SEC Says "Liquid Staking" Activities Do Not Create a "Security"
Commentary by Gage Raju-Salicki
The SEC Division of Corporation Finance ("Division") analyzed the "economic realities" of "Liquid Staking" arrangements—including the issuance of staking receipt tokens—under the Supreme Court's Howey test to determine whether they involve "a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others."
The Division said "liquid staking" refers "to a type of Protocol Staking whereby owners of Covered Crypto Assets deposit their Covered Crypto Assets with a third-party Protocol Staking service provider (such owners, 'Depositors') and in return receive newly 'minted' (or created) crypto assets ('Staking Receipt Tokens') that evidence Depositors' ownership of the deposited Covered Crypto Assets and any rewards (as described in the Protocol Staking Statement) that accrue to the deposited Covered Crypto Assets."
In its public statement, the Division concluded that Liquid Staking activities and the issuance of staking receipt tokens do not constitute the offer or sale of securities under the Securities Act or the Exchange Act. The Division concluded that Liquid Staking does not involve the "entrepreneurial or managerial efforts" of others, as Liquid Staking Providers perform only "administrative or ministerial" functions on behalf of Depositors. The Division stated that activities such as staking assets, issuing receipt tokens and selecting node operators do not satisfy the Howey test, and that any rewards earned are generated by the protocol itself—not by the actions or decisions of the provider.
The Division found that a Staking Receipt Token is not a "security" because it does not fall within the specific financial instruments listed in the Securities and Exchange Acts. The Division stated that, although depositors may earn rewards from the crypto assets they stake, the token itself does not generate those rewards. The Division explained that the token merely serves as a receipt or proof of ownership of the deposited assets. The Division highlighted that while the Securities Act and Exchange Act include "receipts for" securities in their definitions, the tokens do not qualify because the underlying crypto assets are not securities. The Division then applied the Howey test to assess whether the tokens could be considered investment contracts and found they are not, as any benefits to holders come from the protocol itself—not from the efforts of the provider or other third parties.
In a separate statement, SEC Commissioner Hester M. Peirce described liquid staking as a way for users to retain ownership of staked crypto assets while gaining liquidity through transferable tokens. She explained that liquid staking allows users to access the value of their staked assets—such as for collateral or participation in crypto applications—without waiting for the unstaking process. She agreed with the Division's view that this arrangement does not involve the offer or sale of securities.
SEC Commissioner Caroline A. Crenshaw criticized the Division's statement, arguing that it fails to provide clarity for two reasons: (i) the Division relies on unverified factual assumptions about how liquid staking works in practice—assumptions she believes lack grounding in industry reality; and (ii) the legal conclusions staff are narrowly limited to those assumptions, meaning that any liquid staking arrangement that deviates from them falls outside the statement’s scope and protections.
Commentary
This statement follows a long string of opinions from the Division of Corporation Finance determining that mining, staking and more are not securities. The implications for DeFi are clear: staking one's token and using the receipt token does not constitute an investment contract, and thus, a protocol user can use the receipt token in a DeFi protocol's AMM to continue trading.
It is worth asking, then, what is the difference between a liquidity pool receipt token and a liquid staking token under these considerations? Are liquidity pool receipt tokens also not securities? The entire transaction?
In defense of its Defi Platform in Uniswap Labs' Wells Notice response (page 33), a similar argument is made that liquidity pool tokens are not securities because of their underlying economic realities. Uniswap asserted (on page 25,) that individuals "control their own assets and can withdraw them from (or maintain them in) liquidity pools at the[ir] sole discretion." Similarly, in its statement, the Division noted that, "[t]he Liquid Staking Provider does not decide whether, when, or how much of a Depositor's Covered Crypto Assets to stake and is simply acting as an agent in connection with staking the Covered Crypto Assets on behalf of the Depositor."
Perhaps then, the answer is that DeFi's liquidity pools resemble liquid staking more than imagined under the logic of the Division's statement. There is certainly a difference between the underlying "economic realities" of protocol validation and liquidity provision—but in the context of DeFi LPs and liquid staking, maybe the legal difference isn't so great. It would certainly be interesting to see the Division of Corporation Finance weigh in on this topic in the future.
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