Staking in the Spotlight

Overview

In this article we round up some recent actions being taken by various global regulators that are shaping the development of regulation in relation to staking activities.

In the context of a rapidly evolving global digital asset landscape, regulator attention has become increasingly focused on whether and how the practice of staking should be regulated. In broad terms, staking is considered to be a process in which crypto asset holders volunteer to lock up their assets for a set period of time in order to assist in validating transactions on a network’s blockchain. Staking is intended to help confirm that only legitimate transactions are added to a blockchain. In return for locking up their crypto assets, holders earn rewards.

Below we highlight some recent proposals and actions being taken by various global regulators that are shaping the development of this area of regulation. We are seeing various regulators grapple with determining the scope of activities that should be subject to regulation, the types of firms that may be permitted to conduct staking services (and the nature of licences required) and the identity of the clients that may be targeted.

A. Developments relating to the types of entities able to provide staking services

Dubai International Financial Centre

In January 2024, the DFSA issued a consultation paper on updates to the regulation of crypto tokens in the DIFC which includes considerations on additional requirements and/or guidance that may be necessary in relation to staking activities. The proposals include limiting the ability to offer staking only to authorised firms who provide custody of crypto tokens (this may be extended to other authorised firms depending on developments in the market), requirements relating to due diligence, disclosures and obtaining explicit consent for staking services and to remove an exception for staking in respect of authorised market institutions.

Emirate of Dubai

In August 2023, the Dubai VARA published a revised Custody Services Rulebook, which allows virtual asset services providers who are licensed to provide custody services to also provide staking services to their customers from the same legal entity, subject to obtaining a specific additional approval from VARA and meeting the requirements of the amended rulebook.

Hong Kong SAR

On 8 February 2024, the Hong Kong FSTB published a consultation paper on legislative proposals to introduce a licensing regime for providers of OTC trading services of virtual assets. Currently this licensing regime does not appear to include staking activities and provision of services including but not limited to staking, lending and margin trading will not currently be permitted by such licensees.

B. Introducing additional protections for retail investors

Singapore

In July 2023, the MAS published the first part of its response to the consultation paper on the proposed regulatory measures for services relating to digital payment tokens (DPTs), including proposals for a restriction on DPT service providers facilitating lending and staking of DPTs by retail customers. It is proposed to allow DPT service providers to enable or facilitate entry to staking or lending arrangements for institutional and accredited investors, although they will be required to provide a clear risk disclosure document and obtain the customer’s explicit consent.

MAS also responded to feedback received on the differences between lending and staking arrangements and highlighted that, given that staking is still an evolving space, it is intending to continue closely engaging with the industry and to monitor technological developments.

C. Bringing staking within the regulatory framework

United Kingdom

In October 2023, HM Treasury published a response to the consultation on the future financial services regulatory regime for cryptoassets. In the response, HM Treasury acknowledged that many respondents requested that the regulatory treatment of staking should be clarified as a priority, emphasising the importance of staking as part of the technology underpinning the sector and seeking to distinguish it from the provision of a financial service. HM Treasury is therefore accelerating exploratory work in this area through extensive engagement with stakeholders.

Points raised in the HM Treasury paper include whether regulatory treatment should differentiate between lending versus staking or supplying liquidity, what are the most appropriate regulatory hooks for certain staking activity (e.g. the staking pools or the validators themselves) and whether staking activities could be appropriately captured by other existing regimes - including financial promotions, custody, lending and intermediation - without needing further regulation.

D. Regulation via enforcement

United States

In February 2023, the SEC charged a firm with failing to register the offer and sale of its crypto asset staking-as-a-service programme, whereby investors transferred crypto assets to the firm for staking in exchange for advertised annual investment returns of up to 21%. The firm settled and agreed to pay a USD 30 million penalty and to immediately cease offering or selling securities through crypto asset staking services or staking programs.

In a separate statement, SEC Commissioner Hester Peirce disagreed with the action, noting that crypto-related offerings are not making it through the SEC’s registration pipeline and there isn’t sufficient guidance on a regulatory approach to staking programmes.

Peirce commented that

“Using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating. Moreover, staking services are not uniform, so one-off enforcement actions and cookie-cutter analysis does not cut it.”