US Opens Door for Crypto ETFs, Trusts to Earn Staking Rewards
In a landmark move for the digital asset sector, the U.S. Treasury and the Internal Revenue Service (IRS) have jointly issued new guidance that clears the path for crypto Exchange-Traded Funds (ETFs) and trusts to engage in staking and distribute rewards to investors. This regulatory development is expected to boost investor benefits, spur innovation, and solidify America's position as a leader in blockchain technology.
Treasury Secretary Scott Bessent announced the new guidance, emphasizing that it provides a clear framework for crypto ETFs to participate in staking activities. The guidance allows crypto ETFs to receive staking rewards through blockchain network platforms. This framework ensures tax transparency, which is crucial for investors in the crypto space, and offers clarity for ETF issuers, particularly those dealing with Bitcoin and Ethereum funds seeking to generate yield through staking.
What is Staking?
Staking is the process of actively participating in transaction validation (similar to mining) on a proof-of-stake (PoS) blockchain. On these blockchains, anyone with a minimum-required quantity of a specific cryptocurrency can validate transactions and earn staking rewards. It involves locking up crypto assets to support the network and validate transactions. In return for contributing to the network's security and stability, stakers receive rewards, typically in the form of additional cryptocurrency.
Key Provisions of the Guidance
Under the new provisions, trusts can stake digital assets on permissionless proof-of-stake networks if they meet specific criteria. These requirements include:
- Holding only one type of crypto asset along with cash
- Utilizing a qualified custodian to manage keys and execute the staking process
- Maintaining Securities and Exchange Commission (SEC)-approved liquidity policies to ensure redemptions can occur even when assets are staked
- Establishing arms-length arrangements with independent staking providers
- Restricting their activities solely to holding, staking, and redeeming assets, avoiding any discretionary trading
Industry Reaction and Implications
Experts believe the new guidance has substantial implications for staking adoption. Bill Hughes, a market expert and lawyer from ConsenSys, explained that these provisions offer much-needed regulatory and tax clarity for institutional investment vehicles, including crypto ETFs and trusts. By removing a significant legal hurdle, the framework opens the door for broader participation from fund sponsors, custodians, and asset managers in integrating staking yields into regulated investment products.
Greg Xethalis, General Counsel at Multicoin Capital, stated that the guidance creates a "safe harbor" and a transition period for ETP trusts, allowing them to stake digital assets without losing their grantor trust status. He believes this is a critical legal classification that ensures tax transparency for investors and resolves one of the most complex structural issues facing crypto-based investment products.
Impact on the Market
The regulatory shift is expected to attract more interest from retail investors and pave the way for broader adoption of staking among digital asset ETFs. Eleanor Terrett noted that this clarity could accelerate institutional adoption, potentially boosting liquidity and trading volumes in staking-focused cryptocurrencies like Ethereum.
This move may lead to increased staking participation, as more regulated entities begin staking on behalf of investors. The SEC's Division of Corporation Finance had previously stated that staking activities on proof-of-stake networks do not constitute securities transactions, further clearing the way for crypto ETFs to include staking.
Looking Ahead
The new guidance from the U.S. Treasury and the IRS marks a significant step forward for the crypto industry, providing a clear regulatory framework for staking within ETFs and trusts. As the market evolves, these developments are poised to foster greater innovation, attract institutional investment, and enhance the overall appeal of digital assets for a wider range of investors.
