SEC Approves Liquid Staking of Crypto Assets

The announcement is the latest in a series of steps taken by the SEC and the CFTC to clarify how securities laws apply to various types of crypto assets.

Liquid staking is the practice by which users of proof-of-stake blockchain networks such as Ethereum, Lido, and Solana, can deposit their protocol-native coins with a network validator usually through an intermediary, and receive a “staking receipt token” of equal value in return on a one-for-one basis. The strategy allows the user to earn a proportional share of the awards accrued by the validator for certifying transactions on the network while retaining liquidity to engage in other transactions, including other staking activities.

The strategy is a popular way for crypto users to grow their holdings without needing to do the heavy lifting of validating transactions. Bitcoin is a proof-of-work network so the strategy cannot be used with it.

In the view of the SEC, the synthetic tokens received by depositors are properly classified as receipts. Therefore, the do not meet the “Howey” test standard for analyzing whether a particular instrument or transaction should be considered a security, unless the underlying deposited asset is part of an investment contract.

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The policy drew an immediate rebuke from the chief of staff to former SEC chair Gary Gensler, Amanda Fischer. In a long thread on X, she likened liquid staking to the “rehypothecation” strategy that contributed to the collapse of Lehman Brothers in 2007 and the subsequent financial crisis of 2008-2009.

Related: CFTC To Allow Spot Trading of Crypto Assets on Regulated Futures Exchanges

Under rehypothecation, a lender re-uses collateral deposited by a borrower as their own collateral in subsequent transactions, in exchange additional funds or a percentage of earnings from those downstream transactions. It’s a form of leverage that can increase returns when successful, like margin trading, but also increases risk.

“[I]f the synthetic token fails or is hacked, that failure can now cascade wider and deeper through crypto, exacerbating losses,” Fischer wrote. “Assets can also be restaked and restaked and restaked – generating synethic token upon synthetic token. It begins to look a lot like the leverage on derivatives tied to mortgages. A subprime mortgage is a risk to one bank – but when there are 30x bets on that mortgage? Woof”

Her comments drew their own rebuke, however, from some prominent crypto figures, Decrypt reported. Joe Doll, general counsel at Magic Eden, in his own post on X, called her Fischer’s analysis “incredibly misleading.”

It  “demonstrates either a misunderstanding of the basic technological features that underpin liquid staking (dumb/ill-prepared), or deliberate mischaracterization (malicious),” he wrote.

Mert Mumtaz, CEO of Solana infrastructure firm Helius Labs, wrote,  “Comparing transparent, decentralized systems governed by auditable code to opaque, shady ones enforced by crooks and saying the former is worse is insane work. You either have no idea how LSTs actually work or are being intentionally obtuse.”

Current SEC chair Paul Atkins praised the new policy statement. “Under my leadership, the SEC is committed to providing clear guidance on the application of the federal securities laws to emerging technologies and financial activities,” he said in a news release. “Today’s staff statement on liquid staking is a significant step forward in clarifying the staff’s view about crypto asset activities that do not fall within the SEC’s jurisdiction. I am pleased that the SEC’s Project Crypto initiative is already producing results for the American people.”