SEC’s Guidance on Liquid Staking: A Regulatory Win for Crypto

The crypto industry is hailing the US Securities and Exchange Commission’s (SEC) latest guidance on liquid staking as a rare regulatory win. Stakeholders consider it a major step forward for decentralized finance (DeFi) and the institutional adoption of digital assets.

Released on Tuesday, the SEC staff issued guidance stating that under certain conditions, liquid staking activities and the receipt tokens they generate do not constitute securities offerings.

> “Institutions can now confidently integrate LSTs into their products which is sure to drive new revenue streams, expand customer bases, and enable the creation of secondary markets for staked assets,” said Mara Schmiedt, CEO of blockchain developer company Alluvial, to Cointelegraph.
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> This decision sets the stage for a wave of new products and services that will accelerate mainstream participation in digital asset markets.

Crypto companies have been seeking regulatory guidance from the SEC on liquid tokens. Recently, a group of Solana stakeholders wrote a letter to the SEC advocating for their inclusion in exchange-traded funds.

Liquid staking involves depositing crypto assets into a third-party provider and receiving staking receipt tokens in return. These tokens can be traded or used in DeFi without waiting for unstaking funds.

> “Today’s guidance on liquid staking shows the same nuanced understanding of LST technology that the Crypto Task Force exhibited when we met with them on this topic back in February,” remarked Jito Labs CEO Lucas Bruder to Cointelegraph.

Despite apparent support from the crypto community, the SEC’s liquid staking guidance has faced criticism from within the agency. Commissioner Caroline Crenshaw issued a sharp dissent, warning that the statement relies on shaky assumptions and provides little regulatory certainty.

Liquid Staking Activities Under the Howey Test

Katherine Dowling, general counsel and chief compliance officer at Bitwise, stated, “the SEC is making clear that CERTAIN liquid staking activities do not involve securities and therefore would not be required to register.”

Whether an activity qualifies likely relies on a key component of the Howey test, the legal standard used to determine if an asset or transaction constitutes a securities offering.

For liquid staking providers, performing only “administrative or ministerial” functions, such as issuing tokens that represent ownership of staked assets, may not trigger securities registration requirements according to the agency. This includes those issuing “staking receipt tokens,” which refer to the crypto assets depositors receive for liquid staking their assets.

> “In evaluating the economic realities of a transaction, the test is whether there is an investment of money in a common enterprise premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others,” the SEC writes.

That wave of institutional adoption may aid retail traders and affect the offering of DeFi services.
> “Retail platforms will be able to attract more users by providing seamless access to staking rewards without lock-up constraints, while the broader ecosystem benefits from increased liquidity and innovation,” Schmiedt added.