1. Introduction
We are approaching a significant shift in the regulation of crypto assets and related services across the European Union, with the forthcoming unification under Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023, also known as the Markets in Crypto-Assets Regulation (MiCA).
MiCA represents a significant legislative advancement by the European Union aimed at establishing a comprehensive regulatory framework for crypto-assets and their associated services.
MiCA entered into force on 29 June 2023 and will become fully applicable by 30 December 2024, except for the regulation of asset-referenced tokens and electronic money tokens that started to apply already on 30 June 2024.
MiCA aims for maximum harmonization within the EU by establishing a uniform regulatory framework that applies directly in all member states, unlike the fifth EU Money Laundering Directive, i.e. AMLD5, which led to fragmented national regulations regarding “virtual currencies” or crypto assets.
For the first time, MiCA introduces uniform rules for fungible and transferable crypto-assets that are not classified as financial instruments under MiFID II, along with issuers, offerors of such crypto-assets, and providers of crypto-asset services (CASPs), ensuring maximum harmonization across the European Union.
Nevertheless, certain matters are not clear enough or need certain qualifications, this is why this article will be tackling the treatment of staking under MiCA.
2. Does MiCA prohibit staking-related services or are staking activities exempt from the application of MiCA?
MiCA does not contain provisions specific to staking. It does not therefore prohibit staking, and staking as such is not subject to specific requirements or licensing.
3. What is the meaning of staking?
In its narrow meaning, staking is the process of immobilising crypto-assets to support the operations of proof-of-stake and proof-of-stake-like blockchain consensus mechanisms in exchange for the granting of validator privileges that can generate block rewards.
There are, however, different types of staking, each having its own legal implications:
a) technical staking: this involves individuals or institutions setting up and maintaining their own validator nodes. To become a validator, one must hold a minimum of 32 ETH and have the necessary technical skills to keep the node online and functioning properly to earn rewards.
b) pooled staking: this allows users who do not have enough crypto-assets to stake independently, to join a staking pool. In pooled staking, multiple users combine their funds to meet the required amount for staking. The rewards are then shared among the participants based on their contributions. This method makes staking accessible to more people, allowing them to earn rewards and help secure the network.
c) staking-as-a-service (StaaS): for those who prefer not to handle the technical aspects of running a validator node, StaaS providers offer a convenient solution. These providers manage the technical side of staking for you. One still earns rewards, minus the service fees charged by the provider.
d) centralized staking services: some centralized crypto exchanges offer staking services through their platforms. This option is convenient but less decentralized, as it requires entrusting the platform with the custody of the user’s funds. This carries additional intermediary risks.
4. Considerations on custodial StaaS and centralized staking services
As opposed to technical staking, where crypto asset holders engage themselves directly on a proprietary basis with the distributed ledger protocol to stake their assets to obtain validator privileges and eventually collect associated block rewards, or where they commit their assets to a liquidity pool in return for a yield, StaaS entails that staking services are provided to clients for a consideration by intermediaries that undertake to stake the clients’ crypto assets on their behalf.
The staking service provider will collect the yield or obtain the validator privileges allowing them to earn block rewards. This yield or these block rewards are then distributed between the service provider as consideration for their service (staking the assets on the client’s behalf, exercising validator obligations and collecting the block rewards, etc.), and the staking service provider’s clients, who are the ultimate owners of the crypto assets that are staked.
In providing StaaS, the crypto assets, or the private keys giving access to them, are held by the staking service provider in custody. Thus, the provision of staking services is ancillary to custody services which are fully covered under MiCA. The provision of staking services therefore requires that the crypto asset staking service provider is authorised under MiCA to provide custody and administration of crypto-assets on behalf of clients, as set out in Article 75 MiCA. In offering and providing the staking services, the service provider must meet at all times the requirements set out in MiCA incumbent on entities authorized for the provision of custody and administration of 6 crypto-assets on behalf of clients (in particular Articles 59, 62, 66, 67, 68, 69, 70, 71, 72, 73,74 and 75 MiCA including but not limited to concluding agreements that specify duties and responsibilities, segregating customer assets from the service provider’s estate, minimising the risk of loss, liability for loss of crypto assets, etc.).
In particular, it follows from these obligations that, where staking services are provided in combination with the provision of custody, CASPs should ensure that the assets held on behalf of clients can be returned to the clients in accordance with the custody agreement. CASPs should also remain liable to their clients for any loss of crypto-assets attributable to them, pursuant to Article 75(8) MiCA which states: “crypto-asset service providers providing custody and administration of crypto-assets on behalf of clients shall be liable to their clients for the loss of any crypto-assets or of the means of access to the crypto-assets as a result of an incident that is attributable to them. The liability of the crypto-asset service provider shall be capped at the market value of the crypto-asset that was lost, at the time the loss occurred. Incidents not attributable to the crypto-asset service provider include any event in respect of which the crypto-asset service provider demonstrates that it occurred independently of the provision of the relevant service, or independently of the operations of the crypto-asset service provider, such as a problem inherent in the operation of the distributed ledger that the crypto-asset service provider does not control.”
Losses of crypto-assets stemming from the provision of staking services provided to the client, and from the underlying staking activity itself, should be deemed as attributable to the CASP.
Where staking services are provided in combination with any other crypto-asset services governed by MiCA, CASPs should obtain an explicit consent from the clients to stake their crypto-assets, as it may have an impact on their clients’ ability to access them.
5. Get in touch
In conclusion, while MiCA does not explicitly regulate staking, it imposes significant requirements on intermediaries providing staking services, particularly those involving the custody of client assets. This regulatory framework aims to enhance investor protection and market integrity within the EU’s crypto-asset market. As MiCA comes fully into application, stakeholders in the crypto industry must navigate these rules carefully to ensure compliance.
Diana Stetiu, Attorney-at-Law and Founder at Diana Stetiu FinTech Law Office
