Category: DJF

Source: Securities and Exchange Commission

Introduction

As part of an effort to provide greater clarity on the application of the federal securities laws to crypto assets,[1] the Division of Corporation Finance is providing its views[2] on certain activities known as “staking” on networks that use proof-of-stake (“PoS”) as a consensus mechanism (“PoS Networks”). Specifically, this statement addresses the staking of crypto assets that are intrinsically linked to the programmatic functioning of a public, permissionless network, and are used to participate in and/or earned for participating in such network’s consensus mechanism or otherwise used to maintain and/or earned for maintaining the technological operation and security of such network. We refer in this statement to these crypto assets as “Covered Crypto Assets”[3] and their staking on PoS Networks as “Protocol Staking.”

Protocol Staking

Networks rely upon cryptography and economic mechanism design to reduce reliance on designated trusted intermediaries to verify network transactions and provide settlement assurances to users. The operation of each network is governed by an underlying software protocol, consisting of computer code, that programmatically enforces certain network rules, technical requirements, and rewards distributions. Each protocol incorporates a “consensus mechanism,” which is a method for enabling the distributed network of unrelated computers (known as “nodes”) that maintain the peer-to-peer network to agree on the “state” (or authoritative record of network address ownership balances, transactions, smart contract code, and other data) of the network. Public, permissionless networks allow users to participate in the network’s operation, including the validation of new transactions to the network in accordance with the network’s consensus mechanism.

PoS is a consensus mechanism used to prove that operators of nodes (“Node Operators”) participating in the network have contributed value to the network that, in some cases, can be forfeited if they act dishonestly.[4] In a PoS Network, a Node Operator must stake the network’s Covered Crypto Asset to be selected programmatically by the network’s underlying software protocol to validate new blocks of data to, and update the state of, the network. When selected, the Node Operator serves as a “Validator.” In exchange for providing validation services, Validators earn “rewards” of two types: (1) newly minted (or created) Covered Crypto Assets that are programmatically distributed to the Validator by the network in accordance with its underlying software protocol; and (2) a percentage of the transaction fees, paid in Covered Crypto Assets, by parties who are seeking to add their transactions to the network.[5]

In PoS Networks, Node Operators must commit or “stake” Covered Crypto Assets to be eligible to validate and earn rewards, typically effected using a smart contract, which is a self-executing program that automates the actions required in a network transaction. While staked, Covered Crypto Assets are “locked-up” and cannot be transferred for a period of time under the terms of the applicable protocol.[6] The Validator does not take possession or control of staked Covered Crypto Assets, which means that ownership and control of Covered Crypto Assets do not change while they are staked.

Each PoS Network’s underlying software protocol contains the rules for operating and maintaining the PoS Network, including the method of selecting Validators among Node Operators. Some protocols provide for random selection of Validators while others employ specific criteria for selecting Validators, such as the number of Covered Crypto Assets staked by the Node Operators. Protocols also may contain rules intended to deter activities that are detrimental to the network’s security and integrity, such as validating invalid blocks or double signing (which occurs when a Validator attempts to add the same transaction to the network multiple times, effectively spending the same crypto assets more than once).[7]

Rewards from Protocol Staking provide an economic incentive for participants to use their Covered Crypto Assets to secure the PoS Network and ensure its continued operation. An increase in the amount of staked Covered Crypto Assets can increase the security of PoS Networks and mitigate the risk that a hostile party is able to gain control of a majority of the total staked Covered Crypto Assets, which would allow such party to manipulate the PoS Network by influencing the validation of transactions and potentially altering the network’s transaction history.

Covered Crypto Asset owners can earn rewards by serving as a Node Operator and staking their own Covered Crypto Assets. When self (or solo) staking, the owner maintains ownership and control of its Covered Crypto Assets and cryptographic private “keys” at all times.

Alternatively, Covered Crypto Asset owners can participate in the PoS Network validation process without running their own nodes by using self-custodial staking directly with a third party. Covered Crypto Asset owners grant their validation rights to a third-party Node Operator.[8] When using a third-party Node Operator, the Covered Crypto Asset owner receives a portion of the rewards, with the provider also earning a portion of the rewards for its services in validating transactions. When self-custodial staking directly with a third party, the Covered Crypto Asset owner retains ownership and control of its Covered Crypto Assets and its private keys.

