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On September 15, 2022, the Wall Street Journal reported Securities and Exchange Commission
(SEC) Chairman Gary Gensler told reporters after a Congressional
hearing that digital assets and the intermediaries dealing in such
assets that allow for staking may shift the “efforts of
others” analysis under the Howey test. If so, they
would be re-categorized as securities.
“From the coin’s perspective […] that’s another
indicia that under the Howey test, the investing public is
anticipating profits based on the efforts of others,” Mr.
Gensler went on to clarify that he wasn’t referring to any
specific digital asset or cryptocurrency, but when an intermediary
offers staking services to its customers, it “looks very
similar—with some changes of labeling—to
This characterization of the staking mechanism being scrutinized
begs the question: which kind of staking concerns the Chairman?
There are two primary validation models for blockchains:
proof-of-work and proof-of-stake.
Under a proof-of-work model, a network of nodes (who work to
validate transactions) complete complicated computational problems,
fighting for the right to validate transactions and receive newly
minted digital assets as rewards.
Under a proof-of-stake model, nodes increase the likelihood of
being granted the opportunity to verify transactions and receive
the corresponding reward by “staking” the native digital
asset to that chain. The staked assets act as a form of collateral
and can be destroyed or confiscated if there is impropriety or
incompetence (the recourse and process dependent on the specific
blockchain in question).
Alternatively, certain service providers have offered the
opportunity to customers to “stake” their digital assets
in exchange for a particular defined return. When analyzing this
form of staking, the SEC has been quite consistent in holding that
these “crypto-lending” services constitute securities,
fall within their purview, and must register, comply with
applicable exemption from registration, or pay the price (in
February BlockFi Lending paid the price in the amount of $100
This distinction, between staking as part of the mechanical
underpinning of a functioning blockchain and staking as a financial
instrument, highlights the need for clarity – clarity of
terms, clarity of forms, clarity of roles and of expectations.
As discussed previously, some members of the legislature
have taken steps to try and provide the necessary framework for a
safe and vibrant decentralized world and marketplace. Since then,
both the Senate Agriculture Committee, which oversees the Commodity
Futures Trading Commission (CFTC), and the Senate Banking
Committee, which oversees the SEC, have held hearings. This degree
of attention would be heartening, if not for the fact that these
hearings were conducted simultaneously – indicating a
jockeying for jurisdiction and authority as opposed to a cohesive
and thoughtful approach to how to best protect investors while also
staying at the forefront of emerging technologies.
Until there is some form of clarity from the legislature, it is
expected that the SEC will continue to pursue
regulation-by-enforcement, highlighting the need for entrepreneurs
and investors to remain vigilant to stay on the right side of a
moving line. As always, Dinsmore attorneys remain available to
counsel market participants on matters relating to blockchain
technology, digital assets and their regulatory framework.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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