Staking Services Are Not Securities
The rise of cryptocurrencies introduced a host of new terms that the world is still getting used to. Staking services are one example. Staking is the crypto equivalent of saving fiat currency in an interest-earning account. Many in the crypto world depend on staking to generate passive income.
But as with anything with income potential, crypto staking attracted great interest. Businesses jumped at every opportunity to provide staking services at a fee. The problem is that the tinkering with the services led to some equating it with securities. However, this article argues that staking services may or may not be securities.
Explaining Staking Services
Staking services are a type of cryptocurrency savings service provided by certain companies. They allow individuals to generate passive income by not spending their tokens. CoinDesk explains that staking is the crypto equivalent of putting money in a high-yield savings account.
When individuals deposit money in a savings account, the financial institution takes the funds and often creates loan facilities. The reward for locking up the money with the financial institution is receiving a portion of the interest earned from the lent-out money.
In the same breath, individuals lock up their tokens with staking service providers. Typically, the staking gives them the power to participate in making the decisions that govern the community. Their input may be depended upon to decide the direction the community takes regarding security and the operations of the blockchain platform. The 'stakers' earn rewards for their input and holding of the crypto in the staking reserves. However, unlike traditional finance, the rewards earned from staking are often high.
What are Securities?
Securities are financial instruments that represent ownership in a company. They confer the owner the right to receive some form of economic benefits from the company, such as interest or dividends. Securities are typically issued by companies and other institutions, such as government agencies or municipal authorities, to raise capital or to provide liquidity to investors.
Securities can take many forms, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), options, futures contracts, and other derivatives. They are regulated by securities laws; each country has an institution dedicated to policing the financial securities market, such as the Securities and Exchange Commission (SEC) in the United States.
On the one hand, regulatory institutions make laws that guide the activities classified under securities. On the other hand, they protect participants from fraud and other abuses. These regulations typically require companies to provide detailed information about their financial health and business operations to investors before issuing securities. Additionally, securities regulations demand that individuals or firms who sell securities be licensed and adhere to strict rules of conduct.
How Staking Services Differ from Traditional Securities
While staking services may share similarities with traditional securities, several key differences set them apart.
First, let's talk ownership. With traditional securities, investors own a share of a company. As such, the value of their investment is tied to the company's performance. On the contrary, staking services entail individuals staking their own coins. Therefore, the value of their investment is linked to the performance of the cryptocurrency network.
Second, let's talk about the level of control over the assets. On the one hand, investors in traditional securities typically have some level of control over the decision-making by the company in which they have an interest. For example, their input is material when appointing new board members. The investors are also consulted before the allocation of profits. On the other hand, staking services do not grant individuals any control over the cryptocurrency network. Instead, key decisions are often made by another group of participants called validators.
The third difference regards the potential for returns. While traditional securities may offer the potential for capital gains or dividend payments, staking services provide returns in the form of rewards for helping to secure the cryptocurrency network. The rewards are typically paid out in the form of additional cryptocurrency. The amount of rewards earned depends on the amount of cryptocurrency staked and the performance of the network.
Fourthly, the level of regulation. Traditional securities are subject to a wide range of regulations, including disclosure requirements and restrictions on insider trading. Contrarily, staking services are often less regulated. In fact, many countries do not have a legal framework for the asset class.
Finally, the risk levels differ significantly. For traditional securities, investors face many risks, including market volatility, company performance, and regulatory changes. In contrast, staking services only face risks tied to the crypto network. Although 'stakers' are more likely to fall victim to market manipulation and fraud, the risks are different in nature and require a different approach to risk management.
So, Are Staking Services Securities?
As things stand, there is no straight answer to this question. This is because the answer one receives depends on various factors, including the nature of the service, the cryptocurrency being staked, and the regulatory framework in which the service operates.
In the United States, the SEC has taken the position that certain cryptocurrencies are securities. For example, the regulator argues that "DAO tokens" are securities because they meet the definition of an "investment contract." An investment contract involves the transfer of value and may accrue profits for the parties involved. Thus, the regulator categorizes it as a security.
Based on this definition, it is possible that some staking services could be considered securities. For example, suppose a staking service were to promise a guaranteed rate of return or market the service as an investment opportunity. In that case, it could be seen as an investment contract and, therefore, a security.
However, many staking services do not make any such promises or market themselves as investment opportunities. Instead, they simply provide a service that allows individuals to participate in staking without having to do it themselves. In these cases, it is unlikely that the service would be considered a security.
Furthermore, even if a staking service were considered a security, it would not necessarily be subject to the same regulations as traditional securities. This is because the regulatory framework for cryptocurrencies is still evolving, and it is not always clear how existing laws apply to new technologies like staking services.