In addition to self (or solo) staking and self-custodial staking directly with a third party, a third form of Protocol Staking is so-called “custodial” staking, in which a third party (a “Custodian”) takes custody of the owners’ Covered Crypto Assets and facilitates staking of such Covered Crypto Assets on behalf of the owner. When owners deposit their Covered Crypto Assets with a Custodian, the Custodian holds the deposited Covered Crypto Assets in a digital “wallet” that the Custodian controls. The Custodian stakes the Covered Crypto Assets on the owner’s behalf for an agreed-upon portion of any rewards, either using a node the Custodian operates or through a third-party Node Operator the Custodian selects. At all times during the staking process, the deposited Covered Crypto Assets remain in the control of the Custodian and the Covered Crypto Asset owner is intended to retain ownership of the Covered Crypto Assets held by the Custodian.[9] Further, the deposited Covered Crypto Assets are: (1) not used by the Custodian for operational or general business purposes; (2) not lent, pledged, or rehypothecated for any reason; and (3) held in a manner designed not to subject them to claims by third parties. To this end, the Custodian does not use the deposited Covered Crypto Assets to engage in leverage, trading, speculation, or discretionary activities.

Division’s View on Protocol Staking Activities

It is the Division’s view that “Protocol Staking Activities” (as defined below) in connection with Protocol Staking do not involve the offer and sale of securities within the meaning of Section 2(a)(1) of the Securities Act of 1933 (the “Securities Act”) or Section 3(a)(10) of the Securities Exchange Act of 1934 (the “Exchange Act”).[10] Accordingly, it is the Division’s view that participants in Protocol Staking Activities do not need to register with the Commission transactions under the Securities Act, or fall within one of the Securities Act’s exemptions from registration in connection with these Protocol Staking Activities.

Protocol Staking Activities Covered by this Statement

The Division’s view pertains to the following Protocol Staking activities and transactions (“Protocol Staking Activities” and each a “Protocol Staking Activity”):

• staking Covered Crypto Assets on a PoS Network;
• the activities undertaken by third parties involved in the Protocol Staking process ‒ including, but not limited to, third-party Node Operators, Validators, Custodians, Delegates and Nominators (“Service Providers”) ‒ including their roles in connection with the earning and distribution of rewards; and
• providing Ancillary Services (as defined below).

Only Protocol Staking Activities undertaken in connection with the following types of Protocol Staking are addressed in this statement.

• Self (or Solo) Staking, which involves a Node Operator staking Covered Crypto Assets it owns and controls using its own resources. The Node Operator may include one or more persons acting together to operate a node and stake their Covered Crypto Assets.
• Self-Custodial Staking Directly with a Third Party, which involves a Node Operator, under the terms of the protocol, being granted the validation rights of owner(s) of Covered Crypto Assets. Reward payments may flow from the PoS Network directly to the Covered Crypto Asset owners or indirectly to them through the Node Operator.
• Custodial Arrangements, which involve a Custodian staking on behalf of the owners of the Covered Crypto Assets that the Custodian holds on their behalf. For example, a crypto asset trading platform holding deposited Covered Crypto Assets for its customers may stake such Covered Crypto Assets on behalf of such customers on a PoS Network that permits delegation on behalf of and with the consent of customers. The Custodian will stake the deposited Covered Crypto Assets using its own node or select a third-party Node Operator. In the latter case, this selection is the Custodian’s only decision in the staking process.

Discussion of Protocol Staking Activities

Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act each defines the term “security” by providing a list of various financial instruments, including “stock,” “note,” and “bond.” Because a Covered Crypto Asset does not constitute any of the financial instruments that are specifically enumerated in the definition of “security,” we conduct our analysis of certain transactions involving Covered Crypto Assets in the context of Protocol Staking under the “investment contract” test set forth in SEC v. W.J. Howey Co.[11] The “Howey test” is used to analyze arrangements or instruments not listed in those statutory sections based on their “economic realities.”[12]

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.[13] Federal courts since Howey have explained that Howey’s “efforts of others” requirement is satisfied when “the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.”[14] Federal courts also have stated that administrative and ministerial activities are not managerial or entrepreneurial efforts that satisfy Howey’s efforts of others prong.[15]

Self (or Solo) Staking

A Node Operator’s Self (or Solo) Staking is not undertaken with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. Rather, Node Operators contribute their own resources and stake their own Covered Crypto Assets, thereby securing the PoS Network and facilitating the network’s operation through the validation of new blocks, which enables them to qualify for rewards issued by the PoS Network in accordance with its underlying software protocol. To earn rewards, the Node Operator’s activities must comply with the rules of the protocol. By staking its own Covered Crypto Assets and engaging in Protocol Staking, the Node Operator is merely engaging in an administrative or ministerial activity to secure the PoS Network and facilitate its operation. A Node Operator’s expectation to receive rewards is not derived from any third party’s managerial or entrepreneurial efforts upon which the PoS Network’s success depends. Instead, the expected financial incentive from the protocol is derived solely from the administrative or ministerial act of Protocol Staking. As such, rewards are payments to the Node Operator in exchange for the services it provides to the network rather than profits derived from the entrepreneurial or managerial efforts of others.

