Programmatic Protocol Staking Rewards and Regulatory Clarity

In recent months, the regulatory landscape around blockchain staking has taken a significant step forward with new guidance from the U.S. Securities and Exchange Commission (“SEC”). For years, questions around whether protocol staking might be classified as security created uncertainty for networks, developers, and token holders alike. The SEC’s Division of Corporation Finance (the “Division”) has now provided its clearest recognition to date that programmatic protocol staking – where staking rewards are automatically distributed by the underlying protocol’s code – does not constitute an investment contract. In reaching this conclusion, the Division focused on the Howey test. In particular, the Division emphasized the lack of a reasonable expectation of profits derived from the entrepreneurial or managerial efforts of others - based, in large part, on the programmatic nature of both protocol staking and the network’s issuance of staking rewards. This acknowledgment marks an important milestone for proof-of-stake networks and sets the foundation for a more confident, innovation-driven path forward.

Specifically, in its “Statement on Certain Protocol Staking Activities,” the Division emphasized that the operation of proof-of-stake networks is governed by an underlying software protocol, consisting of computer code, that programmatically enforces certain network rules, including staking rewards distributions.  It noted that when a validator is selected, the protocol issues two types of staking rewards: (1) newly minted (or created) tokens that are programmatically distributed to the validator by the network in accordance with its underlying software protocol; and (2) a percentage of the transaction fees paid by parties who are seeking to add their transactions to the network.

The Division’s subsequent “Statement on Certain Liquid Staking Activities,” applied the same logic to tokens issued in liquid-staking arrangements, noting that the receipt of those tokens merely evidences ownership of the staked assets and the automatically accruing protocol rewards; liquid staking tokens do not create a separate investment contract because, again, the rewards flow from the network, not from anyone’s entrepreneurial or managerial efforts.

For Algorand, these regulatory developments carry particular relevance. Today, staking rewards are issued from a finite pool of ALGOs located in the Foundation’s treasury, a model designed to bolster economic resilience and decentralization. While we do not believe that Algorand’s current staking model implicates “efforts of others” under the Howey test, it is clear that the SEC’s recent guidance signals that programmatically distributed, newly minted staking rewards sit on the clearest regulatory footing. As we look ahead, this perspective must inform our planning – especially within the context of Project King Safety, our initiative to ensure the protocol’s sustainability over the long term. Aligning Algorand’s staking model with this guidance will not only reinforce compliance, but also strengthen the network’s foundation for enduring growth.

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