Introduction

As part of an effort to provide greater clarity on the application of the federal securities laws to crypto assets,[1] the Division of Corporation Finance is providing its views[2] on a specific type of Protocol Staking. The Division previously provided its views on certain types of Protocol Staking in a staff statement (the “Protocol Staking Statement”),[3] which addressed three types of Protocol Staking: self (or solo) staking; self-custodial staking directly with a third party; and so-called “custodial staking.” This statement addresses a fourth type of Protocol Staking known as “liquid staking.”[4]

Liquid Staking

“Liquid Staking” as used in this statement refers to a type of Protocol Staking whereby owners of Covered Crypto Assets deposit their Covered Crypto Assets with a third-party Protocol Staking service provider (such owners, “Depositors”) and in return receive newly “minted” (or created) crypto assets (“Staking Receipt Tokens”) that evidence Depositors’ ownership of the deposited Covered Crypto Assets and any rewards (as described in the Protocol Staking Statement) that accrue to the deposited Covered Crypto Assets.[5] As part of Liquid Staking, Staking Receipt Tokens are issued to Depositors on a one-for-one basis to the amount of the deposited Covered Crypto Assets.[6] Staking Receipt Tokens enable their holders to maintain liquidity without having to withdraw the deposited Covered Crypto Assets from staking.[7] For example, holders can use Staking Receipt Tokens as collateral or to participate in crypto applications, including those that can provide a return to the holder, although any such transactions are separate and independent of the actual Protocol Staking Activity itself. Staking Receipt Tokens do not change any of the rights or obligations of the deposited Covered Crypto Assets such that the Staking Receipt Tokens are properly characterized as receipts for the deposited Covered Crypto Assets. Depositors can redeem the Staking Receipt Tokens for the deposited Covered Crypto Assets and any rewards that accrue to the deposited Covered Crypto Assets,[8] subject to any applicable “unbonding” period.

Persons can participate in such Liquid Staking through protocol-based or third-party service providers, both referred to in this statement as “Liquid Staking Providers.” The Liquid Staking Provider facilitates the staking of the deposited Covered Crypto Assets on behalf of the Depositor. The Liquid Staking Provider holds the deposited Covered Crypto Assets either in a cryptographic “wallet” that the Liquid Staking Provider controls or in a smart contract. The Liquid Staking Provider stakes the deposited Covered Crypto Assets on behalf of the Depositor for an agreed-upon fee that reduces the amount of rewards that would otherwise accrue to the deposited Covered Crypto Assets, either using a node the Liquid Staking Provider operates or through a third-party Node Operator the Liquid Staking Provider selects.[9] In the latter case, this selection is the Liquid Staking Provider’s only decision in the staking process, and that decision may be automated. At all times during this Liquid Staking arrangement, the deposited Covered Crypto Assets remain in the control of the Liquid Staking Provider and the Depositor (or any subsequent transferee of the Depositor’s Staking Receipt Tokens) is intended to retain ownership of the deposited Covered Crypto Assets.[10]

When using a protocol-based Liquid Staking Provider, Depositors deposit their Covered Crypto Assets into a protocol that holds the deposited Covered Crypto Assets in a smart contract on behalf of the Depositors, stakes the deposited Covered Crypto Assets on behalf of the Depositors, and issues Staking Receipt Tokens to the Depositors, all in a programmatic manner through self-executing computer code. The minting, issuing and redeeming of the Staking Receipt Tokens is performed without the need for or reliance upon a third-party intermediary.

When using a third-party service provider, such as a Custodian, Depositors deposit their Covered Crypto Assets with the third-party service provider, who holds the deposited Covered Crypto Assets in a digital wallet on behalf of the Depositors, stakes the deposited Covered Crypto Assets on behalf of the Depositors, and issues Staking Receipt Tokens to the Depositors. The minting, issuing and redeeming of the Staking Receipt Tokens is performed by the third-party service provider.