Self-Custodial Staking Directly with a Third Party

Likewise, where an owner of a Covered Crypto Asset grants its validation rights to a Node Operator, the Covered Crypto Asset owner has no expectation of profit derived from the entrepreneurial or managerial efforts of others. The Node Operator’s service to the Covered Crypto Asset owner is administrative or ministerial in nature, not entrepreneurial or managerial for the reasons discussed above with respect to Self (or Solo) Staking. Whether a Node Operator stakes its own Covered Crypto Assets or is granted validation rights from other Covered Crypto Asset owners does not alter the nature of Protocol Staking for purposes of the Howey analysis. In either case, Protocol Staking remains an administrative or ministerial activity, and the expected financial incentive is derived solely from such activity and not the success of the PoS Network or some other third party. Further, the Node Operator does not guarantee or otherwise set or fix the amount of the rewards owed to Covered Crypto Asset owners, although the Node Operator may subtract from such amount its fees (whether fixed or a percentage of such amount).

Custodial Arrangements

In a custodial arrangement, the Custodian (whether a Node Operator or not) does not provide entrepreneurial or managerial efforts to Covered Crypto Asset owners for whom it provides this service. These arrangements are similar to those discussed above where a Covered Crypto Asset owner grants its validation rights to a third party but they also involve the owner granting custody of its deposited Covered Crypto Assets. The Custodian does not decide whether, when, or how much of an owner’s Covered Crypto Assets to stake. The Custodian simply is acting as an agent in connection with staking the deposited Covered Crypto Assets on behalf of the owner.[16] In addition, the Custodian’s taking custody of the deposited Covered Crypto Assets and in some cases selecting a Node Operator is not sufficient to satisfy Howey’s “efforts of others” requirement because these activities are administrative or ministerial in nature and do not involve managerial or entrepreneurial efforts. Further, the Custodian does not guarantee or otherwise set or fix the amount of the rewards owed to Covered Crypto Asset owners, although the Custodian may subtract from such amount its fees (whether fixed or a percentage of such amount).

Ancillary Services

Service Providers may provide the services described below (“Ancillary Services”) to Covered Crypto Asset owners in connection with Protocol Staking. Each of these Ancillary Services is merely administrative or ministerial in nature and does not involve entrepreneurial or managerial efforts. They are facets of a general activity ‒ Protocol Staking ‒ that itself is not entrepreneurial or managerial in nature.

• Slashing Coverage, where the Service Provider reimburses or indemnifies a staking customer against loss resulting from slashing. This protection against a Node Operator’s errors is similar to that offered by service providers in many types of traditional commercial transactions.
• Early Unbonding, where a Service Provider allows Covered Crypto Assets to be returned to an owner before the end of the protocol’s unbonding period.[17] This service merely shortens the protocol’s effective unbonding period as a convenience to the Covered Crypto Asset owner by reducing the burden of the unbonding period.
• Alternate Rewards Payment Schedules and Amounts, where the Service Provider delivers earned rewards at a cadence and in an amount that differs from the protocol’s set schedule and/or where the rewards are paid earlier or less frequently than the protocol awards them, provided the reward amounts are not fixed, guaranteed, or greater than those awarded by the protocol. Similar to early unbonding, this is merely an optional convenience afforded to Covered Crypto Asset owners in connection with the administration of rewards allocation and delivery.
• Aggregation of Covered Crypto Assets, where the Service Provider offers the ability for Covered Crypto Asset owners to aggregate their Covered Crypto Assets to meet the protocol’s staking minimums. This service is part of the validation process, which itself is administrative or ministerial in nature. Without more, aggregating the Covered Crypto Assets of owners to help enable staking is similarly administrative or ministerial in nature.

Whether offered separately or as a group of services, the Service Provider does not act in a managerial or entrepreneurial way if it provides any or all of these services.

For further information, please contact the Division’s Office of Chief Counsel by submitting a web-based request form at https://www.sec.gov/forms/corp_fin_interpretive.

[1]  For purposes of this statement, a “crypto asset” is an asset that is generated, issued, and/or transferred using a blockchain or similar distributed ledger technology network (“crypto network”), including, but not limited to, assets known as “tokens,” “digital assets,” “virtual currencies,” and “coins,” and that relies on cryptographic protocols. In addition, for purposes of this statement, a “network” refers to a crypto network.

[2]  This statement represents the views of the staff of the Division of Corporation Finance (the “Division”). It is not a rule, regulation, guidance, or statement of the U.S. Securities and Exchange Commission (the “Commission”), and the Commission has neither approved nor disapproved its content. This statement, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.

