The ‘Project Crypto’ Initiative that was recently unveiled by the SEC, under recently appointed head Paul Atkins, is already generating benefits for the crypto investing marketplace. With support continuing to come from other agencies such as the FDIC and OCC, not to mention the positive sentiment put forward from the executive branch, the outlook for institutional adoption – and wider utilization – of cryptoassets continues to improve. One area that has remained relatively unaddressed, however, is the important and fast growing staking subset of the crypto landscape. Despite the improvements that have appeared at virtually every level and every aspect of the crypto world the discourse around staking has not moved forward in any substantial way until the announcement from the SEC.
Setting aside the technical specifics of how any one specific staking protocol operates the key takeaways from an investing and policy perspective is that staking provides liquidity for investors of all sizes, provides increased opportunities for DeFi initiatives to expand, and creates opportunities for crypto investors to generate returns off of current holdings. In spite of these benefits, however, the tax treatment and ambiguity related to the classification of staking activities as securities has provided a substantial headwind to broader adoption. With the SEC, specifically the Division of Corporation Finance, stating that certain liquid staking activities do not involve securities, this has the potential to change. Although this statement is not binding guidance from the Commissioners or formal regulations, it has caused renewed optimism for staking advocates.
Let’s take a look at a few of the implications of this announcement, as well as what this means as the market digests this new policy position.
Increased Liquidity
While the statement itself only refers to liquid staking, which itself is a subset of the broader staking ecosystem, this clarification lays the foundation for greater liquidity than had previously been available. When an investor participates in a liquid staking protocol or uses a liquid staking provider, liquid staking tokens are provided in return to prove legal and beneficial ownership of the staked assets, even if the underlying assets themselves remain staked. These LST’s are then able to be deployed onto different chains, used for various blockchain-based applications, or be used as collateral to generate additional returns.
As the crypto marketplace continues to accelerate toward mass institutional adoption the need for 1) flexibility, 2) liquidity, and 3) the ability to generate returns from multiple sources will only increase. This clarification from the SEC provides institutions and investors of all sizes with the basis with which to do so in a clear manner.
Renewed Centralization Concerns
Alongside the very real and tangible benefits able to be accrued by investors participating in liquid staking protocols, however, is a risk that has been flying under the radar even as prices and adoption increase; centralization. While the initial ethos of crypto at large and specifically remaining prominent in the bitcoin maximalist community was a decentralized and distributed financial system and marketplace, the reality is that mainstream investors and policymakers have higher levels of comfort with more centralized options. With Ethereum and ether dominating the staking landscape, and only a few firms such as Coinbase, Kraken, Lido, and Binance headlining the largest holdings of staked ether, the risk of centralization and potential market effects of this centralization are increasing.
Particularly as these crypto-native leaders face growing competition from the TradFi sector, with Coinbase notably facing pressure to reduce fees to mirror changes that have already occurred for TradFi brokerages, this could amplify pressure on the firms at the same time demand also rises. Staking by its nature does involve a level of centralization greater than that utilized by the bitcoin ecosystem, but the specter of too-big-too-fail crypto firms is not something that can be dismissed.
Potentially Increased Volatility
Much like how other derivative instruments can have higher volatility than underlying assets, there is the potential for liquid staking tokens to temporarily depeg from the asset itself. Specifically, if a significant percentage of ether (for example) is staked the LST’s might not have the same instantaneous redemption as expected, which can lead to wider spreads between the token and actual cryptoasset price. If such a depegging occurs, the price volatility and spread can be amplified if the token itself is connected to other leverage protocols or applications. In other words, the more similar the crypto market comes to resemble TradFi marketplaces, the more the risks will mirror the TradFi sector.
Fortunately this is also where the rise of AI and specifically agentic AI can help address the liquid staking marketplace in the form of arbitrage bots. While it is too early to predict whether arbitrage bots, trend spotting and following bots, or bots that can create markets will fill this void the fact remains that AI-based trading and ever advancing applications can assist in resolving volatility in both crypto and TradFi markets.
Staking has the potential to unlock new opportunities for liquidity and crypto utilization, and the recent SEC announcement opens the door for the possibilities to become reality sooner than might have been expected.
