SEC determines proof of work crypto mining is not a security
The Securities and Exchange Commission (SEC) recently made a significant move in providing regulatory clarity regarding cryptocurrencies. Specifically, the SEC issued a statement indicating that solo and pooled mining activities for proof of work blockchains generally do not involve securities.
One of the key points of the argument is that both solo and pooled mining activities place the expectation of profit on the efforts of the miner themselves, rather than on the efforts of third parties. This is crucial as the Howey securities test requires that the expectation of profit derives from the efforts of others.
Acting SEC Chair Uyeda and Commissioner Peirce have expressed discontent with the lack of clarity provided by the SEC in the past. Instead of offering guidance, the previous administration largely focused on regulatory enforcement. The current leadership is now focused on rectifying this situation and steering the SEC in a more pragmatic direction.
The use of proof of stake for blockchain security is increasingly prevalent, with Bitcoin miners fulfilling an essential role in this process. This raises questions about how staking will be categorized moving forward. While staking, as a means to secure the network, may not be considered a security in and of itself, the classification of Staking-as-a-Service remains uncertain.
In cases where end-users delegate their coins to a third party for staking services, there is a reasonable likelihood that this may be considered as involving securities. For example, when the SEC intervened in Kraken’s staking program previously, Commissioner Peirce criticized this action as that of a ‘paternalistic and lazy regulator.’ Her discontent primarily stemmed from the lack of regulatory clarity provided, leaving the industry in limbo.
The discussion around staking opens up complex questions, including whether a staking program should be registered as a whole or if each token’s staking program should be treated separately. The FIT Act introduced last year includes a provision referencing staking as an ‘end-user distribution,’ explicitly excluding it from being categorized as an investment contract. However, this exemption applies solely to activities directly related to the operation of the blockchain system, such as mining, validating, and staking, that are performed directly by the individual without encompassing Staking-as-a-Service.
Overall, the SEC’s move to clarify the status of proof of work crypto mining as not constituting a security marks a step in the right direction towards establishing regulatory certainty in the ever-evolving cryptocurrency landscape. Moving forward, more guidance will be needed to address the complexities arising from different forms of blockchain validation and staking services.
