Key Takeaways

• Alison Mangiero of POSA provides an overview of staking and its importance for the security and maintenance of blockchain networks, emphasizing that staking should not be considered an investment scheme or subject to securities regulations.
• The regulatory landscape for staking is complex, needing a clear differentiation between staking, lending, and other financial products to facilitate appropriate regulatory treatment.
• POSA established the Staking as a Service Industry Principles in 2019, providing guidelines for industry participants to maintain focus on network security and avoid regulatory scrutiny. The principles include using non-financial terminology, focusing on security and network participation, and not providing guarantees on rewards earned.
• Liquid Staking Tokens (LSTs) should be accurately described and differentiated from derivatives (LSDs) to ensure clarity and avoid regulatory confusion. LSTs should not be considered investment contracts, notes, or securities under U.S. federal securities laws, nor should they be considered swaps under commodity law.
• Accurate terminology and clear communication are crucial when discussing staking and related services, making it easier for regulators and lawmakers to understand the technology and its importance in blockchain networks.

• Ongoing regulatory developments may include potential banking packages addressing stablecoin and custody regulations and additional enforcement actions targeting custodial staking arrangements.

• The industry should prioritize educating regulators and lawmakers on the differences between staking, lending, and other financial products to facilitate appropriate regulatory treatment and promote a healthy regulatory environment.

In a recent panel discussion during the Staking Rewards Institutional Ethereum Staking Forum, Alison Mangiero, Executive Director of the Proof of Stake Alliance (POSA), delivered a comprehensive presentation on staking regulation in the blockchain industry. In her talk, Alison discusses the legal and regulatory landscape surrounding staking, various staking models, and how these regulations can impact the industry.

Understanding the Four Staking Models

Alison outlines four distinct staking models that exist within the blockchain space:

1. Protocol staking: Users deposit ETH into a smart contract, run Ethereum software, and receive rewards directly from the protocol.
2. Custodial staking: Users enter an agreement with a service provider to stake ETH using the provider’s infrastructure. The provider takes custody of the ETH.
3. Delegated self-custodial Software as a Service (SaaS) staking: Users maintain control and ownership of their ETH while using professional software to stake. Custody of tokens is never relinquished.
4. Smart contract-facilitated liquid staking: Users deposit ETH into a smart contract, which spins up a validator when it receives 32 ETH in total.

Staking is not an Investment Scheme

Alison emphasizes that staking should not be considered an investment scheme, as it is crucial for maintaining and securing blockchain networks. Validators provide technical services, not financial services. Thus, staking should not be viewed as an investment contract or security.

Staking as a Service Industry Principles

In 2019, POSA developed a set of Staking as a Service Industry Principles, which still hold relevance today:

1. Use non-financial terminology when discussing staking.
2. Focus on security and network participation.
3. Do not provide guarantees on the amount of rewards earned.

Alison explains that these principles aim to help the industry provide a clear understanding of staking and its importance in blockchain networks.

Liquid Staking Tokens vs. Derivatives

A working group was formed to analyze liquid staking tokens (LSTs) under US law, concluding that LSTs for digital commodities should not be considered investment contracts, notes, or securities. They should also not be treated as swaps under commodity law. Alison stresses the importance of accurate terminology, advocating for using “liquid staking tokens” instead of the commonly misused term “liquid staking derivatives.”

Liquid Staking Principles

The working group also developed a set of liquid staking principles, which include:

1. Using appropriate terminology to describe tokens (LSTs vs. LSDs).
2. Focusing on increasing liquidity without sacrificing the importance of staking for security and network participation.
3. Developing tools that enable direct staking with access to liquidity.
4. Refraining from providing investment advice.

These principles aim to guide the industry in developing and offering liquid staking products without crossing regulatory boundaries.

Possible Regulatory Developments

Alison shares her thoughts on possible regulatory developments in the near future, such as a potential banking package that could include stablecoin and custody regulations. She also anticipates additional enforcement actions, although the specifics remain uncertain.

“I think there will be bills introduced in Congress. I think the likelihood of them passing is not likely in the coming months. But there will be some action from people trying to introduce sensible regulations.”

Alison Mangiero

Importance of Accurate Descriptions and Terminology

Alison concludes her talk with a call to the industry to use accurate descriptions and terminology when discussing staking and related activities. She believes that doing so will make engaging with regulators and lawmakers easier while explaining the importance of staking in blockchain networks.

“We should be cautious about the words that we use, the way that we’re describing the activities that we engage in, and also explain why it’s essential for the functioning of these networks.”

Alison Mangiero

Final Thoughts

Alison Mangiero of POSA highlights the importance of staking in the blockchain ecosystem and the need for a clear and accurate understanding of its role in maintaining network security. By following established industry principles and promoting accurate terminology, stakeholders can work together to create a favorable regulatory environment that fosters innovation and growth in the blockchain and staking sectors. As the industry evolves and regulatory landscapes change, education and open communication with regulators and lawmakers will be essential in ensuring that staking and related services are treated fairly and appropriately under existing and future regulations. For future conversations like this, check out our Staking Summit 2023.

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