Crypto staking has so far escaped specific regulation in Europe – but many in the industry wonder if it’s helpful to maintain a regulatory gray area.
There’s a dilemma for the sector here. Setting detailed rules for the still-developing staking sector could prove premature. But recent moves in Singapore and Switzerland show the risk of keeping a legal vacuum, into which regulators may rush to impose heavy-handed restrictions.
This article is part of CoinDesk's "Staking Week."
The European Union’s Markets in Crypto Assets law (MiCA) makes the bloc the world’s first major jurisdiction with a more or less comprehensive crypto law, covering everything from stablecoin issuance to insider trading – but even MiCA leaves staking out.
That’s a gap that needs to be fixed, says the European Central Bank’s Christine Lagarde, who’s called for the service – in which crypto holders can post their assets to earn passive income – to be addressed in a MiCA sequel. That would likely take years, if it happens at all – and some are worried about what will happen in the meantime.
Tom Duff Gordon, Vice President International Policy at Coinbase, sees staking as so fundamental to the crypto ecosystem that it needs to be nailed down – and says the lack of any attempt to do so is a major gap in MiCA.
“Just describing what that [staking] is, I think, would be helpful,” Gordon, the exchange’s Vice President for International Policy, told a Tuesday event hosted by the Blockchain for Europe lobby group.
The problems of a legal lacuna can be seen in Switzerland. In a Sept. 7 press release, the Swiss Blockchain Federation warned of a “change in practice” by financial regulators at Finma, under which only licensed banks can offer staking – something the lobby group said could limit the country’s innovation and competitiveness.
For its part, Finma has told CoinDesk that it continues to follow “clear and precise” blockchain laws dating from 2021 that “leave no room for discretion in implementation.” In some versions of staking, bankruptcy could put client assets at risk, calling for a tougher, bank-style approach, regulators argue.
In other words, the lack of specific, MiCA-style rules has thrown the industry into uncertainty. Authorities have, in effect, forced staking into pre-existing regulatory boxes: either it’s custody, or it’s banking.
But it’s not just Switzerland where an overly blunt approach is causing problems. Singapore has forbidden crypto providers from facilitating staking by retail clients. And some EU laws are venturing into the topic, even before defining exactly what it is. The bloc’s newest tax rules, known as DAC8, cover staking, requiring crypto providers to notify tax authorities of any profits their clients make.
“From staking and lending, people can obtain certain gains, and those gains are interesting from the tax perspective,” Luis Calvo-Parra Martínez, an official from the tax arm of the European Commission, told the same event, adding that “it would be good for legal certainty to have a legal definition for those [services], which now – I wouldn't say is lacking, but could be put more black on white.”
Gordon also favors having that legal certainty sooner rather than later – not via heavy-handed and potentially over-hasty regulation, but simply to establish that staking is a low-risk activity to secure a blockchain network.
“I worry that there's a lot of confusion with regulators about ‘staking is a lending product,’ ‘staking is some kind of managed investment product’,” he said. “Moving too fast and too bluntly on staking – and I've seen that a number of international markets, by the way – that would be problematic for the development of the whole space.”
That view is shared by the Cardano Foundation, a nonprofit which promotes one of the major blockchains that use staking as a way to validate transactions.
According to Frederik Gregaard, the Foundation’s chief executive officer, the situation in Switzerland is fixable, and derives from the rival Ethereum blockchain switching to a proof-of-stake validation system.
Regulators’ concerns grew given the size and significance of Ethereum, together with the fact that staked ether (ETH) can’t always be returned immediately and could be lost all together, meaning the service resembles bank deposits rather than custody, Gregaard told CoinDesk.
Finma officials “have been very clear and said, what we're worried about is the lock-in period, and we are worried about the slashing … and we don't have any of that in Cardano,” Gregaard said. “My hope is we'll get to a situation where they will say … staking that does not have those features, we will deal with as we did before.”
Gregaard’s positive about the discussions he’s had with officials in the EU, and with regulators in the U.K., where the government has also floated the idea of new staking rules.
But if greater clarity would be welcome, he’s also worried about acting too soon – particularly if staking gets treated as a financial service, with all the heavy-handed treatment that implies.
“We have some time to basically show a lot of non-financial use cases …. it's not just capital markets and banking regulation,” he said. “The space is still a little bit immature … the majority of the really great use cases haven't gotten to escape velocity yet.”
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