Author: Division of Corporation Finance, U.S. Securities and Exchange Commission
Translation by: Wu Says Blockchain
Introduction
To further clarify the applicability of federal securities laws in the realm of crypto assets, the Division of Corporation Finance of the U.S. Securities and Exchange Commission (SEC) has expressed its views on so-called "staking" activities, particularly those conducted within networks that utilize Proof-of-Stake (PoS) as a consensus mechanism (hereinafter referred to as "PoS Networks").
This statement focuses on the following scenario: the staking involves crypto assets that are intrinsically related to the programmatic operation of public, permissionless blockchain networks. These assets are used to participate in the consensus mechanism of the network and thereby earn rewards, or to maintain the technical operation and security of the network, thus receiving incentives. In this statement, we refer to such crypto assets as "Covered Crypto Assets" and their staking activities in PoS Networks as "Protocol Staking."
Protocol Staking
Blockchain networks rely on cryptography and economic mechanisms to reduce dependence on centralized trusted intermediaries, thereby enabling the verification of network transactions and providing settlement assurances to users. The operation of each network is governed by an underlying software protocol (composed of computer code) that programmatically executes specific network rules, technical requirements, and reward distribution mechanisms. Each protocol embeds a "consensus mechanism," which is a method that allows distributed computer systems (referred to as "nodes") maintaining a peer-to-peer network to reach consensus on the "state" of the network. The network state refers to authoritative ledger records of address 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 based on the network's consensus mechanism.
Proof-of-Stake (PoS) is a consensus mechanism used to demonstrate that participating node operators have contributed value to the network; in certain cases, if their behavior is dishonest, that portion of value may be forfeited. In PoS Networks, node operators must stake the Covered Crypto Assets of the network to gain the authority to validate new block data and update the network's authoritative ledger records, as automatically selected by the underlying software protocol. Once selected, the node operator will serve as a "Validator." In return for providing validation services, Validators can earn two types of "rewards":
· Newly generated Covered Crypto Assets programmatically created and distributed by the network according to its underlying protocol;
· Transaction fees paid by users wishing to write their transactions into the network, a portion of which is paid to Validators in the form of Covered Crypto Assets.
In PoS Networks, node operators must commit and "stake" Covered Crypto Assets to be eligible to participate in validation and earn rewards. This process is typically implemented through smart contracts, which are automated programs that execute the required operations within the network. During the staking period, the Covered Crypto Assets will be "locked" and cannot be transferred for a specified period as dictated by the applicable protocol. It is important to note that Validators do not actually possess or control the staked Covered Crypto Assets, meaning that ownership and control of the assets remain unchanged during the staking period.
The underlying software protocol of each PoS Network contains rules regarding the operation and maintenance of the network, including methods for selecting Validators from node operators. Some protocols randomly select Validators, while others set specific criteria, such as selecting based on the amount of Covered Crypto Assets staked by the node operators. Additionally, various protocols may establish rules to prevent actions that could harm the security and integrity of the network, such as preventing the validation of invalid blocks or "double-signing." "Double-signing" refers to a Validator attempting to write the same transaction multiple times into the network, effectively resulting in multiple expenditures of the same crypto asset.
The rewards generated from Protocol Staking provide economic incentives for participants to use Covered Crypto Assets to secure the PoS Network and maintain its ongoing operation. An increase in the amount of staked Covered Crypto Assets helps enhance the security level of the PoS Network and reduces the potential risk of malicious parties controlling a majority share of the staked assets. If a malicious entity controls a majority of the staked Covered Crypto Assets, it will have the ability to manipulate the PoS Network, including influencing the transaction validation process and even altering the network's transaction ledger records. Holders of Covered Crypto Assets can earn rewards by serving as node operators and staking their own Covered Crypto Assets. When self-staking (also known as "independent staking"), holders retain ownership and control over their Covered Crypto Assets and their cryptographic private keys throughout the process.
Additionally, holders of Covered Crypto Assets can choose not to run their own nodes and participate in the PoS Network's validation process through a "self-custodial staking" method by directly collaborating with third parties. In this case, asset holders delegate their validation rights to third-party node operators. When using third-party node operators, holders of Covered Crypto Assets can receive a portion of the staking rewards, while the third party providing validation services will also receive a corresponding share of the rewards. In self-custodial staking directly with third parties, holders of Covered Crypto Assets still retain ownership and control over their Covered Crypto Assets and private keys.
