February 9, 2023, Washington, DC – Today, the SEC announced an enforcement action against digital asset exchange Kraken, related to their custodial staking services.

As the preeminent voice for the Proof of Stake community, and staking participants worldwide, the Proof of Stake Alliance opposes any assertion that facilitating individual participation in the securing of proof of stake blockchain networks constitutes an unregistered security. Participation in a particular consensus mechanism used by a blockchain is not the type of activity that the U.S. federal securities laws were designed to regulate. 

In recent years, the term “staking” has been co-opted to describe a variety of activities that do not involve validating transactions on a blockchain. These other activities typically involve users receiving payments for storing or transferring certain digital assets to a third-party who exercises discretion over the assets and uses them for a variety of activities, some of which may be risky.  These activities have resulted in lost or stolen funds and increased regulatory scrutiny. 

Validators, however, are not financial intermediaries. They provide technology services, not financial services.  

Proof of stake blockchains are part of the infrastructure of the internet, making validators equivalent to ISPs. POSA wants to ensure that protocol staking remains permissible and is treated similarly to operating any other node that is part of the internet or operating an ISP.

In 2020, after working closely with the SEC, POSA developed and published recommendations for companies participating in proof of stake protocols to accurately describe staking as a technical service. Those who abide by these principles – which include advising network participants to avoid providing investment advice or referring to staking as a profit opportunity, and instead encouraging them to highlight network participation and security – should be regulated like the infrastructure providers they are – instead of as providers of a financial product.  

In her dissent, SEC Commissioner Hester Peirce cited these principles, saying that guidance need not necessarily come from a regulator. In an effort to further emphasize that staking as a service providers should be regulated like the infrastructure providers they are, we have republished below our staking principles, and encourage the industry to adopt them. POSA continues to urge all participants in proof of stake blockchain ecosystems to ensure that the space is characterized by long-term, responsible growth – instead of short term profit-driven incentives. 

May 14, 2020, New York, NY — Today, the Proof of Stake Alliance (POSA), a community-driven advocacy organization for Proof of Stake (PoS) technology, announced important steps aimed at improving the regulatory landscape that surrounds the Staking as a Service (STaaS) market.

Digital asset innovators are increasingly embracing Proof of Stake as the consensus protocol of choice for their native networks. The momentum in adoption of Proof of Stake, an energy-efficient and environmentally-conscious alternative to Bitcoin’s Proof of Work consensus protocol, underscores the importance of creating an open dialogue with regulators to help promote the growth of the STaaS market.

At a meeting in February, POSA engaged with the staff of the U.S. Securities and Exchange Commission on these topics. The purpose of this meeting was to educate the SEC staff about PoS technology and support a productive dialog with the SEC regarding the regulatory framework for STaaS offerings.

POSA submitted a white paper containing a legal analysis from the international law firm of Paul Hastings LLP, as well as a comprehensive overview of Proof of Stake and the STaaS market, and continues to engage in an ongoing dialogue with the SEC concerning the legal analysis.

“We are grateful for the time and the opportunity to converse with the SEC staff and their willingness to continue the dialogue with us. Through our initial engagement we were able to share useful insights into the functioning of Proof of Stake networks and the STaaS market that will serve as a foundation for further collaboration going forward.” -Matt Perona, Chief Operating Officer of POSA member Polychain Capital

“Staking continues to gain momentum as a core security mechanism for new blockchain networks. It’s critical that the industry has an open dialogue with regulators, and that staking service providers abide by certain standards. By acting together, industry players can help ensure that Proof of Stake networks continue to flourish.” -Bryce Ferguson, Product Manager of POSA member Coinbase Custody

POSA also previewed a set of industry-driven solutions, developed by a group of its members, and was encouraged by the reception from the SEC staff concerning an industry effort to develop such solutions. The goal of these solutions is to address potential regulatory concerns in order to encourage the continued growth of responsible staking in the United States. In summary, POSA is advocating that STaaS providers adopt the following industry-driven standards as they commercialize their services:

● Refrain from Investment Advice — A service provider should not provide investment advice to market participants, nor make any recommendations as to whether or not a market participant should purchase a particular Proof of Stake digital asset. The service provider should make no representations to market participants as to potential appreciation in the value of the staked digital asset.

● Use Non-Financial Terminology — A service provider should not advertise or promote staking rewards as a profit opportunity by utilizing words such as “interest,” “dividend,” or “yield.” POSA suggests the use of terminology such as “Inflation” or “Staking Reward.”

● Focus on Security & Participation — A service provider’s advertising should focus on enhancing participation in both the consensus protocol and the security of the network.

● Focus on Providing Access to the Protocol — A service provider should refrain from making statements that indicate that it has control over the staking inflation rate for the applicable Proof of Stake protocol.

● Do Not Provide Guarantees on Amount of Rewards Earned — A service provider should not provide any guarantees or make any commitments as to the amount of staking rewards to be earned pursuant to the service relationship

“As blockchain and Proof of Stake protocols transform the digital economy, it is becoming increasingly important that professional infrastructure providers demonstrate a more proactive commitment to upholding their responsibilities within the ecosystem. At Bison Trails, we support POSA’s initiative to engage regulators and establish responsible standards for the industry at large. We believe these efforts will serve to strengthen trust in the Proof of Stake ecosystem and help foster greater innovation.” — Joe Lallouz, CEO of POSA member Bison Trails

About POSA:

The Proof of Stake Alliance is an action-oriented, nonprofit industry alliance advocating for forward-thinking public policies that foster innovation in rapidly growing, sustainable, proof-of-stake ecosystems. We bring together innovators, industry leaders, and legal experts to address key areas of regulatory uncertainty, and provide a platform for the staking industry in the United States.