SEC Greenlights Liquid Staking With Clear Guidelines—Major Step Forward for DeFi

As a significant breakthrough in the world of decentralized finance, the U.S. Securities and Exchange Commission (SEC) has shed some much-needed light on liquid staking. SEC has clarified that some liquid staking activities, together with their Staking Receipt Tokens, do not qualify as securities under the existing federal securities regulations.

The SEC Issues Statement on Liquid Staking

As regulators push towards achieving Trump’s vision of making the U.S. the crypto capital of the world, the SEC has issued guidance on liquid staking. The regulator explained that some liquid staking actions do not meet the definition of federal securities law.

In guidance issued on Tuesday, the SEC’s Division of Corporation Finance said individuals operating liquid staking involving tokens issued by a more centralized entity need not register with the SEC under securities laws.

Liquid Staking, According To the SEC

In its statement, the SEC defined Liquid Staking as a form of Protocol Staking, where owners of so-called Covered Crypto Assets transfer them to a third-party Protocol Staking service provider. Newly minted crypto assets referred to as Staking Receipt Tokens will, in turn, be given to the depositors.

Depositors receive Staking Receipt Tokens on an equal basis to the amount of the Covered Crypto Assets deposited as part of Liquid Staking. These are receipt tokens in order to prove the ownership of the staked crypto. Stakers also get reward tokens. 

The users are allowed to trade these receipt tokens or utilize them in other crypto apps, but their original tokens remain staked. Popular liquid staking tokens are stETH (staked Ethereum) and rETH (Rocket Pool ETH).

According to the statement provided by the SEC, those tokens act as the receipts of the assets that have been deposited. Liquid staking enables crypto owners to access the rewards of staking and still be able to use their assets in other ways. 

What Applies To Liquid Staking

The Howey test enabled the SEC to determine whether liquid staking is included as a securities transaction. The test looks at the existence of a contribution to a shared business where there are profits to be made due to the endeavors of others.

According to the statement, companies that offer and sell Staking Receipt Tokens within the Division’s definition of Liquid Staking are not under the securities laws. However, they will be categorized as securities if the assets are part of investment contracts.

Liquid Staking Providers who are involved in minting, issuing, and redeeming Staking Receipt Tokens and people involved in the secondary market also do not need to register those transactions with the SEC under the Securities Act, unless it is part of or subject to an investment contract.

According to the guidance, liquid staking providers can only benefit from this guidance if they stick to only administrative tasks. They would not be able to make investment decisions on behalf of users and ensure certain returns.

Why The SEC’s Greenlight Matters

Liquid staking is one of the fastest-growing industries in crypto today. According to data from DeFiLlama, it is a $68.4 billion sector. The SEC’s statement is an important step toward regulatory certainty and could encourage more individuals and institutions to get involved with liquid staking. 

After years of regulatory uncertainty, Crypto companies were glad to receive the news. Rebecca Rettig, the legal counsel at Jito Labs, said that the crypto sector has been expecting this because there is no securities transaction in liquid staking because providers are not involved in entrepreneurial or managerial activities.