Besides self-staking (or independent staking) and self-custodial staking directly through third parties, Protocol Staking also includes a third form known as "custodial staking." In this method, a third party (i.e., the "Custodian") holds the Covered Crypto Assets of the asset holders and performs staking operations on behalf of the asset holders. When asset holders deposit their Covered Crypto Assets with the Custodian, the Custodian keeps the deposited assets in a digital "wallet" controlled by it. The Custodian performs staking operations on behalf of the asset holders at a pre-agreed reward rate, which can be done using its own nodes or through selected third-party node operators. Throughout the staking process, the staked Covered Crypto Assets are always controlled by the Custodian, while the ownership of the Covered Crypto Assets remains with the asset holders.
Furthermore, the staked Covered Crypto Assets must meet the following conditions:
They must not be used by the Custodian for operations or other general business purposes;
They must not be lent, pledged, or re-staked for any reason;
They must be safeguarded in a manner that does not allow third parties to assert rights over them.
To this end, the Custodian must not use the staked Covered Crypto Assets for leverage, trading, speculation, or other autonomous activities.
The Division of Corporation Finance's View on Protocol Staking Activities
The Division of Corporation Finance believes that "Protocol Staking Activities" (as defined below) related to Protocol Staking do not constitute the issuance and sale of securities as defined in Section 2(a)(1) of the Securities Act of 1933 or Section 3(a)(10) of the Securities Exchange Act of 1934. Therefore, the Division believes that parties participating in Protocol Staking Activities are not required to register such Protocol Staking Activities with the SEC under the Securities Act, nor do they need to rely on the registration exemptions provided by the Securities Act.
Protocol Staking Activities Covered by This Statement
The views of the Division of Corporation Finance apply to the following activities and transactions related to Protocol Staking (broadly defined as "Protocol Staking Activities" and individually as "Protocol Staking Activities"):
· Staking Covered Crypto Assets on PoS Networks;
· Related activities conducted by third parties participating in the Protocol Staking process, including but not limited to the roles and actions of third-party node operators, Validators, Custodians, Delegates, and Nominators (collectively referred to as "Service Providers") in obtaining and distributing rewards;
· Providing ancillary services (as defined below).
This statement only applies to Protocol Staking Activities related to the following types of Protocol Staking forms:
· Self-Staking: Refers to node operators staking the Covered Crypto Assets they own and control using their own resources. The node operator can be an individual or multiple individuals jointly operating a node and staking their Covered Crypto Assets.
· Self-Custodial Staking Directly with a Third Party: Refers to a structure where the node operator obtains validation rights from the owners of Covered Crypto Assets according to the terms of the protocol. In this structure, rewards may be directly distributed by the PoS Network to the holders of Covered Crypto Assets or indirectly distributed through the node operator.
· Custodial Arrangements: Refers to situations where the Custodian performs staking operations on behalf of the owners of Covered Crypto Assets. For example, a crypto asset trading platform holds the Covered Crypto Assets deposited by clients on their behalf, and if the PoS Network allows staking in the client's name with the client's consent, the platform may stake on behalf of the client. The Custodian may stake using its own nodes or choose third-party node operators. In the latter case, the Custodian is only responsible for the decision-making regarding node selection during the staking process.
Discussion Related to Protocol Staking Activities
Sections 2(a)(1) of the Securities Act and 3(a)(10) of the Exchange Act define the term "security" by enumerating various financial instruments (such as "stocks," "notes," "bonds," etc.). Since Covered Crypto Assets do not fall within the categories of financial instruments explicitly listed in these provisions, we apply the "investment contract" standard established in the SEC v. W.J. Howey Co. case when analyzing certain Protocol Staking transactions involving Covered Crypto Assets. The "Howey Test" is used to examine arrangements or financial instruments not explicitly listed in the relevant legal provisions, with the core basis being the "economic reality" of the transaction or arrangement.
