Regulatory Clarity for Cryptocurrencies
The Securities and Exchange Commission (SEC) has taken a major step towards providing regulatory clarity around cryptocurrencies. In a recent note, the SEC stated that solo and pooled mining for proof of labor blockchains will generally not be considered to involve securities. This decision relies on the concept that the expectation of profit in these cases relies on the efforts of the miner, not of others.
Understanding the Howey Securities Test
The Howey securities test requires that the expectation of profit be based on the efforts of third parties. In the case of solo and pooled mining, the profit is directly related to the miner’s efforts, not those of others. This distinction is crucial in determining whether an activity involves securities or not. Acting SEC Chair Uyeda and Commissioner Peirce have criticized the previous administration’s approach to regulating cryptocurrencies, which they consider was inadequate and failed to supply clarity.
A New Approach to Regulation
The current SEC administration is attempting to correct the course by providing more clarity around cryptocurrencies. This recent approach goals to manage through clear guidelines moderately than enforcement actions. The SEC’s note on proof of labor mining is a major step on this direction, because it provides a transparent understanding of what activities are considered securities and what aren’t.
Proof of Stake and Staking-as-a-Service
While the SEC’s note provides clarity on proof of labor mining, the larger query stays about proof of stake and staking. Most blockchains today use proof of stake to secure their networks, and the treatment of staking remains to be unclear. There is a few expectation that staking by itself is probably not considered a security, as its primary purpose is to secure the network. However, Staking-as-a-Service, which involves delegating coins to a 3rd party for staking, could also be considered a security in lots of cases.
Previous Regulatory Actions
The SEC’s previous actions on staking have been controversial. For example, the shutdown of Kraken’s staking program two years ago was criticized by Commissioner Peirce, who argued that the SEC was being “paternalistic and lazy” in its approach. She noted that the difficulty of staking raises complex questions, including whether staking programs needs to be registered and the way they needs to be regulated.
Legislative Developments
The FIT Act for digital assets, passed by the House last 12 months, features a clause referencing staking as an “end user distribution,” which is explicitly excluded from being treated as an investment contract. However, this clause only applies to activities directly related to the operation of the blockchain system, reminiscent of mining, validating, or staking. It is unclear whether this exemption would apply to Staking-as-a-Service.
Conclusion
The SEC’s recent note on proof of labor mining is a major step towards providing regulatory clarity for cryptocurrencies. While there remains to be uncertainty around proof of stake and staking, the brand new approach to regulation is a positive development. As the regulatory landscape continues to evolve, it is crucial to observe for further developments and guidance from the SEC. The treatment of staking and Staking-as-a-Service might be crucial in determining the longer term of the cryptocurrency industry, and clarity on these issues is eagerly awaited.
