Did the SEC Just Retreat on Liquid Staking: SEC Commissioner Dashes Earning yield ETF Dreams

Liquid locking tokens serves as a vital component of the crypto landscape, particularly within proof-of-stake networks such as ETH and Solana. Since community members need to operate nodes and “stake” or “lock up” their assets to maintain network security, their participation is crucial for its overall protection. An increase in participants enhances the blockchain’s resilience against malicious attacks.

Thus, on August 5, when the United States Securities and Trading network Commission (SEC) published new guidance indicating that certain liquid staking activities may not be subject to its regulation, there was a notable surge of enthusiasm in the liquid earning yield crypto market.

Although non-binding, this guidance was viewed as a significant advancement for the United States, with particular relevance to SEC officials adopting a more favorable stance towards crypto innovation. However, despite its potential to revolutionize the sector, not everyone is on board.

SEC Commissioner Caroline Crenshaw is questioning the validity of this guidance, thereby undermining the optimism surrounding the integration of liquid locking tokens into spot ETH ETFs and other similar products reliant on liquid staking providers for additional protection.

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The SEC’s Position on Liquid Staking

Liquid staking is fundamental to crypto, particularly in the DeFi domain. As per Coingecko, the sector now has a total value locked (TVL) exceeding $89 billion, surpassing the market capitalization of the leading Solana meme coins.

(Source: Coingecko)

In liquid earning yield, crypto holders can stake assets like ETH and SOL through providers such as Lido Finance, Marinade Finance, or Rocket Pool, while obtaining liquid tokens that represent their staked assets.

These liquid earning yield tokens (LSTs) can be utilized or traded on various Decentralized finance platforms, providing flexibility, all while ensuring that the staker continues to secure the underlying protocol.

Traditionally, particularly under Gary Gensler’s leadership, the SEC has maintained a strict stance, asserting that numerous staking programs, including liquid locking tokens, bear resemblance to investment contracts per the Howey Test. They likened locking tokens and liquid earning yield activities to securities offerings since stakers anticipate returns from the efforts of others.

This viewpoint has resulted in enforcement actions, culminating in Kraken terminating its locking tokens program in the United States, alongside scrutiny directed towards many providers offering staking-as-a-service.

On August 5, the SEC, via the Division of Corporation Finance, released a non-binding guidance which altered their position. They stated that specific liquid earning yield arrangements, particularly if the coin plays a role in a genuinely decentralized protocol, may not necessarily fulfill the criteria outlined by the Howey Test and, therefore, are not considered securities offerings.

Paul Atkins, the SEC chair, emphasized that while this guidance doesn’t represent a formal rule and lacks legal authority beyond staff interpretation, it constitutes a “notable step” towards achieving regulatory clarity in the crypto space.

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Crenshaw’s Dissent: A Regulatory Reality Check

Due to the varied interpretations permissible with this guidance, Commissioner Caroline Crenshaw issued a critical dissent, stating it was largely based on unsupported premises, particularly regarding the design of the liquid staking program.

She contended that the guidance does not adequately represent the complexities of the DeFi ecosystem, cautioning that since it is non-binding, it offers minimal security to platforms and entities involved in liquid staking. Consequently, her position suggests that liquid staking programs may still be inadvertently engaging in the illegal offering of unregistered securities.

Crenshaw advises those participating in liquid locking tokens activities to proceed with caution, indicating that the guidance may not “reflect the current conditions on the ground.”

“Given its unsupported factual claims and limited legal analysis, the Liquid Earning yield Statement should provide minimal assurance to entities engaged in liquid staking, particularly as the statement accurately notes, it merely “represents the views of the staff of the Division of Corporation Finance,” not the perspectives of this or any forthcoming Commission.”

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Implications for Spot Ethereum ETF Issuers

Her philosophical stance puts her in disagreement with Atkins, who supports fewer regulations in the crypto realm to enhance innovation and attract capital to some of the top meme token ICOs. This could also pose challenges for spot ETH ETF issuers, who were uptrend that the SEC would allow them to stake collateral for underlying shares and earn returns.

Upon the SEC’s approval of spot Ethereum ETFs in 2024, they excluded locking tokens functionalities. Their concern was that staking would effectively categorize these ETFs as securities, as issuers would be deriving passive income. This differs from spot BTC ETFs, since BTC does not base level earning yield.

The SEC guidance raises hopes that firms like Grayscale, BlackRock, and other spot ETH ETF issuers may be able to incorporate liquid staking into their ETFs without infringing upon U.S. securities laws. Adopting such an approach would align with global trends, as nations like Canada and regions like Hong Kong support approved crypto ETFs that include staking aspects.

However, Crenshaw’s dissent, in light of the guidance’s non-binding authority, dampens these aspirations. Her caution suggests that regulators could still take enforcement actions against U.S. spot Ethereum ETF issuers if they decide to implement liquid earning yield programs. For the time being, issuers will need to remain patient, recognizing they cannot depend on this guidance without further legal clarification from the SEC.

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The post Did the SEC Just Back Down on Liquid Staking: SEC Commissioner Shuts Down Locking tokens ETF Hopes appeared first on 99Bitcoins.