ETH Staking Not an Investment Scheme, ConsenSys Execs Argue

The blockchain technology company’s arguments follow SEC enforcement against Kraken and the NYAG’s labeling of ether as a security

article-image

Yoann184/Shutterstock.com modified by Blockworks

share

Staking rewards are compensation for services to keep the Ethereum network secure, ConsenSys executives said Monday in a blog post that argued the process should not be confused with an investment. 

Rewards and fees that network validators might receive are not yield on a loan, nor are they a dividend on investment, argued ConsenSys General Counsel Matt Corva and Bill Hughes, the company’s director of global regulatory matters.    

“Staking is a data integrity mechanism that Ethereum and similar blockchain networks require to function, not an investment scheme,” they added in a blog post. “Service agreements that offer technical staking solutions are not investment contracts or any other type of enumerated security.”  

Staking is a process in which crypto holders participate in validating transactions on the blockchain. In return, the block’s proposer receives a reward paid in the blockchain’s native crypto, such as ether.  

Read more: The Investor’s Guide to Staking

Founded in 2014, ConsenSys is a blockchain technology company focused on the Ethereum ecosystem. The firm hosts more than 17,000 Ethereum validators — representing 3% of all Ethereum validators, according to its website.   

Validator rewards come from two places: the protocol-specified rewards and a portion of the transactional fees paid by users who want their transactions added to the network, the ConsenSys executives said. 

“Rewards aren’t a mythical construct dependent on the acts of a specialized manager, such as funds entrusted to a hedge fund or other money manager who enjoys discretion over how the funds are invested to generate a reward,” Corva and Hughes wrote.

Regulation amid a challenging backdrop

The declaration comes just days after New York Attorney General Letitia James called ether a security in a lawsuit against crypto exchange KuCoin.

Some industry watchers have said regulators are likely to continue a “regulation-by-enforcement” trend seen in recent months, particularly as contagion in the space has impacted companies like Silvergate, Silicon Valley Bank and Signature

“I think everyone’s on the same page that we would like to have a more broad, comprehensive legal framework for the entire crypto space,” Wilshire Phoenix co-founder William Cai told Blockworks. “But the two words “crypto space” really encompasses so many different pieces, and asking for a comprehensive legal framework…seems to be a difficult task.”

The ConsenSys blog post also comes about a month after the SEC charged Kraken with failing to register crypto staking products as securities. The crypto exchange settled on both counts — paying $30 million and ending its on-chain staking services for US clients. 

Following the Kraken settlement, Coinbase CEO Brian Armstrong said in a tweet that “Coinbase’s staking services are not securities,” adding that the company would “happily defend this in court.”

Coinbase’s chief legal officer, Paul Grewal, added in a blog that staking does not meet the Howey Test, which the SEC and US courts use to determine whether an asset is a security. 

“When a customer asks us to stake some of their crypto, they aren’t giving up one thing to get something else — they own exactly the same thing they did before,” Grewal wrote. “Staking customers retain full ownership of their assets at all times, as well as the right to ‘unstake’ those assets consistent with the underlying protocol.”


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Salt Lake City, UT

MON - TUES, OCT. 7 - 8, 2024

Blockworks and Bankless in collaboration with buidlbox are excited to announce the second installment of the Permissionless Hackathon – taking place October 7-8 in Salt Lake City, Utah. We’ve partnered with buidlbox to bring together the brightest minds in crypto for […]

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Permissionless is a conference for founders, application developers, and users. Come meet the next generation of people building and using crypto.

Javits Center North | 445 11th Ave

Tues - Thurs, March 18 - 20, 2025

Blockworks’ Digital Asset Summit (DAS) will feature conversations between the builders, allocators, and legislators who will shape the trajectory of the digital asset ecosystem in the US and abroad.

recent research

4.png

Research

This months PPGC covered four main areas. Firstly, debriefing the progress and status of the mainnet implementation of the Ahmedabad hard fork. Secondly, a retrospective on the testnet phase of the Ahemdabad Hard Fork. Thirdly, an update on PIP-36 which involves replaying failed state syncs. Lastly, PIP-47 which pushes upgrades to the Polygon Protocol Council.

article-image

Institutions to test out the settlement of “digital assets and currencies” on a network that annually carries more than 5 billion financial messages

article-image

After Bitwise’s XRP ETF filing this week, one industry watcher notes: “Politics will determine whether this happens soon or in a few years”

article-image

Plus, a look back at some of the SEC’s biggest enforcement moves under Gurbir Grewal

article-image

The forward-looking financial system is being championed by several contributors to India’s UPI digital money system

article-image

Multiple teams are pursuing integration cross-chain and off-chain

article-image

An SEC spokesperson told Blockworks the Ripple judgment clashes with Supreme Court precedent and securities laws