For years, the United States has lagged behind the global community regarding staking policies. Recently, however, the topic has gained traction. The newly formed crypto task force under the SEC has prioritized staking, and it has been discussed in Congressional hearings. A bipartisan group of lawmakers is now advocating for a shift in the SEC’s stance regarding staking in exchange-traded products (ETPs).
The Significance of Staking in ETPs
The approval of the first spot ether ETFs last September was a landmark moment for the cryptocurrency sector, marking a significant step towards recognition by U.S. regulators. However, an important element is missing from these financial products: the ability to stake the assets they hold to generate profits.
A coalition of lawmakers, including Senators Cynthia Lummis (R-WY), Kirsten Gillibrand (D-NY), and others, is leading the charge to rectify this situation. They have sent a letter to the SEC urging a reconsideration of its directive that excludes protocol staking from ETPs. Their argument centers on how this exclusion could jeopardize investor protections and weaken the competitiveness of U.S. financial markets.
Understanding Staking in Context
The SEC’s prohibition against staking in ETPs stems from a misunderstanding of how staking operates within proof-of-stake networks like Ethereum. Staking is not merely an investment tool; it is a fundamental component of the network’s security and transaction validation. When token holders stake their assets, they enhance network security and receive rewards generated by the protocol itself, rather than from any centralized entity.
Global Competitiveness at Risk
The SEC’s stance on staking poses significant risks to America’s competitiveness in the digital asset market. While the U.S. remains hesitant, countries like Switzerland, Canada, Germany, and Australia have already recognized the importance of staking in their digital asset ETPs. For instance, the U.K. has recently issued a statutory instrument affirming that qualifying crypto asset staking does not constitute a collective investment scheme.
Without staking, the assets held in U.S. ETPs are at risk. This situation means that American investors may inadvertently rely on assets staked in other jurisdictions for protection. The ramifications of this regulation extend beyond Ethereum to other proof-of-stake networks such as Solana, Avalanche, and Polkadot, as the digital asset sector continues to expand.
Consequences for American Investors
Misguided regulations could be detrimental to both American investors and the broader U.S. economy. Investors are faced with a choice: accept domestic products that lack staking and the associated rewards, or seek exposure through offshore alternatives, which would drive capital away from U.S. stock exchanges. The absence of staking diminishes the relative ownership position of ether ETP holders due to the inflationary nature of staking rewards.
This economic reality ultimately makes U.S. products less appealing to investors seeking comprehensive exposure to the Ethereum ecosystem. Moreover, this outcome contradicts the SEC’s mission of investor protection, potentially steering investors toward vehicles in other jurisdictions that may lack the same safeguards.
The Risks of Staking: A Closer Look
The technical risks linked to staking, when managed by experienced validators, are minimal and well understood. The so-called “slashing risk,” a penalty for dishonest validation attempts, has affected a mere 0.001 percent of staked ether to date. This statistic suggests that the SEC’s cautious approach may not align with the actual risks involved.
What Lies Ahead: The Need for a Balanced Approach
As we await the SEC’s response to the concerns raised by Congress, American investors find themselves in a precarious position. A balanced approach that acknowledges staking as a crucial mechanism for network security, while ensuring appropriate regulatory oversight, is essential.
The bipartisan letter to SEC Commissioners Uyeda and Peirce advocating for Protocol Staking in Digital Asset ETPs marks a pivotal moment for both crypto-native and institutional investors. With discussions around the “weaponization” of the SEC’s enforcement functions coming to light, there is a unique opportunity to address one of the most sensible issues within the digital asset landscape.
A Call to Action for the SEC
It is crucial for the SEC to take on a leadership role regarding protocol staking, which is vital to the digital asset sector. Embracing this initiative aligns with the aspirations of the American economy and the citizens who depend on it. The time for action is now.
