How the US and Switzerland approaches differ

Crypto Staking is the most important activity for the operation and security of many modern blockchain protocols, including Ethereum and Solana. The digital asset market has matured significantly over the years, but the regulatory clarity of this core function remains grey.

In positive developments for the industry, recent publications from the Swiss Financial Markets Supervisory Authority (FINMA) and the US SEC provide a framework for analyzing staking activities.

In this article, Nicola Massella, Legal partner and head of Storm Partners, provides a comparative analysis of these two positions.

Swiss framework: Focused on Prudential monitoring and risk management

With Guidance 08/2023, FINMA is primarily working on staking, following the passage of Switzerland’s DLT Act, primarily through the lens of Prudential regulations and bankruptcy laws.

The central legal question is whether piling crypto assets can be separated from custodian real estate in the event of bankruptcy, and whether they are “always ready for the customer.”

FINMA acknowledges that the risk of lockup periods and “thrashing” (forfeiture of tokens for validator fraud) creates “legal ambiguity” in this standard.

However, rather than banning activities, FINMA has established a practical “tentative practice” that creates clear compliance pathways for the monitored entities they oversee.

Under this practice, the authorized institution may provide direct staking services without subject to capital requirements for the betting assets, provided that the following strict conditions are met:

• The customer gave specific instructions on the type and number of crypto assets to be staked.
• The appropriate measures should ensure that crypto assets are clearly assigned to individual customers.
• Customers will be transparently and clearly informed of all relevant risks, including thrashing, lock-up periods and legal uncertainties regarding quarantine in potential bankruptcy.
• The agency will take appropriate measures to mitigate the operational risk of running validator nodes to avoid thrashing and other penalties.
• The “Digital Asset Resolution Package” (DARP) is prepared to allow liquidators to quickly and efficiently identify assets and return them to investors in a crisis

This framework provides a clear blueprint for Swiss controlled entities to provide staking services responsibly.

US perspective: Analysis based on federal securities laws

In a May 2024 statement, the SEC Corporation Finance division approached dyeing in terms of US federal securities law.

The analysis focuses on whether a particular staking activity constitutes an “investment agreement” under established testing in Seconds.WJ Howey co.therefore, it is qualified for security.

The department’s statement provides great clarity by concluding that it believes “protocol staking activities” does not meet “the efforts of others.” Howie test.

The reason is that the functions performed by node operators or validators are “essentially” rather than “entrepreneurs or management efforts” essential to the success of a common company.

Therefore, the rewards earned are not considered as profits obtained from third-party management, but as compensation for providing verification services to the network.

This view applies to some common forms of staking.

• Self (or solo) stakingoperators bet their own assets.
• Independence working directly with third partiesthe owner grants validation rights to the node operator, but retains the storage of the assets.
• Detention arrangementif the custodian bets assets on behalf of the client, the custodian acts as an agent and has not made a discretionary decision as to whether, when, or to what extent the interests are.

Staff also revealed that providing auxiliary services such as reduced coverage and asset aggregation to meet protocol minimums does not change the management nature of the activity.

It is also important to note that this is not a committee rule, but a statement of staff and does not explicitly address complex arrangements like “Liquid Staking.”

Impact on market participants

Guidance from both FINMA and SEC staff represents a significant advance in the clarity of regulations in the digital asset industry.

Their legal framework differs, but focusing on the SEC on prudent health and investor protection, FINMA both creates viable pathways for core stakes technology functions.

For market participants, these developments offer valuable directions.

• In SwitzerlandThe path to regulated entities’ compliance lies in meticulous operational risk management and transparent customer disclosure, as stipulated by FINMA.
• In the USBuilding a staking programme as a denunciation-free management service is an important consideration for mitigating the impact of securities laws in the context of protocol staking.