^{Translated by Lani Oh (elcreto)}

*This article was co-authored by Xangle and DeSpread to promote understanding of the controversy surrounding the security status of staking and related assets.

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Content

Staking: In the Crosshairs

Gary Gensler’s Snipe at Staking

SEC and Staking: How Far Will They Go? 

Part 1. Determining the Security Status of Staking

Securities Laws, the SEC, and the Howey Test

Why Staking and Staked Assets May Constitute Investment Contracts

Why It May Not Constitute an Investment Contract Nonetheless

Part 2. Security Status of Staking Services

Types of Staking Service & Security Classification

Other Factors: Tokens, Protocols, Decentralization, Transparency, and Non-Custodial Nature

Closing Thoughts: Barrage of Regulations Clouding the Outlook for Crypto

An In-depth Look at the Regulatory Landscape of Staking

Domestic Implications; Uncertainty Nearing Its End

 

 

Staking: In the Crosshairs

 

Gary Gensler’s Snipe at Staking.

"The investing public is investing anticipating a return, anticipating something on these tokens, whether they’re proof-of-stake tokens, where they’re also looking to get returns on those proof-of-stake tokens and getting 2%, 4%, 18% returns.”

- Gary Gensler, speaking to the press on March 15, 2023

On March 15, Gary Gensler, chair of the U.S. Securities and Exchange Commission (SEC), voiced his opinion during a meeting with reporters that all tokens with Proof-of-Stake and staking consensus mechanisms are securities and should therefore be subject to SEC oversight. It is significant that the SEC, which is already in the process of expanding its purview over a number of projects, is now recognizing that security status may apply even to the protocol level of staking.

 

Source: Staking-as-a-Service | Office Hours with Gary Gensler | U.S. SEC Youtube Channel

Especially since the Proof of Stake consensus algorithm is becoming the de facto standard for blockchain consensus algorithms after Ethereum’s Merge, a determination that staking activities are securities will beget various regulatory obligations on many blockchain projects. Once again, after the ICO regulations, regulatory uncertainty has loomed over the cryptocurrency market.

SEC and Staking: How Far Will They Go?

To clear up this uncertainty, Xangle and DeSpread teamed up for this joint research to understand the security status of staking within the validator-network relationship, which forms the essence of the asset's existence, and to speculate on how the SEC's upcoming regulatory actions would proceed. In this report, we'll take a look at 1) securities laws, the SEC, and the Howey Test, 2) pros and cons surrounding security classification of staking, and 3) potential implications of security status on staking-as-a-service, such as liquid staking.

 

 

Part 1. Determining the Security Status of Staking

Before we dive right in, let's briefly go over the background and purposes of securities laws, the SEC, and the Howey Test, which constitute the matrix of the security classification.

Securities Laws, the SEC, and the Howey Test

Background of the SEC

The SEC is a U.S. financial regulatory agency created to protect investors under the Securities Exchange Act. Back in the day, before the SEC came into the picture, investors were left to the mercy of Blue Sky Laws *, leaving them wide open to all sorts of fraudulent and manipulative tactics. In October 1929, a market bubble swollen by rampant leverage and fraud burst on "Black Thursday," wiping out fortunes from investors and plunging the U.S. economy into the depths of the Great Depression.

As part of the New Deal, President Franklin D. Roosevelt created the SEC in 1934 to restore investor confidence. Charged with enforcing federal securi