- Liquid staking tokens are not securities, the SEC said Tuesday.
- The agency's statement continues an effort to undo the legacy of its prior Chair, Gary Gensler.
- Under Gensler's leadership, the SEC sued a crypto wallet for selling unregistered securities in the form of liquid staking tokens.
Liquid staking tokens are not securities like stocks and bonds, the Securities and Exchange Commission said on Tuesday.
The statement from the US’ top financial regulator was the latest in a slew of guidance meant to clarify the legal status of various cryptocurrencies and blockchain-based activity.
In recent months, the SEC has issued similar guidance for memecoins and other staking services.
Liquid staking is the second-largest business in decentralised finance. More than $66 billion dollars worth of crypto is spread across hundreds of liquid staking protocols.
Lido has long been the dominant liquid staking protocol. As of Tuesday, it accounted for half of the liquid staking market, with more than $31.6 billion in deposits.
“Today’s staff statement on liquid staking is a significant step forward in clarifying the staff’s view about crypto asset activities that do not fall within the SEC’s jurisdiction,” newly appointed SEC Chair Paul Atkins said in a statement.
“I am pleased that the SEC’s Project Crypto initiative is already producing results for the American people.”
Atkins and Gensler
Last week, Atkins detailed “Project Crypto,” a deregulatory blitz that could turbocharge the integration of traditional financial markets with blockchain technology and enable the creation of financial “super-apps.”
It is part of a larger effort to undo the legacy of Gary Gensler, the head of the SEC under former President Joe Biden.
Gensler’s controversial tenure of almost four years was marked in part by his clashes with the crypto industry.
He frequently said that digital asset markets were rife with fraud and that most cryptocurrencies were securities subject to stringent SEC oversight.
He sued dozens of crypto companies for failing to register with the SEC, including MetaMask developer Consensys.
Last year, the SEC alleged that MetaMask had sold unregistered securities on behalf of Lido and Rocket Pool, two liquid staking services. In February, under the leadership of interim chair Mark Uyeda, the SEC dropped the lawsuit.
Receipts
The SEC’s statement on Tuesday echoed many arguments long made by industry lawyers, including those in an April 30 letter addressed to SEC Commissioner Hester Peirce.
Liquid staking providers are not engaged in securities transactions, the SEC said Tuesday, because their work isn’t managerial or entrepreneurial. Rather, their work is administrative, the regulator said.
“The Liquid Staking Provider does not decide whether, when, or how much of a depositor’s [crypto] to stake and is simply acting as an agent,” the statement reads.
Moreover, liquid staking tokens are not, in themselves, securities, according to the SEC.
That’s because the token is a mere receipt, according to the agency.
The SEC’s statement referred to liquid staking tokens as “staking receipt tokens,” borrowing a term used in the April 30 letter and a 2023 legal analysis from a staking advocacy group, the Proof of Stake Alliance.
Liquid staking tokens were initially referred to as liquid staking derivatives. But the industry slowly moved away from that term over fear the word “derivative” would trigger scrutiny from regulators that oversee financial derivatives.
The SEC’s guidance does not apply to restaking protocols, such as EigenLayer, the agency said. Nor does it apply to staking transactions in which the token confers the same rights as traditional securities, including passive yield or the rights to a business’ future income, profits, or assets.
Liquid staking
Most major blockchains run on proof-of-stake technology, relying on users to lock up cryptocurrency in exchange for a modest annual reward.
That process, dubbed staking, provides network security and helps determine how pending transactions are verified and ordered before they settle on the blockchain.
Liquid staking protocols make the process easy, by staking the required cryptocurrency on users’ behalf.
They also address an opportunity cost on proof-of-stake blockchains: staking is often less lucrative than depositing cryptocurrency in a liquidity pool or lending protocol.
Liquid staking protocols address the problem by issuing IOUs known as liquid staking tokens. Those IOUs can then be deployed in other DeFi protocols in lieu of the staked crypto, letting users profit off staking and other DeFi activity simultaneously.
Aleks Gilbert is DL News’ New York-based DeFi correspondent. You can reach him at aleks@dlnews.com.
