Crypto Staking ETFs On The Horizon: SEC Clarifies Liquid Staking Tokens Are Not Securities Under US Law

In its latest staff guidance, issued on Tuesday, the US Securities and Exchange Commission (SEC) clarified that under certain circumstances, cryptocurrency liquid staking activities and the tokens they generate do not constitute security offerings.

This is considered a milestone in the securities watchdog’s ongoing efforts to provide clearer guidance on the regulation of digital assets. The crypto industry hails it a rare regulatory victory and a major step forward for decentralized finance (DeFi) and institutional adoption of the asset class.

SEC Says Crypto Liquidity Staking Is Not a Securities Offering

Liquid staking has become one of the largest sub-sectors of the crypto industry. According to DefiLlama, the total value locked (TVL) on staking protocols is nearing $67 billion across all blockchains that support the activity, with Ethereum alone accounting for $51 billion of the TVL. As of August 6, Lido (LDO) is the largest liquid staking platform with $31.89 billion in TVL across five chains, followed by Binance Staked ETH with $11.43 billion locked on two chains, and Jito with $2.56 billion on Solana.

Referring to key sections of the Securities Act of 1933 and the Securities Exchange Act of 1934, the Commission stated that “depending on the facts and circumstances,” liquid staking does not involve the offer and sale of securities.

The SEC defined liquid staking as the process of delegating cryptocurrencies through a protocol and receiving a “liquid staking receipt token”, which serves as evidence of the staker’s ownership. Paul Atkins, the agency’s chairman, called the staff statement a “significant step forward” in clarifying the SEC’s view about crypto asset activities that do not fall within its jurisdiction.

The process typically involves crypto holders allocating their tokens to a blockchain validator by depositing them into a third-party liquid staking provider in exchange for a derivative token, which can be traded or used in DeFi without unstaking the original asset.

Speaking to Cointelegraph, Mara Schmeidt, CEO of blockchain development firm Alluvial, said the decision will now allow institutions to “confidently” integrate liquid staking tokens into their products, driving new revenue streams, expanding customer bases, and creating secondary markets for staked assets. She added that it sets the stage for a wave of new products and services that will accelerate mainstream participation in the crypto market.

Asset Managers and Crypto Advocates Request the SEC to Allow Liquid Staking for SOL and ETH ETFs

The SEC’s clarification on the subject comes amid rising institutional interest in the product. Last week, Solana infrastructure firm Jito Labs, asset managers Bitwise, VanEck, and Multicoin Capital Management, and the Solana Policy Institute wrote a letter to the agency urging it to permit liquid staking for spot Solana exchange-traded products (ETPs).

The group’s letter states that if ETP issuers are forced to limit staking to a set percentage of assets, large share creations and redemptions would force rebalancing, thereby increasing the costs of operating the funds and introducing potential “tracking error”. They argued that LSTs could improve capital efficiency by allowing issuers to avoid forced rebalancing in that scenario and could even be delivered or received in-kind by authorized participants (APs).

The letter also highlighted some additional benefits of LSTs, such as providing increased security to the native blockchain, more product options for investors, and additional revenue for ETPs. However, liquid staking isn’t without its drawbacks, chief among them being smart contract bugs or vulnerabilities, token depegging events, and slashing risks, which the letter did not cover.

Currently, at least nine Solana ETPs are awaiting a decision from the SEC to be listed on Wall Street. 

Issuers of Ether-backed funds are also vying for staking features, with asset management giant BlackRock applying to allow staking for its Nasdaq-listed iShares Ether ETF (ETHA) – the largest fund tracking the spot market performance of ETH, with an AUM of $10.47 billion. The Nasdaq stock exchange made a similar request to the SEC for the Grayscale Ethereum Trust ETF (ETHE) and Grayscale Ethereum Mini Trust ETF in January, pending a decision.

Analysts are bullish on the prospect of staking, citing that adding the feature to Ether ETFs could result in an influx of institutional capital. Back in March, BlackRock’s head of digital assets, Robbie Mitchnick, said that while the firm’s ETH product has been successful, it is “less perfect” without staking.

Discover More: Security Tokens Vs Utility Tokens In Crypto: Legal & Functional Difference

Will Crypto Liquid Staking Pass the SEC’s Howey Test?

The SEC’s liquid staking guidance has drawn criticism from within the agency, with Commissioner Caroline Crenshaw warning that the staff statement relies on “shaky assumptions” and offers little regulatory clarity.

Katherine Dowling, general counsel and chief compliance officer at Bitwise, said that the SEC has made it clear that certain liquid staking activities do not involve security offerings and therefore would not be required to register. Whether the activity qualifies is likely to rely on key elements of the Howey Test, the legal standard used to determine whether an asset or transaction constitutes a securities offering.

According to the agency, liquid staking providers performing only administrative or ministerial functions, such as issuing tokens that represent ownership of staked assets, may not require securities registrations. This classification also includes those issuing “staking receipt tokens”, which is the SEC’s definition of crypto assets that depositors receive in exchange for liquid staking.

The SEC wrote in its guidance that the test to evaluate the “economic realities” of an LST transaction involves determining whether there is a monetary investment in a common enterprise permitted on the expectation of profits derived from the “entrepreneurial or managerial efforts of others”.

The guidance is part of the Commission’s ‘Project Crypto’ initiative, which seeks to adopt the policy recommendations made by President Trump’s Working Group on Digital Assets to overhaul the regulatory framework for cryptocurrency trading in the United States. 

Under the leadership of Atkins, the SEC has taken a more lenient approach to regulating digital assets. In May, the agency clarified that proof-of-stake (PoS) blockchains do not constitute securities transactions. Last month, it approved in-kind creations and redemptions for spot Bitcoin and Ether ETFs, which will allow APs to exchange the funds’ shares directly for the underlying assets rather than cash.