When assessing the economic reality of a transaction, the criteria are: whether there is an investment of money in a common enterprise, and whether that investment is based on a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others. Since the Howey case, federal courts have further elaborated on this standard, indicating that when the efforts of parties other than the investors are undeniably key efforts—those core managerial efforts that are decisive to the success or failure of the enterprise—the "efforts of others" requirement in the Howey Test is satisfied. Additionally, federal courts have clarified that administrative or ministerial activities do not constitute the managerial or entrepreneurial efforts required to meet the "efforts of others" standard in the Howey Test.
- Self-Staking:
Node operators engaging in self-staking (also known as independent staking) do not do so based on a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others. Instead, node operators invest their own resources and stake their Covered Crypto Assets to secure the PoS Network and facilitate its operation by validating new blocks, thereby qualifying for rewards issued by the PoS Network according to the provisions of the underlying protocol. To earn rewards, the actions of node operators must adhere to the protocol rules. By staking their own Covered Crypto Assets and participating in Protocol Staking, the activities of node operators are merely administrative or ministerial actions aimed at ensuring network operation and facilitating block validation. The expectation of rewards for node operators does not rely on any third party's managerial or entrepreneurial efforts for the success of the PoS Network; rather, this economic incentive entirely stems from the transactional nature of Protocol Staking. Therefore, such rewards are essentially compensation for the services provided by the PoS Network to node operators, rather than a profit distribution derived from the efforts of others.
- Custodial Arrangements:
In custodial arrangements, the Custodian (regardless of whether it is a node operator) does not provide entrepreneurial or managerial efforts to the Covered Crypto Asset holders it serves. This arrangement is similar to the aforementioned scenario where holders delegate their validation rights to third parties, but it also involves asset holders entrusting their deposited Covered Crypto Assets to a third party for safekeeping. In this arrangement, the Custodian does not decide whether to stake, when to stake, or how much Covered Crypto Assets to stake. The Custodian merely acts as an agent on behalf of the asset holders to execute staking operations on their deposited Covered Crypto Assets. Furthermore, the Custodian's actions regarding the custody of Covered Crypto Assets, as well as the selection of node operators in certain cases, are essentially administrative or ministerial operations and do not constitute the managerial or entrepreneurial efforts required by the "efforts of others" standard in the Howey Test. Moreover, although the Custodian may deduct fixed or proportionate fees from the rewards payable to the Covered Crypto Asset holders, it does not guarantee, set, or fix the specific amount of rewards that the holders are entitled to.
- Ancillary Services:
Service Providers may offer the following services (collectively referred to as "Ancillary Services") to assist Covered Crypto Asset holders in participating in Protocol Staking. The aforementioned Ancillary Services are essentially administrative or ministerial operations that do not involve entrepreneurial or managerial efforts. These services constitute a component of a general activity—Protocol Staking—which itself does not possess entrepreneurial or managerial characteristics.
· Slashing Coverage: Refers to the compensation or reimbursement provided by the Service Provider to staking clients for losses incurred due to node operator errors when slashing penalties occur. This protective mechanism against node errors is similar to the guarantees provided by service providers in traditional commercial transactions.
· Early Unbonding: Refers to the Service Provider allowing the early return of Covered Crypto Assets to asset holders before the end of the unbonding period set by the protocol. This service is essentially a convenience that shortens the actual unbonding period for Covered Crypto Asset holders, reducing the time cost of having their assets frozen.
· Alternate Rewards Payment Schedules and Amounts: Refers to situations where the frequency or amount of rewards issued by the Service Provider differs from what is set by the protocol. For example, rewards may be paid out early or at a lower frequency than stipulated by the protocol, provided that the reward amounts are not fixed, not guaranteed, and do not exceed the total rewards set by the protocol. This service is similar to "Early Unbonding," providing administrative convenience to Covered Crypto Asset holders during the reward distribution and issuance process.
· Aggregation of Covered Crypto Assets: Refers to the Service Provider offering a function to aggregate the assets of Covered Crypto Asset holders to meet the staking threshold set by the protocol. This service is part of the validation process, which inherently possesses administrative or ministerial characteristics. Absent other factors, actions taken solely to achieve staking purposes through asset aggregation are essentially administrative or ministerial operations.
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