KEY TAKEAWAYS
- The SEC has clarified that certain Proof-of-Stake activities are not securities, focusing on the 'administrative vs. managerial' distinction of the Howey test.
- This includes self-staking, self-custodial staking with third parties, and specific custodial arrangements, provided certain conditions are met.
- Key ancillary services like slashing coverage and crypto aggregation are also deemed administrative and not subject to securities classification.
- The guidance represents a significant proactive step from regulators, providing much-needed clarity for the digital asset industry.
- This fosters innovation in staking services by reducing regulatory uncertainty and benefiting users.
INTRODUCTION
In the rapidly evolving landscape of digital assets, Proof-of-Stake ("PoS") has emerged as a cornerstone technology. Unlike Proof-of-Work ("PoW"), which relies on energy-intensive mining, PoS is a consensus mechanism where users "stake" tokens. This act of staking is a fundamental contribution to the network's health, enabling participants to validate transactions, create new blocks, and secure the entire blockchain. In exchange for these vital services, stokers are rewarded for their contributions, creating a robust and decentralised incentive structure that fosters network growth and stability.
Despite its integral role and impact on the scalability of blockchains and its widespread adoption, there has been substantial debate and regulatory uncertainty regarding whether staking activities (especially when offered as a service by intermediaries) constitute securities in the eyes of the U.S. Securities and Exchange Commission ("SEC"). Such a classification carries significant implications, as it would subject staking services to rigorous regulatory burdens, including extensive registration requirements.
Recognising the critical need for clarity, the Crypto Council for Innovation ("CCI") and its dedicated Proof of Stake Alliance ("PoSA") project embarked on a proactive and strategic engagement with regulators. Their efforts culminated in submitting a 'PoSA Playbook' to the SEC's Crypto Task Force.1
This proactive engagement by the industry represents a significant departure from a reactive stance, where regulatory clarity often emerges only after enforcement actions have been initiated. It underscores a growing maturity within the digital asset space, suggesting that organised, educational advocacy can indeed influence regulatory outcomes.
UNDERSTANDING THE HOWEY TEST
At the very foundation of U.S. securities law lies the landmark Supreme Court case, SEC v. W.J. Howey Co.2 This pivotal 1946 decision established the legal precedent for determining what constitutes an 'investment contract' and, by extension, a security. For a transaction to qualify as an investment contract, it must satisfy four distinct yet interconnected criteria, known as the Howey test: (1) an investment of money, (2) in a common enterprise, (3) with a reasonable expectation of profits, (4) derived solely from the entrepreneurial or managerial efforts of others.
While all four prongs are essential, the fourth prong, which focuses on 'the efforts of others', holds particular significance and has become the primary battleground for staking activities. Federal courts have consistently clarified that this requirement is met only when those efforts are "undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise".3 Crucially, activities that are deemed merely 'administrative' or 'ministerial' in nature do not satisfy this prong.
The consistent emphasis across SEC statements and industry discussions on the "efforts of others" prong for digital assets, especially in relation to staking, underscores its status as the most legally contentious and interpretively scrutinized element in determining whether a crypto activity constitutes an investment contract. This recurring focus implies that the first three prongs – investment of money, common enterprise, and reasonable expectation of profit are either more straightforward to satisfy or are not as vigorously disputed.
While the SEC has not expressly conceded that all Proof-of-Stake (PoS) networks are sufficiently decentralized, it has indirectly suggested that, where decentralization is demonstrable, the legal basis for identifying a security weakens. Specifically, if a protocol's success and the rewards it generates are the result of rule-based processes and autonomous actions of participants as opposed to ongoing, discretionary managerial decisions by a central entity, then the "efforts of others" prong loses force. This reflects an emerging, albeit subtle, legal accommodation of blockchain's decentralized architectures within the legacy securities law framework.
Yet, an even more nuanced and underexplored argument further weakens the applicability of the "efforts of others" prong: the potential for crypto-asset holders themselves to be the source of value creation. Drawing from corporate law analogies, such as the treatment of limited liability company (LLC) interests, it is notable that courts have, at times, declined to treat such interests as securities precisely because holders could reasonably expect to earn profits from their own efforts, even if they choose not to actively participate. This interpretation opens the door to a more robust defense against Howey's fourth prong in the crypto context.
