Whether staked or not, Ethereum is not a security
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Whether staked or not, Ethereum is not a security
ETH staking is a technical service, not a securities offering, and its profits primarily come from network and market conditions rather than third-party efforts.
Navigating Web3 tides with focused insightsBy: EVAN THOMAS
Translated by: Baihua Blockchain
Since Ethereum's transition from proof-of-work to proof-of-stake, some have argued that this makes ether (ETH), or at least ETH staking, a security.
These arguments do not withstand scrutiny.
Properly understood, ETH staking is a technical service designed to ensure transactions on the Ethereum network are processed correctly and securely—not an investment subject to securities regulation. This remains true even when third parties, such as node operators or exchanges, facilitate ETH staking. Validators' expectation of profit arises from staking rewards and the ETH market, not from administrative or technical services provided by third parties.
1. Legal Framework: Defining the "Investment Contract"
Whether a tool or activity falls under securities law depends on the definition of "security."
Under U.S. federal securities law, the term "security" includes various instruments, including "investment contracts." Court rulings have refined the meaning of this term, but an "investment contract" generally refers to a transaction involving (1) an investment of money; (2) in a common enterprise; (3) with a reasonable expectation of profits; (4) derived primarily from the efforts of others.
This concept originated in the U.S. Supreme Court’s Howey decision, which involved orange groves and their profitability. The Court concluded that if a third party sells plots of land along with a management agreement to cultivate the groves and share in the profits, it constitutes an investment contract regulated under securities law—the buyer is not merely purchasing land but investing capital to earn profits based on the third party’s efforts in planting and selling oranges.
Subsequent rulings have clarified that the "efforts of others" must be "undeniably significant—namely, managerial efforts that are central to the success or failure of the enterprise." Administrative or "ministerial" efforts do not suffice to create an investment contract.
Applying the concept of an "investment contract," Ethereum’s shift from proof-of-work (PoW) to proof-of-stake (PoS) clearly did not turn ETH itself into an investment contract. Simply holding ETH does not automatically entitle holders to staking rewards, so the transition to PoS did not create an investment contract.
A more nuanced argument is that staking ETH constitutes an investment contract—but this claim also fails under scrutiny.
Technically, staking ETH involves sending ETH to an Ethereum deposit contract and associating it with a specific validator—a software instance specifically designed to process transactions on the Ethereum network. If hardware or software failures cause a validator to violate Ethereum’s validation rules, the network penalizes the staked ETH associated with that validator (a process known as “slashing”). In practice, staked ETH functions as a financial guarantee that the validator performs its duties as expected.
In cases where ETH validators operate independently—sometimes called solo staking—the analysis is straightforward. Since no “others” are exerting effort, there is no investment contract.
Staking via liquid staking protocols or exchanges through providers
Some ETH stakers may prefer to have other parties operate validators on their behalf.
More complex arrangements—such as staking services offered by node operators, liquid staking protocols, or centralized exchanges—require further analysis to determine whether these relationships constitute investment contracts.
Typically, staking with a node operator does not involve transferring ownership of staked ETH to the operator. Instead, stakers associate their ETH with a validator operated by the node operator and designate their own address as the withdrawal destination for both staked ETH and any rewards. All staking rewards and the original ETH can only be withdrawn to addresses controlled by the staker—not the node operator. This ensures stakers retain full ownership and control over their ETH; no funds or value are invested in another party.
Similarly, staking via a liquid staking protocol—a smart contract deployed on Ethereum—associates staked ETH with node operators willing to run validators on behalf of stakers. When using such a protocol, stakers receive a transferable token that can later be redeemed for their staked ETH plus accumulated rewards.
Again, this is programmatically enforced by the protocol, not by a third party. Crucially, neither node operators nor any other third parties gain ownership or control over the staked ETH or staking rewards.
Users of centralized exchange staking services can also allow the exchange to stake on their behalf. The exchange allocates users’ ETH to validators operated by either the exchange or third parties. While custodial exchanges hold users’ ETH, their terms of service typically explicitly state that staked ETH remains the property of the user. The exchange’s role is limited to arranging staking and calculating rewards.
In all these cases, whether there is an "investment of money" and a "common enterprise" is debatable. Stakers retain legal ownership of their staked ETH and, except in custodial staking arrangements, do not even transfer their ETH to another party. This stands in stark contrast to investment schemes where investors transfer funds or assets to promoters who have broad discretion over how those investments are used to generate profits.
However, even if we assume ETH staking does involve a common enterprise, when involving node operators or exchanges, stakers’ expectations of profit are not primarily tied to the efforts of third parties.
Staking rewards include consensus-layer rewards generated by the Ethereum network itself when validators propose or attest to new blocks. They also include execution-layer rewards, which are essentially fees paid by users to validators for prioritizing their transactions.
The timing and amount of these rewards depend on factors such as the total number of validators, the fees users are willing to pay for transaction priority, and the overall state of the Ethereum network. Since rewards are received in ETH, stakers’ profits may also be affected by the market price of ETH in their local currency.
This means stakers must expect to earn profits based on network and market dynamics—not on the efforts of node operators or exchanges facilitating staking.
Moreover, the activities performed by node operators or exchanges are not "entrepreneurial" or "managerial" in the sense defined by case law. Although node operators or exchanges may provide technical and other services enabling stakers to earn rewards, these third parties typically use similar hardware infrastructure, run open-source software, and follow comparable best practices to secure and operate their systems. They do not possess proprietary methods or specialized expertise that enable their users to earn significantly more rewards than users of other similar services. In practice, reward rates across validators operated by different node operators tend to be very close, rarely differing by more than one-tenth of a percent.
2. Lessons from Recent SEC Cases
None of the above suggests staking can never be part of a broader investment scheme subject to securities law.
In February 2023, Kraken settled with the U.S. Securities and Exchange Commission (SEC) over allegations that its staking service in the U.S. violated federal securities laws. More recently, in late March 2024, a U.S. district court judge denied a motion to dismiss the SEC’s lawsuit regarding Coinbase’s staking service.
In the case against Kraken, the SEC alleged that the exchange retained discretionary control over staking reward rates, smoothed out reward payouts to users, and maintained a pool of unstaked tokens that allowed users to effectively bypass lock-up periods applicable to staked tokens. Similarly, the Coinbase ruling noted that at one time, Coinbase maintained a liquidity pool akin to Kraken’s. The key point is that these alleged features relate to the specific way these exchanges structured their staking services—they are not general characteristics of ETH or staking itself.
Importantly, neither case represents a definitive legal determination on whether these (or any other) staking services constitute securities offerings under U.S. law. Kraken resolved the charges without admitting or denying the SEC’s allegations and agreed to shut down its staking service in the U.S. The Coinbase ruling merely determined whether the SEC’s allegations were sufficient to allow the litigation to proceed.
3. Conclusion: Staking as a Technical Service, Not a Securities Offering
Even when stakers collaborate with other parties like node operators and exchanges to stake ETH, their expectation of profit stems from network and market conditions independent of these third parties’ efforts. The economic reality is that these third parties function more like administrative or technical service providers—not promoters or managers of an investment scheme.
The fact that ETH can be staked does not make it a security, and earning staking rewards through ETH staking does not necessarily constitute a securities offering.
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