Compass Investments

FINMA in Switzerland allows direct steaking, but with conditions: FINMA allows licensed institutions to offer steaking if they adhere to strict separation, transparency and risk management measures.

SEC clarifies that protocol steaking is not a security: The SEC staff has stated that stand-alone and custodial steaking generally do not fall under the Howey test and are considered administrative rather than investment activities.

Both approaches provide greater clarity: Despite the different regulatory focus – prudential regulation in Switzerland and securities laws in the U.S. – both systems support compliant steering transactions.

Cryptocurrency staking is clearly a key activity for the operation and security of many modern blockchain protocols, including Ethereum and Solana. The market for digital assets has evolved significantly over the years, but regulatory clarity around this critical function remains uncertain.

On a positive note for the industry, recent publications by the Swiss Financial Market Supervisory Authority (FINMA) and the U.S. Securities and Exchange Commission have provided a valuable, albeit different, framework for analyzing steaking activity.

In its Guideline 08/2023, FINMA looks at steaking mainly through the prudential and bankruptcy law lens, following the adoption of the Swiss DLT Act.

The main legal issue is whether cryptoassets placed on staking can be separated from the custodian’s estate in the event of bankruptcy, which depends on whether they are available at all times to customers.

FINMA recognizes that staking features such as lockout periods and the risk of slashing (loss of tokens for validator misconduct) create legal ambiguity with respect to this criterion.

Instead of prohibiting this activity, however, FINMA has established a pragmatic interim practice that creates a clear compliance pathway for supervised entities.

Under this practice, a licensed institution may offer direct-stacking services without capital requirements for the assets to be staked, subject to the following strict conditions:

the customer has provided specific instructions regarding the type and quantity of cryptoassets to be staked.

Appropriate measures have been taken to ensure that cryptoassets can be unambiguously allocated to individual clients.

The client is transparently and clearly informed of all associated risks, including slashing, blocking periods and legal uncertainty regarding segregation in the event of possible bankruptcy.

The institution takes appropriate steps to mitigate operational risks associated with the validation hub to avoid slashing and other penalties.

This system provides a clear plan for Swiss regulated organizations to offer steak services responsibly.

In a May 2024 filing, the SEC’s Division of Corporation Finance examined steaking from the perspective of the U.S. federal securities laws.

the analysis focused on whether certain types of shakedown activities constitute an investment contract under the test set forth in SEC v. W.J. Howey Co. Howey Co. and therefore qualify as a security.

The Division’s Statement provides significant clarity by concluding that, in its view, “protocol steaking activities” do not meet the “efforts of others” test under the Howey test.