In just two months, the implosion of FTX heightened regulatory scrutiny of the industry in general, and eventually staking-as-a-service programs specifically. The SEC issued an enforcement action against digital asset exchange Kraken in February related to their custodial staking services. The agency then put other StaaS providers on notice that they need to 'come in and register'. The SEC later filed a suit alleging that Coinbase's staking services were illegal. Then several state authorities alleged that Coinbase violated securities laws by offering'staking rewards programs' to residents without registration.
This past July, Senate Finance Committee Chairman Ron Wyden and Finance Committee Ranking Member Mike Crapo asked questions on taxation of digital assets with a section devoted to the taxation of staking rewards. The industry leaders and trade groups, such as POSA, the Blockchain Association, CCI, Polygon Labs, Coin Center, and others, have steadfastly endorsed the fact that staking rewards should be taxed at the time of sale, not at the time of creation. But the IRS's first public opinion on staking Revenue Ruling 2023-14 suggested that some staking rewards should be taxed as ordinary income in the year that the taxpayer gains control over the rewards. There has been a lot of regulatory action in this space recently but there is a lot that remains unknown. What's clear is that there is an increased need for better explanations about how this technology works, what staking is and why it matters.
PoS blockchains, such as Ethereum, enable all token-holders, not just those with industrial-scale computer systems, to benefit from securing and in many cases governing the network. These networks are more secure, neutral, and sustainable due to the more token owners holding, the more secure, neutral, and sustainable they are. To function, almost every significant blockchain relies on staking, which is the standard for all major blockchains. PoS blockchains have expanded to include 19 of the top 20 smart contract platforms, with millions of users globally, with a market cap of nearly $100 billion this month.
Why are StaaS providers subject to regulatory scrutiny? In part, there is still uncertainty surrounding the term. While the term staking is commonly used to describe securing a PoS network, a number of industry experts have pointed out that the term is often confused, and more recently co-opted to describe a variety of activities that do not involve validating transactions on a blockchain. The other activities typically involve users receiving payments for storing or transferring certain digital assets to a third-party that exercises discretion over the assets and uses them for various activities, some of which may be risky.
The broader crypto industry is experiencing a distinct historical moment. A year after the Merge, ongoing confusion and misconceptions about staking still affect how we are governed. There's a clear need for industry leaders to agree on appropriate terms and standards of what is and isn't staking, and to the extent that there is risk involved, what the nature of that risk truly is - technical, instead of financial.
Staking industry should come together, once again, on industry principles and do the hard work of educating lawmakers and regulators to foster a thriving PoS ecosystem. America's digital asset industry will continue to be in uncertainty and unable to meet its potential. For the sake of all PoS ecosystem participants, I hope we can end that confusion soon.