SEC Issues Fresh Crypto Guidance on Staking Tokens, Buybacks, and the Howey Test

The failure of the CLARITY Act in the US Senate on September 15 hasn’t deterred the two largest local regulators from trying to clear the air on crypto regulation in the country, with the Securities and Exchange Commission now issuing fresh staff guidance addressing several long-running questions.

The new set of FAQs focuses heavily on when tokens may fall outside securities regulation and what types of issuer activity do or do not create new Howey-related concerns.

New Set of FAQs

One of the more notable sections addresses Staking Receipt Tokens, which represent ownership of crypto assets deposited for staking. The circumstances described by the watchdog indicate that a staking receipt tied to a digital commodity that is not subject to an investment contract can be considered a digital tool since it simply evidences ownership of the underlying asset.

In certain cases, such a token may instead qualify as a digital commodity when issued by a protocol-based liquid staking provider. The distinction depends heavily on what rights the receipt actually creates. The agency said a true “receipt” should not transfer ownership or control of the deposited asset to the issuer, nor allow that issuer to lend, pledge, rehypothecate, or otherwise use it.

According to the statement, continuing to secure, maintain, improve, or enhance a functional blockchain network, including funding development or encouraging network effects, does not constitute the type of “essential managerial efforts” typically associated with an investment contract under Howey.

Once a functional crypto system has no central controlling party, statements by an original issuer would generally be less likely to create a new investment contract around the native asset.

Token Buybacks and Marketing

Announcing a buyback of a non-security token for a functional crypto system would not amount to a promise of essential managerial efforts. The answer, though, changes if the network is not yet functional and the issuer markets the buyback as a mechanism designed to generate yield or returns for holders.

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Broader marketing receives similar treatment, as the SEC said simply promoting a network’s existing utility or capabilities would generally not be enough to establish an investment contract. Even aspirational statements about future features may fall outside that threshold if they do not promote the prospect of profit.

These FAQs follow the most recent guidance issued by the SEC and the CFTC after the CLARITY Act vote failed in the US Senate.