SEC Clears Liquid Staking: A Watershed Moment for $66 Billion Crypto Market
On August 5, 2025, the U.S. Securities and Exchange Commission's Division of Corporation Finance declared that certain crypto liquid staking activities do not constitute securities under federal law, marking a watershed moment for the $66 billion liquid staking market. This regulatory clarity, part of Chairman Paul Atkins' "Project Crypto" initiative, represents a dramatic reversal from previous enforcement actions and could unlock significant growth in DeFi protocols and crypto ETF products. The guidance applies specifically to liquid staking arrangements where providers perform only administrative functions, while excluding more complex products like restaking protocols.
The official declaration and its architects
The groundbreaking statement emerged from the SEC's Division of Corporation Finance under Acting Director Cicely LaMothe, with strong backing from Chairman Paul S. Atkins and Commissioner Hester Peirce, who leads the agency's Crypto Task Force. Released as SEC Press Release 2025-104, the staff statement built upon an earlier protocol staking guidance from May 29, 2025, forming part of a broader regulatory modernization effort announced by Atkins on July 31.
The timing wasn't coincidental - this declaration followed a July 30 White House report from the President's Working Group on Digital Asset Markets, aligning with the Trump administration's stated goal to make America the "crypto capital of the world." The SEC applied a nuanced interpretation of the Howey Test, concluding that liquid staking providers perform merely "administrative or ministerial activities" rather than the entrepreneurial efforts that would trigger securities classification. As Chairman Atkins stated in the announcement: "Today's staff statement on liquid staking is a significant step forward in clarifying the staff's view about crypto asset activities that do not fall within the SEC's jurisdiction."
Understanding liquid staking mechanics
Liquid staking solves a fundamental problem in proof-of-stake cryptocurrencies where tokens must be locked for extended periods, preventing their use elsewhere. Users deposit crypto assets like ETH with a liquid staking provider, which stakes these assets and issues "liquid staking tokens" (LSTs) or "staking receipt tokens" on a 1:1 basis as proof of ownership. These tokens, unlike the locked underlying assets, remain freely tradable and usable across DeFi protocols.
The technical mechanism involves several key features that distinguish it from traditional staking. LSTs represent ownership of both the staked assets and any accrued rewards, with value adjustments reflecting network rewards or potential slashing penalties. Users retain legal and beneficial ownership of their original assets throughout the process. Major protocols like Lido Finance (operating stETH with over $31 billion in deposits), Rocket Pool (rETH), and Coinbase (cbETH) have pioneered different token models - some using rebasing mechanisms where token balances increase, others where token prices appreciate to reflect rewards.
Why "not securities" matters profoundly
The securities classification question has haunted crypto staking since the SEC's $30 million enforcement action against Kraken in February 2023, which forced the exchange to shut down its U.S. staking operations entirely. Under securities law, offerings must either register with the SEC - an expensive, complex process - or qualify for narrow exemptions. Securities designation would have effectively banned most liquid staking protocols from serving U.S. users and prevented institutional participation.
The SEC's analysis focused on the fourth prong of the Howey Test - whether profits derive from "the efforts of others." The Division concluded that liquid staking providers don't provide entrepreneurial or managerial efforts but merely facilitate access to blockchain protocol rewards through administrative functions. This distinction is crucial: economic benefits come directly from the underlying blockchain's staking mechanism, not from any value-add by the liquid staking provider. The legal reasoning drew parallels to warehouse receipts for commodities, which courts have long held are not investment contracts even though they represent ownership of stored assets.
Sweeping implications across the ecosystem
For crypto investors, this guidance removes the regulatory sword hanging over liquid staking participation, enabling more confident deployment of capital into these yield-generating strategies. The ability to use LSTs as collateral throughout DeFi while earning staking rewards creates unprecedented capital efficiency. Institutional investors, previously sidelined by regulatory uncertainty, can now incorporate liquid staking into portfolios without fear of securities law violations.
Staking platforms gain enormous operational clarity but must carefully structure their services within defined parameters. Providers cannot exercise discretionary control over staking decisions, guarantee specific returns, or engage in active management strategies. The guidance creates a clear operational framework: automated, transparent processes that merely facilitate user participation in blockchain staking. This enables platforms to innovate within boundaries while avoiding the regulatory quicksand that trapped earlier operators.
Perhaps most significantly, the guidance paves the way for staking-enabled crypto ETFs. ETF Store President Nate Geraci called this "the last hurdle" for SEC approval of staking in spot Ethereum ETFs, as liquid staking tokens solve the liquidity management concerns that previously worried regulators.
Industry celebration tempered by dissent
The crypto community's reaction was overwhelmingly positive, with legal experts and industry leaders celebrating the long-awaited clarity. Rebecca Rettig, Chief Legal Officer at Jito Labs, enthusiastically tweeted about the implications for ETF integration, while Miles Jennings from Andreessen Horowitz called it a "huge win" for the industry. Token prices for major liquid staking protocols saw modest gains, with historical precedent suggesting more significant appreciation typically follows regulatory clarity.
However, Commissioner Caroline Crenshaw published a sharp dissent titled "Stake it 'Till You Make It?" warning that the guidance creates "a wobbly wall of facts without an anchor in industry reality." Her opposition highlights the non-binding nature of staff guidance and the risk of future regulatory reversal. While three commissioners support the crypto-friendly approach, the 2-1 split reveals ongoing philosophical divisions within the SEC about appropriate crypto regulation.
The broader DeFi ecosystem stands to benefit enormously from legitimizing this key primitive. Liquid staking forms the foundation for numerous other protocols and financial products, and regulatory clarity enables more sophisticated innovation. Multiple firms including VanEck, Bitwise, and Jito Labs have already petitioned for LST-based ETF products, signaling immediate commercial interest in building on this regulatory foundation.