In a Liquid Staking arrangement, rewards accrue to and slashing losses are deducted from the staked Covered Crypto Assets. In this regard, rewards are deposited with the Liquid Staking Provider, and staked Covered Crypto Assets are forfeited if there are slashing losses, in either case in a programmatic manner through self-executing computer code. There are two methods through which Staking Receipt Tokens reflect rewards and/or slashing losses. In the first method, the Staking Receipt Token itself evidences ownership of more Covered Crypto Assets as and when rewards accrue and fewer Covered Crypto Assets as and when slashing losses occur. This means that the ratio of one Staking Receipt Token to one Covered Crypto Asset changes as rewards accrue and/or slashing losses occur. For example, as rewards accrue the ratio changes from one-to-one to one-to-more-than-one, with one Staking Receipt Token representing more than one Covered Crypto Asset. In the second method, Staking Receipt Token holders receive additional Staking Receipt Tokens as and when rewards accrue and lose Staking Receipt Tokens as and when slashing losses occur. This means that the ratio of Staking Receipt Tokens to Covered Crypto Assets always remains one-to-one. In either case, the Staking Receipt Tokens can be redeemed with the Liquid Staking Provider for the deposited Covered Crypto Assets, subject to any applicable “unbonding” period.

Division’s View on Liquid Staking Activities

It is the Division’s view that “Liquid Staking Activities” (as defined below) in connection with Protocol Staking do not involve the offer and sale of securities within the meaning of Section 2(a)(1) of the Securities Act of 1933 (the “Securities Act”) or Section 3(a)(10) of the Securities Exchange Act of 1934 (the “Exchange Act”).[11] Accordingly, it is the Division’s view that participants in Liquid Staking Activities do not need to register with the Commission transactions under the Securities Act, or fall within one of the Securities Act’s exemptions from registration in connection with these Liquid Staking Activities.

It also is the Division’s view that the offer and sale of Staking Receipt Tokens, in the manner and under the circumstances described in this statement, do not involve the offer and sale of securities within the meaning of Section 2(a)(1) of the Securities Act or Section 3(a)(10) of the Exchange Act, unless the deposited Covered Crypto Assets are part of or subject to an investment contract.[12] Accordingly, Liquid Staking Providers involved in the process of minting, issuing and redeeming Staking Receipt Tokens, as described in this statement, as well as persons involved in secondary market offers and sales of Staking Receipt Tokens, do not need to register those transactions with the Commission under the Securities Act or fall within one of the Securities Act’s exemptions from registration, unless the deposited Covered Crypto Assets are part of or subject to an investment contract.

Liquid Staking Activities Covered by this Statement

The Division’s view pertains to the following Protocol Staking activities and transactions when such activities and transactions conform to the descriptions above (“Liquid Staking Activities” and each a “Liquid Staking Activity”):

• the activities undertaken by Liquid Staking Providers in connection with Liquid Staking, including their roles in connection with the earning and distribution of rewards, slashing, and the minting, issuing and redeeming of Staking Receipt Tokens, including holding deposited Covered Crypto Assets (in a wallet or smart contract) on behalf of the Depositors, issuing Staking Receipt Tokens evidencing the Depositors’ ownership of the deposited Covered Crypto Assets, and facilitating the staking of the deposited Covered Crypto Assets on behalf of the Depositors; and
• providing Ancillary Services (as described in the Protocol Staking Statement).

Discussion of Liquid Staking Activities

Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act each defines the term “security” by providing a list of various financial instruments, including “stock,” “note,” and “bond.” As noted in the Protocol Staking Statement, a Covered Crypto Asset does not constitute any of the financial instruments that are specifically enumerated in the definition of “security.” Accordingly, we conduct our analysis of certain transactions involving Covered Crypto Assets in the context of Liquid Staking under the “investment contract” test set forth in SEC v. W.J. Howey Co.[13] The “Howey test” is used to analyze arrangements or instruments not listed in those statutory sections based on their “economic realities.”[14]

In evaluating the economic realities of a transaction, the test is whether there is an investment of money in a common enterprise premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. [15] Federal courts since Howey have explained that Howey’s “efforts of others” requirement is satisfied when “the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.”[16] Federal courts also have stated that administrative and ministerial activities are not managerial or entrepreneurial efforts that satisfy Howey’s efforts of others prong.[17]

