Key Takeaways
- The SEC said liquid staking and related tokens don’t run afoul of securities laws, addressing the more than $67 billion in total value locked across blockchains.
- The crypto-friendly guidance was a win for decentralized finance platforms (DeFi).
- Guidance isn’t law, and subject to change.
Investors chasing yield and liquidity in the crypto world just got handed a nice gift from US securities regulators.
The Securities and Exchange Commission announced Tuesday that liquid staking and related tokens don’t run afoul of securities laws, effectively flashing the green light to centralized and decentralized crypto trading platforms that offer those services and corresponding rewards, as well as to their customers.
The liquid staking guidance is incremental clarity for the crypto industry, following up on its views on protocol staking in May, and addressing the more than $68 billion in value locked up across all blockchains, according to data compiled by research platform DefiLlama.
Staking is a collective process in which people pledge their tokens to shore up a blockchain network’s security and validate transactions. In return for doing this, they earn rewards denominated in the native token. This is sometimes compared to a savings account and the interest they accrue. On the surface that’s true, though, staking generally yields rewards not through lending, but through fees generated from people using the blockchain network and a rise in token prices.
Liquid staking allows people to pledge their tokens, but also retain the liquidity of those assets through what are called liquid staking tokens (LSTs), also referred to as liquid staking derivatives (LSDs). For example, Lido and Rocket Pool, two leading Ethereum liquid staking providers, use stETH and rETH, respectively. Their customers stake their ETH (ETHUSD), and use LSTs to collect rewards, sometimes presented as an annual percentage yield (APY),and/or use them on various DeFi platforms to say, buy other crypto.
Call it double-dipping, but not necessarily securities, per the SEC.
In May, the SEC said that staking didn’t automatically qualify as securities transactions, in a 180-degree shift from just a couple years earlier when it sued several exchanges and service providers for violating security laws and operating as unregistered brokers. The U.S.’s largest publicly traded centralized crypto exchange Coinbase (COIN) was among them, but the regulator dropped its case against it in February. The clarifying note also cracks open the door for ETF issuers that have asked for approval to offer staking; crypto ETFs with staking services exist outside of the US.
However, the SEC’s analyses of crypto activities haven’t been codified into law through a formal rule-making process, so they can change under new leadership.