[3]  This statement only addresses certain activities involving Covered Crypto Assets that do not have intrinsic economic properties or rights, such as generating a passive yield or conveying rights to future income, profits, or assets of a business enterprise.

[4]  This statement addresses Protocol Staking generally rather than all of its variations. Further, this statement does not address all forms of “staking,” such as so-called “liquid staking,” “restaking” or “liquid restaking.” The specific staking activities covered by this statement are discussed below in “Protocol Staking Activities Covered by this Statement.”

[5]  While the protocol establishes rules on rewards, Node Operators generally are free to share rewards or impose fees for their services in ways that differ from those of the protocol. Some protocols permit a Node Operator to propose and receive a reward that differs from the protocol’s standard reward.

[6]  The minimum staking or lock-up period varies among PoS protocols.

[7]  A Node Operator or Validator may have its staked Covered Crypto Assets forfeited or “slashed” if it engages in such detrimental activities or fails to adhere to the PoS Network’s technical requirements.

[8]  On certain PoS Networks, Covered Crypto Asset owners can stake their Covered Crypto Assets and receive validation rights that they can grant to a third party, thereby allowing the third party to use the staked Covered Crypto Assets to verify transactions on the PoS Network on behalf of the owners. For example, some PoS Networks may facilitate this by allowing a Covered Crypto Asset owner to “delegate” its validation rights to a Node Operator. In this case, the Node Operator acts as a so-called “Delegate” in the staking process. Other PoS Networks may use so-called “Nominators” to whom a Covered Crypto Asset owner may grant its validation rights to act on the Covered Crypto Asset owner’s behalf in selecting Validators.

[9]  The Custodian typically enters into an agreement with the owner, such as a user agreement or terms of service, providing that the owner retains ownership of the Covered Crypto Assets.

[10]  The Division’s view is not dispositive as to whether any specific Protocol Staking Activity (defined below) involves the offer and sale of a security. A definitive determination requires analyzing the facts relating to the specific Protocol Staking Activity. Where facts vary from those presented in this statement, the Division’s view as to whether the specific Protocol Staking Activity involves the offer and sale of a security may be different.

[11]  328 U.S. 293 (1946). We do not believe Protocol Staking generally and the “Protocol Staking Activities” defined in this statement and upon which we express our view in this statement involve notes or other evidences of indebtedness because at all times during the staking process the Covered Crypto Asset owner retains ownership of its Covered Crypto Assets (either directly or through a Custodian).

[12]  See Landreth Timber Co. v. Landreth, 471 U.S. 681, 689 (1985), in which the U.S. Supreme Court suggested that the proper test for determining whether a particular instrument that is not clearly within the definition of “stock” as set forth in Section 2(a)(1) of the Securities Act, or that otherwise is of an unusual nature, is the economic realities test set forth in Howey. In analyzing whether an instrument is a security, “form should be disregarded for substance,” Tcherepnin v. Knight, 389 U.S. 332, 336 (1967), “and the emphasis should be on economic realities underlying a transaction, and not on the name appended thereto.” United Housing Found., Inc. v. Forman, 421 U.S. 837, 849 (1975).

[13]  Forman, 421 U.S. at 852.

[14]  See, e.g., SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 (9th Cir. 1973).

[15]  See, e.g., First Fin. Fed. Sav. & Loan v. E.F. Hutton Mortgage, 834 F.2d 685 (8th Cir. 1987) (activities performed were merely administrative and ministerial in nature and therefore did not constitute the managerial or entrepreneurial efforts of others); Union Planters National Bank of Memphis v. Commercial Credit Business Loans, Inc., 651 F.2d 1174 (6th Cir. 1981) (administrative tasks and services are not managerial or entrepreneurial under Howey). See also Donovan v. GMO-Z.com Trust, 2025 U.S. Dist. LEXIS 27871 (S.D.N.Y. 2025) (“Ministerial, technical, and clerical tasks often are ‘necessary’ for an investment scheme to operate and thereby generate a profit, but courts have long found such efforts to be insufficient under Howey’s third prong.”).

[16]  If a Custodian does select whether, when, or how much of an owner’s Covered Crypto Assets to stake, its activities are outside the scope of this statement.

[17]  Staked Covered Crypto Assets are subject to a “bonding period,” which is a length of time set by the protocol after which time the Covered Crypto Asset owner becomes eligible to earn rewards. The “unbonding period” is a length of time set by the protocol to “unstake” a Covered Crypto Asset. Each protocol has its own bonding and unbonding periods, which can be hours, days, or weeks.

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