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Crypto alliance backs guidelines for $250bn staking industry in bid to stem regulator crackdown

Crypto alliance backs guidelines for $250bn staking industry in bid to stem regulator crackdown
The Proof of Stake Alliance and its founder Evan Weiss want to address regulatory concerns and encourage the continued growth of responsible crypto staking in the US. Credit: Rita Fortunato/DL News
  • An alliance of crypto firms address regulatory concerns with updated staking guidelines.
  • 18 firms and protocols support the guidelines, including heavyweights Coinbase and Lido.
  • “True staking services are technical services, not securities,” Alison Mangiero, executive director of Proof of Stake Alliance, told DL News.

The Proof of Stake Alliance, or POSA, a community-driven advocacy organisation for proof of stake technology, has released an updated version of its staking guidelines, first drafted over three years prior.

The hope is that setting out principles which major industry players abide by will give regulators — such as the US Securities and Exchange Commission — the clarity they need to rule on the $250 billion crypto staking industry without hindering its growth.

The guidelines aim to address potential regulatory concerns and encourage the continued growth of responsible crypto staking in the US.

They come with support from 18 of the crypto industry’s biggest firms and protocols, including leading US exchange Coinbase, Avalanche blockchain developer Ava Labs, and top liquid staking DeFi protocol Lido.

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“The updated POSA principles underscore the ecosystem’s commitment to clarity and responsibility, especially in a time of increased scrutiny and misconceptions,” Evan Weiss, founder of POSA and head of business and policy at staking software development company Alluvial, said in a statement.

Updated Guidelines

POSA’s updated guidelines for companies and protocols that let users stake crypto assets focus on three pillars: clear communication, letting users maintain control over their assets, and not providing guarantees on the rewards distributed through staking.

For the users of such services, this means providers should clearly explain how a user’s assets will be staked and state the risks involved, while letting users retain control over their staked assets.

Providers should also focus on staking processes instead of the ability to earn. This means presenting a clear fee schedule — the amount of staking rewards the staking provider will take for themselves as a fee for their services — and refraining from claiming or providing any competitive advantage outside what is earned natively from staking.

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The 18 crypto firms and protocols who have already agreed to the guidelines are Alluvial, Ava Labs, Bitcoin Suisse, Blockdaemon, Coinbase, Credibly Neutral, Figment, Infstones, Kiln, Lido Protocol, Luganodes, Methodic Capital, Obol, Polychain, Paradigm, Rocketpool, Staking Rewards, and Swell.

Regulatory response

The new guidelines come amid a battle to regulate staking technology in the US.

In February, the SEC demanded Kraken, a US-based crypto exchange with $3.9 billion of user deposits, cease offering staking services to US customers.

“When a company or platform offers you these kinds of returns, whether they call their services ‘lending,’ ‘earn,’ ‘rewards,’ ‘APY,’ or ‘staking,’ — that relationship should come with the protections of the federal securities laws,” SEC Chair Gary Gensler said in an instalment of his Office Hours series shortly after the SEC took action against Kraken.

One of the main reasons behind the SEC’s enforcement was that it viewed staked assets as securities, giving the SEC jurisdiction of how they should be regulated.

The Proof of Stake Alliance directly challenges this assertion.

“True staking services are technical services, not securities,” Alison Mangiero, executive director of Proof of Stake Alliance, told DL News.

Staking-in-name-only

Staking crypto assets is vital to maintaining the security of decentralised blockchains. Users lock up assets in validators — software that processes transactions — as collateral to ensure those validators report transactions honestly.

If a validator lies, or goes offline when it should be processing transactions, the blockchain automatically takes some of its locked assets in a process called slashing.

To compensate those who lock assets in validators, the network rewards them with newly-minted crypto. On Ethereum, currently the biggest proof-of-stake blockchain, stakers can currently earn a base yield of around 3.6% paid in Ether.

However, not all crypto protocols that advertise staking work in this way.

“Some actors co-opt the word staking to mean something other than services related to data validation and securing proof-of-stake blockchains,” Mangiero said.

Such actors allow holders to lock up their crypto without it contributing to the security of any underlying blockchain. They then distribute crypto they hold in reserve to these stakers at a fixed rate.

What the POSA argues is that such staking-in-name-only services should be viewed as separate from other staking services, even if they use the same terminology.

According to Mangiero, if regulators understood the distinction between true and in-name-only staking services, it would enable staking providers who follow POSA’s guidelines to be bound by regular commercial agreements like other service providers.

While US regulators have yet to weigh in on such a distinction, there are signs that regulators elsewhere are aware of it.

In an October report from the UK Treasury discussing a new regime for regulating crypto assets, the finance ministry said that it wants to develop a clear definition of staking on a proof-of-stake blockchain, and separate it from “other, riskier, activities which may be referred to, or marketed as ‘staking.’”

For Mangiero and the supporters of the POSA guidelines, such a distinction is imperative.

The success of staking and proof-of-stake blockchains is “necessary for the success of crypto as a whole,” she said.

Tim Craig is DL News’ Edinburgh-based DeFi correspondent. Reach out to him with tips at tim@dlnews.com.