Why Proof-of-Stake Inherently Challenges Securities Law Definitions

Staking is not an investment contract. The Howey Test requires a common enterprise with profits derived from the efforts of others. In PoS networks like Ethereum, stakers perform the core work of consensus and security; their rewards are payment for a service, not passive returns from a promoter.

The asset is the utility. Tokens like SOL or ATOM are the operational fuel for their respective blockchains. This is a functional necessity, akin to AWS credits, not a speculative security. The SEC's application of securities law ignores this essential utility argument.

Legal precedent is misapplied. Regulators treat all token distributions as fundraising events. However, the continuous, decentralized operation of a live network like Cosmos or a liquid staking protocol like Lido represents a post-investment phase that existing law does not address.

Evidence: The SEC's case against Ripple established that XRP sales on secondary exchanges are not securities transactions. This ruling implicitly acknowledges that a token's status depends on context, not its inherent code, challenging blanket enforcement against PoS assets.

Staking is active validation work. A validator's capital is a performance bond, not a capital contribution. The validator runs software, processes transactions, and maintains network security, which directly contrasts with the passive expectation of profits in securities law.

The Howey Test fails on 'common enterprise'. In decentralized networks like Ethereum or Solana, validator rewards derive from individual performance and slashing risk, not from the managerial efforts of a central promoter. This is a critical legal distinction.

Protocols like Lido and Rocket Pool reinforce this. Their liquid staking tokens (stETH, rETH) are derivative claims on performed work, not equity. The SEC's case against Kraken's staking-as-a-service hinged on the platform's centralized control, not the underlying cryptographic act.

Evidence: The Ethereum Merge shifted security from energy (PoW) to economic capital (PoS) but kept the core requirement of active, verifiable computation. This technical reality is the foundation for regulatory arguments by entities like Coinbase.

Liquid staking tokens (LSTs) are not passive receipts. Tokens like Lido's stETH and Rocket Pool's rETH are programmatically rehypothecated collateral within DeFi. Their value accrual is a function of automated smart contract execution, not a managerial effort by a common enterprise.

EigenLayer's restaking primitive decouples cryptoeconomic security from consensus. A staker delegates stake to Actively Validated Services (AVSs) like EigenDA, creating a security-as-a-service market. This transforms a static staking position into a dynamic, multi-utility asset.

The legal wrapper dissolves. The staker's relationship with the protocol (e.g., Ethereum) is now mediated through multiple autonomous intermediaries (Lido, EigenLayer, AVS operators). There is no single 'issuer' or promoter controlling the enterprise, fracturing the Howey framework.

Evidence: Over 40% of staked ETH is now liquid via LSTs, and EigenLayer has attracted over $15B in restaked assets. This scale creates a new asset class whose regulatory classification has no precedent in traditional finance.

The Howey Test's 'Common Enterprise': The SEC will argue staking pools like Lido or Rocket Pool create a centralized profit-seeking enterprise. This misapplies the test. Validator slashing and decentralized client diversity (e.g., Prysm, Teku, Lighthouse) prove operational control is not pooled; rewards are a network function, not a promoter's effort.

The 'Expectation of Profits' Fallacy: Regulators will claim staking yields are passive income from others' work. This ignores the active security service. Staking is computationally intensive work securing the chain, distinct from passive dividend collection. The yield is a probabilistic reward for uptime, not a guaranteed return.

The 'Investment of Money' Simplification: The SEC views token purchase as the investment. The legal reality is that staking requires ongoing capital lockup and infrastructure risk. The primary investment is not money but opportunity cost and operational expenditure, a barrier the Howey Test never contemplated.

Evidence from Enforcement: The SEC's case against Kraken's staking-as-a-service conflated custodial intermediation with the base protocol. Their settlement targeted the centralized wrapper, not Ethereum's native staking mechanics, revealing their argument collapses without a centralized promoter.