Cynthia Lummis led a group US senators who urged SEC to clarify their position regarding protocol staking for crypto exchange traded products. The letter.
These lawmakers want answers about the exclusions of ETP S-1s from staking, which are affecting the competitiveness of U.S. Asset Managers and preventing investors from accessing blockchain core functions.
SEC allows the registration of several digital asset ETPs, but requires issuers that protocol staking be removed from their filings.
In response, senators requested the SEC give a clear explanation of its decision not to allow staking in digital asset ETPs.
Three key questions were asked about the SEC’s staking restrictions, their rationale, and if they would permit staking in a product that is registered, if deemed an investment contract.
Additionally, the senators argued that increased transparency would help market participants understand the SEC’s regulatory position and inform potential legislative action if needed.
They have given the SEC until April 1 to respond. SEC must respond by April 1.
Competitive disadvantage
Senators argue that by taking this position, they are limiting the potential investment of such products in the US and putting them at a competitive disadvantage with similar offerings from Canada, Europe, or the United Kingdom. Last month, the latter allowed digital asset ETPs that allow staking. This was supported bipartisan by both Conservative and Labour leaders.
Staking is a fundamental part of proof-ofstake networks like Ethereum (ETH), and Solana. Staking allows validators to protect blockchain networks in exchange for fees, newly issued tokens and native assets.
Authors of the letter argue that by preventing ETPs to stake, investors are prevented from obtaining these benefits. This also lowers their returns and reduces network security.
The stakeout discussions have heated up
On February 5, SEC’s Crypto Task Force hosted a discussion with Lucas Bruder of Jito Labs and Kyle Samani from Multicoin Capital. Both firms also sent legal experts. The focus of the discussion was on integrating stake into ETPs while also addressing regulatory issues.
Staking as a service is classified by the SEC as a security offering. The SEC cites several reasons why it has been hesitant, such repayment timelines which conflict with T+1 settlement cycles, tax implications for staking rewards and staking reward amounts.
The SEC was prompted by these factors to order issuers that they remove staking from the initial Ethereum ETP application.
During the meeting, industry representatives presented two models designed to mitigate the SEC’s concerns while enabling staking within ETPs.
First, ETPs would stake a percentage of their assets through third-party validators. Second, ETPs could hold liquid tokens as staked assets. As an example, an ETP based on Solana could also include JitoSOL – a liquid stake derivative of SOL.
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