Proof of Stake Alliance issues legal research on liquid staking tokens following SEC attack on Kraken

The crypto industry was hit hard this month when the Securities and Exchange Commission (SEC) cracked down on staking services. This led to many industry leaders coming together and finding a solution for assets related to liquid staking, with the Alliance publishing its legal research on Tuesday.

Liquid Staking Tokens and their principles

The Proof of Stake Alliance (POSA), in two white papers, issued what it considers as the legal research and analysis of liquid staking tokens. The alliance argued that such tokens for digital commodities must not be treated as securities or taxable events. Commenting on the same POSA stated,

“By building on well-established case law and legal precedent, these papers provide scholarly legal research and analysis for the industry and lawmakers, offering a framework for meaningful legislative codification or elucidation.”

Part of the research also included POSA defining four industry principles aimed at improving the regulatory landscape when it comes to liquid staking. The first of these is appropriate labeling of such assets and calling them “Liquid Staking Tokens” (LSTs). 

The second principle was to develop tools to enable direct staking with access to liquidity, not staking-backed yield products. This was followed by focusing promotion on expanding liquidity without giving up any security and participation. Lastly, the alliance suggested refraining from providing investment advice.

POSA also urged that LSTs should not be treated as securities under the US Federal securities law, nor should these tokens be considered as swaps under commodity laws. Furthermore, the alliance published that the conversion of crypto assets for LSTs should not be marked as a taxable event under income tax laws.

SEC took on Kraken

The concerns surrounding liquid staking began early this month following SEC’s charges against Kraken. The cryptocurrency exchange was fined $30 million and was asked to shut down the selling of its crypto-staking services.

SEC Chair Gary Gensler, at the time of the charges, explicitly stated the need for disclosure under the securities law and said,

“Today’s action should make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection.”