A group of US senators, led by Cynthia Lummis, has urged the Securities and Exchange Commission (SEC) to clarify its position on protocol staking in crypto exchange-traded products (ETPs) in a Feb. 20 letter. 

The lawmakers are seeking answers regarding the exclusion of staking from ETP issuers’ S-1 filings, which they argue impacts the competitiveness of U.S. asset managers and prevents investors from accessing core blockchain functions.

The SEC has allowed the registration of multiple digital asset ETPs but has consistently required issuers to remove protocol staking from their filings. 

As a result, the senators have requested that the SEC provide explicit reasoning for its decision to exclude staking from digital asset ETPs. 

They have posed three key questions regarding the rationale behind the restriction, the risks the SEC identified regarding staking, and whether the regulator would allow staking to be offered within a registered security instrument if the product is seen as an investment contract.

Additionally, the senators argued that increased transparency would help market participants understand the SEC’s regulatory position and inform potential legislative action if needed.

The senators have set an April. 1 deadline for the SEC to respond to its letter.

Competitive disadvantage

The senators contend that this stance limits the investment potential of these products in the US, placing them at a disadvantage compared to similar offerings in Canada, Europe, and the United Kingdom. The latter recently permitted digital asset ETPs with staking, supported by bipartisan backing from Conservative and Labour leadership.

Staking is integral to proof-of-stake (PoS) networks such as Ethereum (ETH) and Solana (SOL). It enables validators to secure blockchain networks by locking up native assets in exchange for transaction fees and newly minted tokens.

The letter authors argue that barring staking from ETPs prevents investors from realizing these benefits, reduces their potential returns, and weakens network security.

Staking discussions are heating up

On Feb. 5, the SEC’s Crypto Task Force met with Jito Labs CEO Lucas Bruder, Multicoin Capital’s Kyle Samani, and legal experts from both firms. The discussion focused on integrating staking into ETP structures while addressing regulatory concerns.

The SEC has cited multiple reasons for its hesitation, including redemption timelines that conflict with the T+1 settlement cycle, the tax implications of staking rewards, and the classification of staking-as-a-service as a securities offering. 

These factors led the SEC to require issuers to strip staking features from initial Ethereum ETP applications. 

During the meeting, industry representatives presented two models designed to mitigate the SEC’s concerns while enabling staking within ETPs. 

The first proposes that a portion of ETP-held assets be staked through third-party validators, while the second model would allow ETPs to hold liquid staking tokens representing staked assets. For example, a Solana-based ETP could include JitoSOL, a liquid staking derivative of SOL.

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