The Staff clarifies that protocol staking does not qualify as a security under the Howey Test, clearing the way for market participants to engage in staking.
On May 29, 2025, the SEC’s Division of Corporation Finance (the Staff or Division) published a Statement on Protocol Staking Activities clarifying that, in the Staff’s view, certain defined protocol staking activities do not involve the offer and sale of securities requiring registration under the US federal securities laws (the Staking Statement).
The SEC had previously determined that a major crypto exchange’s crypto staking program was an unregistered security offering, specifically alleging that it involved an “investment contract” under the test in SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (the Howey Test). In a complete about face, the Staff’s analysis in the Staking Statement focuses on “the economic realities” of staking pursuant to self (or solo) staking, self-custodial staking directly with a third party (delegated staking), and custodial staking arrangements.
The Staff takes the view that staking in these circumstances, as well as certain related third-party and ancillary services, does not constitute or involve the offer or sale of an investment contract under the Howey Test), and thus does not involve transactions in a “security” within the meaning of Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act. As a result, participants in such staking arrangements (including service providers that facilitate staking on a non-discretionary agency basis), should not need to comply with the registration requirements of the Securities Act or qualify for an exemption from registration.
The Staking Statement follows similar recent statements of the Staff’s views on stablecoins (for more information, see this Latham blog post), meme coins (for more information, see this Latham blog post), and certain proof-of-work mining activities (for more information, see this Latham blog post). It represents the latest in the SEC Staff’s efforts to clarify how the US federal securities laws apply (or, as in the present case, do not apply) to digital assets following President Trump’s Executive Order on digital assets (for more information, see this Latham blog post) and the establishment of the SEC’s Crypto Task Force (for more information, see this Latham blog post).
Protocol Staking Activities Covered by the Staff Statement
According to the Staff, the Staking Statement “addresses the staking of crypto assets that are intrinsically linked to the programmatic functioning of a public, permissionless network, and are used to participate in and/or earned for participating in such network’s consensus mechanism or otherwise used to maintain and/or earned for maintaining the technological operation and security of such network” (Protocol Staking).
The proof-of-stake (PoS) blockchain consensus model is an alternative to the proof-of-work (PoW) consensus model. PoS differs from PoW primarily in how it selects validators to form new blocks and secure the network. In PoS, node operators must pledge or “stake” their own funds in the form of the network’s cryptoasset (Covered Cryptoasset) to be eligible to create and validate new blocks of data, and update the state of the network. Staked tokens in a PoS system are typically locked or frozen for a certain period, known as a “staking freeze.” After a validator decides to unstake their tokens, there is typically a period before those tokens become fully accessible, known as an unbonding period.
As an alternative to operating their own nodes, holders of Covered Cryptoassets can “delegate” those assets to another node operator, which can be done by transferring those assets to the node operator or through delegating through the relevant blockchain protocol.
The method of selecting validators to create a block varies based on the underlying software protocol, but typically uses some element of random selection that is weighted more towards node operators that have more Covered Cryptoassets staked or delegated to them. The node operator that proposes a block that is then validated by node operators with a majority of the staked Covered Cryptoasset then receives a reward denominated in the Covered Cryptoasset generated through the blockchain protocol, and also receives third-party transaction fees. This differs from PoW’s model of competing to solve complex mathematical puzzles. The PoS consensus model significantly reduces the energy consumption associated with PoW, as it does not require extensive computational resources.
PoS also provides for network security in a different way from PoW. While PoW relies on no one entity gaining sufficient computing power to add malicious blocks, PoS relies on no one entity gaining sufficient staked or delegated Covered Cryptoassets to add malicious blocks. Thus, even passive delegation of Covered Cryptoassets contributes to network security. Because PoS does not involve waiting for the solution to computational puzzles, this approach allows for greater scalability and efficiency, making it a more sustainable option for blockchain networks.
Against this background, the Staff Statement addresses three specific forms of participating in Protocol Staking activities, which comprise the vast majority of staking activity:
- Self (or solo) staking: Direct staking of one’s own digital assets and earning rewards by serving as a node operator. When self (or solo) staking, the digital asset owner retains ownership and control of staked assets and their cryptographic private keys.
- Self-custodial staking directly with a third party: Staking one’s own digital assets and earning rewards by granting or delegating validation rights to a third-party node operator for a portion of the block rewards. When self-custodial staking directly with a third party, the digital asset owner retains ownership and control of staked assets and their cryptographic private keys.
- Custodial arrangements: An arrangement whereby a third party (custodian) takes custody of the owners’ digital assets and facilitates staking on behalf of the asset owner, either using its own node or a third-party node operator. In such an arrangement, the digital asset’s owner retains ownership of the staked assets, but the assets remain in the control of the custodian. The custodian is not permitted to use the staked assets for any purpose other than network validation (such as business or operational purposes, loans, rehypothecation, leverage, trading, speculation, etc.)
The Staff’s Security Analysis
As with the other recent Staff statements, the Staking Statement applies the Howey Test for an investment contract in analyzing whether the transactions involved in Protocol Staking activities constitute the offer or sale of a “security,” emphasizing the Howey Test’s focus on the economic realities of a transaction, financial product, or scheme.
