owner's crypto assets to help enable staking is likewise administrative or transactional in nature.

Whether provided individually or as a group of services, any or all of such services provided by the service provider do not have a management or corporate nature.

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