In decentralized web3 governance systems, where codebases are open-source, control is widely distributed, and no central entity wields intellectual property rights like trademarks, token holders are not passive investors but active or at least empowered participants. They may vote, propose protocol changes, market the protocol, or even deploy infrastructure to support the network. Courts have outlined three factors that determine whether an investor is relying too heavily on others: lack of any meaningful decision-making power (as in a limited partnership), inexperience or ignorance of the business affairs, and dependence on someone's irreplaceable managerial skill. When applied to typical decentralized networks, these criteria often aren't met. Token holders generally retain governance rights, often have a deep understanding of the project or its goals, and are not reliant on any singular entity or team. Thus, even if an informal or uncoordinated group contributes to a protocol's success, the key question becomes: could a holder reasonably expect to derive profits from their own ability to engage, influence, or operate within the protocol ecosystem? If the answer is yes, the Howey test's fourth prong is not satisfied because the profits are not "solely" or even "primarily" derived from the efforts of others. This perspective allows a more realistic and decentralized interpretation of value creation in blockchain networks, aligning the legal lens not only with technology but also with the evolving economic roles of participants in web3.4
THE SEC'S LANDMARK STAKING GUIDANCE
On 29 May 2025, the SEC Division of Corporation Finance issued a statement5 that brought much-anticipated clarity to the digital asset space. The statement concluded that certain 'Protocol Staking Activities' do not involve the offer and sale of securities under federal law.
The SEC clarified that, under specific conditions, protocol staking activities do not involve the offer and sale of securities as defined by the Securities Act of 1933 or the Securities Exchange Act of 1934. This conclusion is rooted in the application of the Howey test particularly the "efforts of others" prong, specifically finding that the efforts involved in these activities are 'administrative or ministerial' rather than 'entrepreneurial or managerial'. This distinction is paramount: rewards are considered payments for direct participation and service in operating or securing the network, not profits derived from the management of others.
The guidance delineates several specific categories of staking activities that fall outside the definition of a security:
- Self (or Solo) Staking: This refers to instances where an individual or any entity ("node operator") use their own covered crypto assets and resources to participate directly in PoS consensus by operating a network node. In this scenario, rewards reflect the operator's own active engagement in securing and maintaining the network, not dependent on a third party's entrepreneurial or managerial efforts.
- Self-Custodial Staking Directly with a Third Party: In this arrangement, a digital asset owner delegates validation rights to a third-party node operator but retains full custody and control over their assets. The third party's activities are considered purely administrative or ministerial, facilitating network participation without managing an investment. Rewards should neither be fixed nor guaranteed by the node operator, and should be fluctuating as determined by network activity and protocol rules.
- Custodial Arrangements: Even when a custodian
holds and stakes crypto assets on behalf of owners, this is also
not considered a securities offering under the new guidance. The
custodian acts as a mere agent, and their activities, such as
taking custody of the assets and selecting a node operator, are
deemed administrative or ministerial, not managerial or
entrepreneurial. The Custodian does not exercise discretion over
whether, when, or how much of an owner's covered cryptos to
stake. The custodian acts solely as an agent providing ministerial
services. The custodial model is subject to strict conditions:
- Covered crypto must not be used for operational, business, lending, pledging, or rehypothecation purposes.
- Asset owners retain the beneficial interest, and rewards are not guaranteed or fixed by the custodian
The SEC emphasized that it would focus on the economic realities of staking arrangements, not just their labels or structure. Where rewards and participation stem from direct service to the network and not the efforts or promises of a managing party, those activities fall outside the scope of securities regulation. This approach is consistent with detailed application of the Howey test and reflects careful attention to the operational and risk dynamics of PoS networks. This guidance is a major milestone for U.S. crypto regulation, offering participants much-needed clarity while focusing investor protections on non-administrative, investment-like schemes.
THE NUANCE OF ANCILLARY SERVICES
Beyond the core staking activities, the SEC's statement provides further clarity by addressing various ancillary services commonly offered by service providers in connection with Protocol Staking. These services, too, are deemed administrative or ministerial and, significantly, do not involve entrepreneurial or managerial efforts that would trigger securities classification. This guidance aspect is particularly impactful, as it broadens the scope of permissible activities for staking service providers.
- Slashing Coverage:This service involves reimbursing or indemnifying a staking customer against potential losses that may arise from slashing. Slashing refers to penalties the protocol imposes for validator misbehaviour, such as going offline or submitting invalid transactions. The SEC views this as analogous to services offered by providers in many types of traditional commercial transactions, where insurance or indemnification is a common administrative protection rather than a managerial effort to generate profit.
- Early Unbonding:Typically, staked assets are locked for a period defined by the protocol (the "Unbonding Period") before they can be withdrawn. This service allows staked assets to be returned to an owner before the protocol's standard Unbonding Period ends. The SEC considers this a mere convenience that shortens the effective Unbonding Period, reducing the burden on the crypto owner, rather than a managerial effort that would constitute an investment contract.
- Alternate Rewards Payment Schedules and Amounts:Service providers may offer to deliver earned rewards at a different cadence or in varying amounts than the protocol's set schedule. This is permissible, provided the amounts are not fixed, guaranteed, or greater than those awarded by the protocol itself. This flexibility in reward distribution is seen as an administrative convenience for the staker, not a profit-generating managerial activity by the service provider.