A dramatic reversal from enforcement
The contrast with previous SEC positions couldn't be starker. The Kraken settlement characterized staking-as-a-service as an unregistered securities offering, focusing on promised returns up to 21% APY and pooled customer assets with limited transparency. Coinbase received a Wells notice in March 2023 warning of potential enforcement over its staking services, though the company fought back arguing their model differed fundamentally from Kraken's yield product.
The 2025 guidance represents a complete philosophical shift from "regulation by enforcement" to providing clear operational guidelines. Where the previous regime under Gary Gensler relied on case-by-case litigation creating uncertainty, the new framework establishes bright-line safe harbors for compliant operations. This change stems from multiple factors: new political leadership favoring crypto innovation, improved technical understanding distinguishing network validation from investment management, and intense market pressure as the U.S. risked losing competitiveness to more crypto-friendly jurisdictions.
Commissioner Hester Peirce's supporting statement compared liquid staking tokens to traditional warehouse receipts and bills of lading, providing intellectual framework for the administrative-not-entrepreneurial distinction. This framing resonated with established legal precedent while acknowledging the novel technology's unique characteristics.
Major protocols and tokens affected
The guidance provides clarity for a diverse ecosystem of liquid staking protocols managing tens of billions in value. Lido Finance, controlling over 30% of all staked ETH with approximately $25 billion in deposits, emerges as the biggest winner. Their stETH token uses a rebasing mechanism where balances increase daily to reflect rewards, maintaining a 1:1 peg with ETH while simplifying DeFi integration.
Rocket Pool's rETH takes second position with over $3 billion staked, using a non-rebasing model where token price appreciates rather than balance increasing. This decentralized approach with permissionless node operators gains regulatory validation for its innovative structure. Frax Finance's dual-token model (frxETH maintaining 1:1 ETH parity while sfrxETH accumulates rewards) and Coinbase's centralized cbETH offering also receive explicit clarity.
Other protocols benefiting include StakeWise (pioneering dual-token separation of principal and rewards), Origin Protocol's OETH (rebasing model optimized for DeFi), and newer entrants like Swell (swETH) and Hord (hETH). Wrapped versions enabling DeFi compatibility, such as wstETH (wrapped stETH), gain derivative clarity. Collectively, these tokens represent over $30 billion in staked assets across Ethereum and emerging proof-of-stake networks.
Legal architecture and critical boundaries
The SEC's legal reasoning rests on carefully distinguishing administrative functions from entrepreneurial efforts. Liquid staking providers can take custody of assets, stake them according to user instructions, select node operators through transparent criteria, and mint/redeem receipt tokens - all considered ministerial activities. Providers cannot decide whether, when, or how much to stake, guarantee returns, or exercise investment discretion.
Drawing from established precedent, the guidance analogizes to Noa v. Key Futures, where courts found warehouse receipts for commodities aren't investment contracts. Since the CFTC classifies ETH as a commodity, liquid staking providers act like digital warehouses - storing assets and issuing receipts without adding entrepreneurial value. This creates a "bailment" relationship where providers hold but don't own user assets, maintaining duty to return them on demand.
Critical limitations constrain the guidance's scope. It applies only to specific structural arrangements meeting defined criteria, with any deviation potentially triggering securities classification. Providers promoting staking as high-return investments, actively managing strategies, or offering yield enhancement beyond basic staking fall outside the safe harbor. The guidance explicitly excludes "restaking" protocols like EigenLayer, leaving significant market segments without clarity. Each protocol must evaluate its specific implementation for compliance, as the Division warned: "Where the facts or activities differ from those described in this statement, the Division's views may be different."
Positioning America's crypto competitiveness
The U.S. regulatory stance now appears more crypto-friendly than major competitors, reversing years of perceived hostility. The European Union's approach remains fragmented, with MiCA regulation providing some clarity but DAC8 tax directives creating new complications by requiring extensive staking reporting. The UK moved ahead in January 2025 by clarifying staking isn't a "collective investment scheme," but the U.S. guidance goes further in explicitly addressing liquid staking tokens.
Switzerland, traditionally crypto-friendly, moved backward with FINMA requirements that only licensed banks can offer staking services. This restriction contrasts sharply with the U.S. framework enabling diverse providers operating within defined parameters. The competitive advantage could attract significant innovation and capital to American markets, particularly as institutional investors seek regulatory certainty for large-scale deployments.
The guidance aligns with the Biden administration's broader "Project Crypto" goals of modernizing securities regulations for blockchain technology. By providing clarity while maintaining investor protection principles, the framework attempts to balance innovation with regulatory oversight. This positions the U.S. to capture value from the rapidly growing liquid staking market while other jurisdictions struggle with regulatory uncertainty or overly restrictive approaches.
Conclusion
The SEC's liquid staking guidance fundamentally reshapes American crypto regulation, transforming a $66 billion market from regulatory grey zone to defined operational framework. By distinguishing administrative blockchain functions from securities-triggering entrepreneurial efforts, the Division created space for innovation while maintaining investor protections. Major protocols gain operational certainty, institutional capital can flow more freely, and new products like staking-enabled ETFs become possible.
Yet important caveats remain - this staff guidance isn't binding regulation, applies only to narrow structural parameters, and faces opposition from Commissioner Crenshaw. Protocols must carefully design operations within prescribed boundaries, and more complex products like restaking await clarification. Despite limitations, this represents the most significant positive regulatory development for crypto staking in U.S. history, potentially catalyzing a new wave of institutional adoption and product innovation while cementing America's position in the global digital asset economy.