In a Liquid Staking arrangement, the Liquid Staking Provider (whether a Node Operator or not) does not provide entrepreneurial or managerial efforts to Depositors for whom it provides this service. These arrangements are similar to those discussed in the Protocol Staking Statement with respect to “Custodial Arrangements.” The Liquid Staking Provider does not decide whether, when, or how much of a Depositor’s Covered Crypto Assets to stake and is simply acting as an agent in connection with staking the Covered Crypto Assets on behalf of the Depositor.[18] In addition, the Liquid Staking Provider’s taking custody of the deposited Covered Crypto Assets and in some cases selecting a Node Operator is not sufficient to satisfy Howey’s “efforts of others” requirement because these activities are administrative or ministerial in nature and do not involve managerial or entrepreneurial efforts. Further, the Liquid Staking Provider does not guarantee or otherwise set the amount of the rewards owed to Depositors, although the Liquid Staking Provider may subtract from such amount its fees (whether fixed or a percentage of such amount).[19]

Further, Liquid Staking Providers may provide Ancillary Services to Depositors in connection with Liquid Staking. Each of these Ancillary Services is merely administrative or ministerial in nature and does not involve entrepreneurial or managerial efforts. As noted in the Protocol Staking Statement, they are facets of a general activity ‒ Protocol Staking ‒ that itself is not entrepreneurial or managerial in nature. Whether a Liquid Staking Provider offers Ancillary Services separately or as a group of services, the Liquid Staking Provider does not act in a managerial or entrepreneurial way if it provides any or all of these services.

Discussion of Staking Receipt Tokens

Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act each defines the term “security” by providing a list of various financial instruments, including “stock,” “note,” and “bond.” As part of Liquid Staking, a Staking Receipt Token issued to a Depositor does not constitute any of the financial instruments specifically enumerated in the definition of “security.”[20] While Depositors are entitled to rewards accruing with respect to their deposited Covered Crypto Assets, the Staking Receipt Token itself does not generate rewards. Rather, rewards are generated from the underlying Protocol Staking Activities, which (as discussed above) do not involve securities transactions. As such, the Staking Receipt Token merely evidences the deposited Covered Crypto Assets held with the Liquid Staking Providers to which the Depositor is entitled as the owner.

The definition of “security” specifically includes “receipt for” any security.[21] A Staking Receipt Token is a receipt, which is an instrument certifying that a stated amount of a Covered Crypto Asset has been deposited with the Liquid Staking Provider issuing the receipt, because it evidences the holder’s ownership of the deposited Covered Crypto Asset.[22] But a Staking Receipt Token is not a receipt for a security because the deposited Covered Crypto Asset is not a security.[23]

If a Staking Receipt Token itself is not a security, consideration must be given to whether it itself is offered and sold as part of or subject to an investment contract. Determining whether a Staking Receipt Token is offered and sold as part of or subject to an investment contract is analyzed using the Howey test. It is the Division’s view that Staking Receipt Tokens are not offered and sold as part of or subject to an investment contract because the parties involved in the process of minting, issuing and redeeming Staking Receipt Tokens do not provide entrepreneurial or managerial efforts to Staked Receipt Token holders and any economic benefits realized by Staking Receipt Tokens holders are not derived from any such efforts.[24] That is, the value of Staking Receipt Tokens is derived from the value of the deposited Covered Crypto Assets and not from the entrepreneurial or managerial efforts of the Liquid Staking Provider or those of any other third party involved in the process of minting, issuing and redeeming Staking Receipt Tokens. Moreover, any rewards accruing with respect to the deposited Covered Crypto Assets are realized from Protocol Staking Activities that, as discussed above, do not involve the offer and sale of securities within the meaning of Section 2(a)(1) of the Securities Act or Section 3(a)(10) of the Exchange Act.

Notwithstanding any of the foregoing, this statement does not extend to Liquid Staking Provider Activities that go beyond administrative and ministerial activities, or to the offer, sale, or issuance of Staking Receipt Tokens that are inconsistent with the descriptions set forth above.

For further information, please contact the Division’s Office of Chief Counsel by submitting a web-based request form at https://www.sec.gov/forms/corp_fin_interpretive.