- Aggregation of Covered Cryptos:This service facilitates the pooling of cryptos from multiple owners to meet the minimum staking requirements of a particular protocol. Many PoS networks require a substantial amount of crypto to run a validator node. Aggregation services allow smaller holders to participate by combining their assets, which is viewed as an administrative function to enable participation, not a managerial effort to generate profits for others.
While the classifications of core staking activities were somewhat anticipated by industry participants, the explicit inclusion and classification of these ancillary services as administrative represents a significant and perhaps unexpected development. This demonstrates the SEC's willingness to delve into the practicalities of staking service provision and carve out a broader range of permissible activities.
INDUSTRY REACTION
TradFi Reactions:
The SEC clarification on staking is a significant boost for the financial industry, particularly for increased institutional involvement in crypto. Experts anticipate that banks and fintechs will increasingly explore staking clients' crypto assets due to the attractive yield for investors. This move is expected to accelerate the creation of new financial instruments, drive innovation in DeFi, and generally promote broader acceptance of blockchain technologies within traditional finance. Bill Hughes of Consensys further notes that this regulatory clarity fundamentally changes how proof-of-stake tokens are viewed as investable assets, likening Ethereum (ETH) to "digital oil" that can both appreciate and generate returns through staking.
This positive development also significantly enhances the prospects for staking-based Exchange Traded Funds (ETFs). Hadley Stern of Marinade Labs highlights that the SEC's decision clarifies staking as a non-securities transaction, opening doors for more institutional staking options and wider adoption in the US. Sid Powell of Maple Finance agrees, stating that the SEC's letter strengthens the case for spot ETFs that include staking rewards. For firms focused on institutional on-chain strategies, this clarity also reduces legal hurdles, making it easier to develop more staking-based products.6
Liquid Staking v. Protocol Staking:
Liquid staking protocols issue a separate "liquid staking token" representing a user's staked asset, which can be transferred or used in other DeFi activities. It's crucial to understand that the SEC's guidance applies exclusively to protocol staking activities, and expressly excludes liquid staking and restaking.
It's crucial to understand that the SEC's guidance applies a exclusively to protocol staking activities, explicitly excluding liquid staking from ETF consideration. The SEC staff letter clearly states that staked asset custodians cannot use these assets for operational or general business purposes. They are prohibited from being lent, pledged, or rehypothecated. Furthermore, staked crypto assets must be protected from third-party claims, meaning custodians cannot engage in leverage, trading, speculation, or discretionary activities with these assets.7 The custodian's role is strictly limited to facilitating staking and, if relevant, selecting a node operator but no profits may be promised, guaranteed, or managed beyond protocol rewards.
CONCLUSION: A STEP TOWARDS REGULATORY CERTAINTY
The SEC Division of Corporation Finance's guidance on staking services offers significant clarity for the crypto industry, particularly in its distinction between 'administrative' and 'managerial/entrepreneurial' services when analysing staking services under the Howey Test. While the classification of basic solo and non-custodial and custodial staking as non-securities was expected, the explicit categorisation of features like slashing protection, pooling, and early unbonding as administrative is a game-changer. This removes a substantial compliance barrier for providers building advanced staking products, as these features alone do not automatically lead to a "securities" designation.
Though non-binding and subject to future shifts in regulatory philosophy, this guidance is a positive step. It acknowledges the subjective nature of regulatory interpretation, highlighting that regulators' prevailing views can influence the 'administrative vs. managerial' line. Despite this dynamism, the current interpretation fosters innovation by providing much-needed clarity, enabling service providers to focus on competitive service differentiation rather than being solely driven by compliance fears. This ultimately benefits end-users and lays a crucial foundation for the maturation of the digital asset markets.
Footnotes
1. Alison Mongiero for the Crypto Council for Innovation, CCI's POSA leads Industry Push for SEC Staking Certainty, https://cryptoforinnovation.org/posa-playbook/
2. 328 U.S. 293 (1946)
3. See, e.g., SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 (9th Cir. 1973).
4. Boiron Marc. "Sufficient Decentralization: A Playbook for web3 Builders and Lawyers." Variant Fund, 2022, https://variant.fund/wp-content/uploads/2022/08/Sufficient-Decentralization-by-Marc-Boiron.docx.pdf
5. SEC, Statement on Certain Protocol Staking Activities, https://www.sec.gov/newsroom/speeches-statements/statement-certain-protocol-staking-activities-052925#_ftn14
6. Leo Jakobson, SEC Says Staking Activities Are Not Securities Transactions, Opening the Door for Institutions and ETFs, https://thedefiant.io/news/regulation/sec-says-staking-activities-are-not-securities-transactions-opening-the-door-for-institutions
7. ibid
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