Yesterday the Securities and Exchange Commission took a big step in starting to provide regulatory clarity around cryptocurrencies, by issuing a note saying that solo and pooled mining for proof of work blockchains will generally not be considered to involve securities.
The crux of the argument is that in both cases the expectation of profit is based on the efforts of the miner, not of others. The Howey securities test requires the expectation of profit based on the efforts of third parties.
Acting SEC Chair Uyeda and Commissioner Peirce complained that the SEC under the previous administration failed to provide clarity around cryptocurrencies and instead aimed to regulate by enforcement. They are now trying to correct the course.
What about Proof of Stake?
While Bitcoin miners play an important role, the vast majority of blockchains today use proof of stake to secure the network rather than proof of work. So, the bigger question is how will staking be treated? There’s some expectation that staking on its own may not be classed as a security, because the purpose is to secure the network. However, that remains to be seen.
On the other hand, there’s a reasonable likelihood that Staking-as-a-Service could be considered as involving securities in many cases. Staking-as-a-Service involves end users delegating their coins to a third party, who stakes them on their behalf.
When the SEC shut down Kraken’s staking program two years ago, in one of her more forthright dissentions, Commissioner Peirce said it was the action of a “paternalistic and lazy regulator”. However, her dissent was more about the SEC neither providing regulatory clarity nor a pathway for a staking service provider to become regulated. She noted that the topic “raises a host of complicated questions, including whether the staking program as a whole would be registered or whether each token’s staking program would be separately registered.”
The FIT Act for digital assets was passed by the House last year (but not the Senate). It included a clause referencing staking, classing it as an ‘end user distribution’ which is explicitly excluded from being treated as an investment contract by the Act.
However, this only applies to “activities directly related to the operation of the blockchain system, such as mining, validating, staking, or other activity directly tied to the operation of the blockchain system”. Again, arguably this is for those that perform staking directly but does not cover Staking-as-a-Service.
