Liquid Staking Crypto Isn’t a Securities Issue, SEC Says

Life is good for the crypto industry under the new SEC leadership.

The agency last week gave a green light to so-called liquid staking, potentially paving the way for staking by some ETFs. In staff comments, the Securities and Exchange Commission made clear that under certain sets of conditions, the use of liquid staking does not make something a security, meaning that the vehicle would not fall under the agency’s oversight. That’s welcome news for spot-price crypto exchange- traded products that are registered under the Securities Act of 1933 rather than the Investment Company Act of 1940. The use of staking — whereby digital asset owners lend some of their crypto holdings to be used in a network’s consensus mechanism —is a benefit to owning Ethereum, Solana and other currencies. Asset owners are rewarded for their lending by receiving additional currency. Numerous crypto ETPs are waiting for the SEC to approve the use of staking within their products, but to date, very few have been successful.

SEC Chairman Paul Akins and Commissioner Hester Peirce praised the development, which the former called: “a significant step forward in clarifying the staff’s view about crypto asset activities that do not fall within the SEC’s jurisdiction.” Atkins credited the comments to the SEC’s recently announced Project Crypto, which he said “is already producing results for the American people.”

Assumptions All the Way Down

The lone Democrat commissioner, Caroline Crenshaw, cautioned that the staff comments may apply in few, if any, cases, as the statement “stacks factual assumption on top of factual assumption on top of factual assumption” and may not represent how liquid staking actually occurs. “The legal conclusions in the statement are circumscribed by the staff’s plentiful assumptions about liquid staking,” she said in a statement. “For those entities whose liquid staking programs deviate in any respect from the soaring wall of factual assumptions erected in the liquid staking statement, the message should be clear: Caveat liquid staker.”

Liquid staking solves a problem in crypto networks that use proof-of-stake validation:

• Staking has liquidity constraints, as un-staking assets in order to transfer them can take days or weeks.
• Liquid staking provides asset owners with tokens that can be used to transfer assets, making transactions faster and easier.

What’s at Stake: However, former SEC Chair Gary Gensler’s chief of staff and senior counsel, Amanda Fischer, who is now policy director at Better Markets, raised red flags. Assets can be restaked numerous times, with the generation of new tokens resembling leverage on derivatives, harkening back to the subprime mortgage crisis, Fischer said in a post on X. “It will exacerbate risks in the crypto market, especially when this ‘liquid staked’ crypto is put into ETF wrappers.”