Reciting the familiar elements of the Howey Test as looking to whether there is (i) an investment of money; (ii) in a common enterprise; (iii) premised on a reasonable expectation of profits; (iv) to be derived from the entrepreneurial or managerial efforts of others, the Staff’s analysis in the Staking Statement primarily focuses on the final “efforts of others” prong. In particular, the Staff cites to federal court authority clarifying that “efforts of others” in the final prong of the Howey Test means “essential managerial efforts” or “undeniably significant” efforts “which affect the failure or success of the enterprise,” and not mere “administrative and ministerial activities.”
Crucially, the Staff assert that Protocol Staking [is] is a “general activity” (…) “that itself is not entrepreneurial or managerial in nature.” In particular, the Staff analysis proceeds principally by characterizing staking as a purely ministerial or administrative activity, as follows:
- Self (or solo) staking: In this model of staking participation, node operators earn rewards in exchange for securing the blockchain network and validating transactions. According to the Staff, “the Node Operator is merely engaging in an administrative or ministerial activity to secure the PoS Network and facilitate its operation.” There is no reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.
- Self-custodial staking directly with a third party: Earning rewards by granting validation rights to a third-party node operator for a portion of the mining rewards also does not involve a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. According to the Staff, “[t]he Node Operator’s service to the Covered Crypto Asset owner is administrative or ministerial in nature, not entrepreneurial or managerial.” The financial incentive is derived from the staking activity itself, not the operation of the node software.
- Custodial arrangements: Such arrangements likewise do not involve a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others because generally, the custodian is “acting as an agent” on behalf of the owner. A custodian “does not decide whether, when, or how much of an owner’s Covered Crypto Assets to stake,” and “does not guarantee or otherwise set or fix the amount of the rewards owed to Covered Crypto Asset owners.” The custodian taking custody of a digital asset owner’s assets and choosing a node operator on behalf of the asset owner are also administrative or ministerial activities. However, the Staff notes that if a custodian does choose whether, when, or how much of an owner’s digital assets to stake, its activities are “outside the scope of [the Staking Statement],” implying that such an arrangement may be enough to satisfy the “efforts of others” prong of Howey.
- Ancillary services: Ancillary services1 that digital asset owners may receive in connection with protocol staking are all deemed administrative or ministerial activities by the Staff. Ancillary services bundles with non-custodial or custodial staking services do not change the non-security status of the staking services.
Limitations and What’s Not Covered
As noted by the Staff in a footnote, the Staff Statement does not address liquid staking or the analysis of liquid staking tokens. The Staff Statement also does not address restaking (i.e., the restaking of cryptoassets that are already staked on one blockchain to further secure another blockchain, network, or protocol).
In addition, the Staff caveat in a footnote to the Staking Statement that any definitive determination remains subject to the facts and circumstances involved, and any differences from the models of staking activity directly addressed in the Staff statement may impact the analysis.
Commissioner Peirce Supports the Staff Statement
Commissioner Hester M. Peirce supported the Staking Statement, arguing that regulatory ambiguity had chilled participation in staking services and as a result, harmed decentralization efforts. She praised the Staff for providing “welcome clarity” on staking, and stated that she “expect[s] that the Division and Crypto Task Force will continue to develop views about security status for other activities, products, and services involving participation in network consensus.”
Commissioner Crenshaw Again Sharply Disagrees
Commissioner Caroline A. Crenshaw published a statement stridently criticizing the Staking Statement. She highlights the fact that in many of the SEC enforcement actions involving staking, the SEC alleged that staking services were investment contracts under Howey. And two courts, she notes, “upheld the legal basis of these allegations.”2 She also argues that the Staking Statement only offers “vague generalizations” and “fails to deliver a reliable roadmap for determining whether a staking service may be an investment contract.”
According to Commissioner Crenshaw, the Staking statement, as well as the many recent Staff statements addressing digital assets, “ignore[s] existing law” and “sow[s] uncertainty around what the law is and what parts of it the Commission is willing to enforce.”
Finally, she implies that by carving out broad categories of digital assets from the securities laws, the Staff is minimizing the risks that these products carry for consumers and investors. For Commissioner Crenshaw, that is a betrayal of one of the core pillars of the SEC’s mission, to protect investors.
Conclusion
The Staff continues to provide guideposts to the regulatory treatment of certain broad classes of digital asset products and services. The Staking Statement provides much needed clarity around the types of activities a self-custodial staking service provider or custodial staking service provider can undertake without running afoul of the registration provisions of the US federal securities laws. While this clarification may be interim if the SEC proposes a comprehensive approach to digital assets via notice-and-comment rulemaking, it is a pivotal step in addressing the regulatory ambiguity that has surrounded digital assets.
The Staff in no way indicated or even implied that it would not enforce the law in the face of securities law violations, but would treat the Howey Test as a fact-specific analysis of an arrangement’s economic realities.
By clearing the way for market participants to engage in staking — as generally described in the Staking Statement — the Staff is removing obstacles to capital formation in the digital asset space.
This post was prepared with the assistance of Hank Balaban in the Washington, D.C. office of Latham & Watkins.
