SEC Staff Guidance on Liquid Staking Triggers Industry Debate and Regulatory Concerns

A U.S. Securities and Exchange Commission (SEC) staff statement regarding liquid staking has, as expected, drawn different views and opinions across all corners of the crypto space. Although some believe that this nonbinding guidance could help drive institutional and retail adoption, others have raised concerns over the risk, potential challenges, and key legal hurdles.

Staff Member Guidance Sparks Industry Debate

According to the SEC staff guidance, liquid staking and its associated assets are not classified as securities in the agency’s rule book. However, this comment has led to mixed reviews from industry stakeholders, highlighting the gray area around one of the crypto industry’s trending sectors.

SEC commissioner Caroline Crenshaw has slammed the recent guidance, saying that it does not fully capture the regulatory complexities.

But unfortunately, as with the Division’s other recent Howey statements, the conclusions here are vague generalizations that cannot readily be mapped onto real-world services.

Crenshaw

Crenshaw also highlighted two major gaps overlooked by the SEC staff’s guidelines, one of which is the controversial claims about the operational framework of liquid staking. The second flaw pertains to the staff’s legal conclusions, which are overly conditional and thus render the guide unreliable for regulatory compliance. 

Crenshaw explained that any staking activity that does not fit with the conditions of the guidelines would fall outside its definition. And as such, the SEC chief maintained that the staff’s statements fail to provide the much-needed safety net or complete oversight of staking activities.

She further clarified that the guidance does not represent the official stance of the SEC, but rather the personal view of a staff member. Hence, she urged the public to treat the guide as a cautionary measure, not a regulatory report.

The head of institutional staking at Marinade echoed similar comments, stating that these “guidelines are not law” and are subject to debate. He also called for the broader industry to work together in order to establish positive regulatory results.

Regulatory Uncertainty Looms Over Liquid Staking Models

Unlike traditional staking, liquid staking keeps funds usable during staking, meaning that users could earn rewards while being able to use their tokens. Basically, users receive a synthetic version of any staked token, which can be reused to earn benefits.

Several liquid staking platforms have varying operational and technical principles. As stated by Crenshaw, the SEC staff’s guidance may not cover these various frameworks.

Lido Labs Chief Legal Officer Sam Kim also noted that there are regulatory question marks around key areas such as “restaking”, “cross-chain staking”, and other financial products that leverage staking. He explained that these components will still require further regulatory insight.

SOL Strategies Chief Strategy Officer Michael Hubbard stated that staking networks that provide basic admin tasks, such as issuing one-for-one receipt tokens and avoiding promising returns, may fit the rules. Still, he noted that the guidance is strict, and any deviation could change their regulatory perception.

Staking Rewards, Tax Ambiguity, and Liquid Staking Risks

Apart from the lack of full regulatory coverage, the staff’s statement failed to offer clarity regarding taxation of staking rewards.

Here are some key notes regarding this topic:

• Uncertainty on timing: It’s unclear whether staking rewards are taxed when received or when sold.
• Legal cases in progress: Courts are currently reviewing this question, with active cases underway.
• Policy advocacy: Industry groups are pushing Congress for fairer staking tax rules to encourage growth.
• Grantor trust hurdle: Existing trust tax rules create challenges for including staking in exchange-traded funds (ETFs).

Meanwhile, former SEC Chief of Staff Amanda Fischer likened liquid staking to the risky financial moves that drove the crash of the Lehman Brothers in 2008.

Taking to X (formerly Twitter), Fischer cautioned that liquid staking could cause a heavy financial blow to the market. She argued that offering a synthetic version of an asset is akin to how the Lehman Brothers reused clients’ investments to back high-risk ventures. 

According to the former SEC chief, liquid staking could pose a similar threat if not properly regulated. 
She also pointed out the issues associated with relying on token issuers, possibly including delays during token issuance, vulnerability to hacking, and other technical issues as strong risk factors that could affect the broader crypto market. In a recent report, the SEC also raised concerns over liquid staking, citing the associated legal risks.