Although the application of the Howey test to staking Ethereum and many other cryptocurrencies can be complex and subject to different legal interpretations, the SEC insists that staking qualifies as an investment contract under the Howey test.
Bitstamp is set to discontinue its Ethereum staking service for United States customers by September 25 due to regulatory constraints. The exchange has offered Ether staking in the US, getting a commission of 15% on customers’ rewards. While it will no longer be an option in the country, Bitstamp confirms that its other range of services will remain unaffected.
In a statement, Bobby Zagotta, Bitstamp’s US CEO and global chief commercial officer declared:
“Starting September 25, 2023, Bitstamp will no longer offer staking services in the United States… As a result, US customers will stop receiving staking rewards. All other Bitstamp services will remain unaffected.”
One of the arguments put forth by regulators in support of terminating staking activities in the United States is that the practice aligns with the criteria of the Howey test. The test is used to determine if a transaction is an investment contract or not. If it is an investment contract, then it should be registered as a security. The test states that:
“A contract is a security ‘if there is an investment of money’ in a ‘common enterprise’ with ‘profits’ to come ‘solely from the efforts of others’.”
How Staking Could Be an Investment Contract Through the Howey Test
The Howey test holds significant legal weight in the United States, acting as a litmus test to ascertain whether a transaction or investment meets the definition of a security. Consequently, investments falling into the securities category are subject to specific regulatory guidelines. This becomes particularly relevant given that many cryptocurrencies remain unregistered as securities.
When individuals stake Ethereum, they essentially invest their cryptocurrencies by locking them up, a process that could be argued as meeting the criteria for an ‘investment of money.’ While determining whether staking constitutes a ‘common enterprise’ may be open to interpretation, participants effectively contribute to the security and functioning of the blockchain network, potentially aligning with a shared purpose.
Many stakers engage in the practice to gain rewards and this intention might fulfill the ‘expectation of profit’ aspect of the test. Nonetheless, some participants may stake for motives beyond financial gain, such as supporting a network they believe in. This complexity introduces the possibility of further debate.
An argument can be made that staking rewards are a result of validators’ activities, potentially satisfying the ‘efforts of others’ condition in the Howey test. Taking a broader perspective, certain staking protocols employ automation and algorithms, reducing or eliminating the direct involvement of third parties.
The Howey Test Interpretation for Cryptocurrency Staking Remains Complex
Although the application of the Howey test to staking Ethereum and many other cryptocurrencies can be complex and subject to different legal interpretations, the United States Securities and Exchange Commission (SEC) insists that staking qualifies as an investment contract under the Howey test.
Some exchanges have also stopped staking operations in the United States, and one of them is Kraken. The crypto exchange shut down its crypto staking services in February and also paid 30 million dollars in fines to the SEC. The exchange advertised that users could get up to a 20% annual profit if they locked up their funds in the staking pool.
Many exchanges are also playing it safe so as to stay clear of legal issues in this area. Coinbase, for example, restricted its staking services in four states in the United States after continued issues from regulators for offering unregistered securities. The crypto service has continued to argue that its staking services are not securities.
Temitope is a writer with more than four years of experience writing across various niches. He has a special interest in the fintech and blockchain spaces and enjoy writing articles in those areas. He holds bachelor’s and master’s degrees in linguistics. When not writing, he trades forex and plays video games.