Hong Kong SFC's Interpretation of Compliance Essentials for Virtual Asset Staking Businesses
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Hong Kong SFC's Interpretation of Compliance Essentials for Virtual Asset Staking Businesses
A significant shift in the CSRC's regulatory stance aims to provide structural regulation for pledge activities.
Navigating Web3 tides with focused insightsAuthor: Manqun
The Securities and Futures Commission (SFC) of Hong Kong recently issued a circular on staking services provided by licensed virtual asset trading platforms (VATPs), introducing a clear regulatory framework into Hong Kong's virtual asset ecosystem, which will have significant implications. This move marks a notable shift in the SFC’s regulatory stance, aiming to structurally regulate staking activities while responding to growing investor and market demand for policy clarity.
Understanding Staking Mechanisms
Staking refers to committing or "locking" virtual assets within a blockchain protocol to support its validation process (typically based on a Proof-of-Stake (PoS) consensus mechanism). By staking their assets, participants assist in validating transactions and maintaining blockchain security, and in return usually receive rewards in the form of additional tokens.
Although staking offers investors a way to earn passive income, it comes with multiple risks: stakers may face penalty mechanisms such as "slashing," where part of their staked assets are confiscated due to validator mismanagement or misconduct. Additionally, staked assets are typically locked for fixed periods, exposing investors to liquidity risk.
SFC's Staking Guidance
The SFC's recent circular outlines its regulatory approach toward VATPs wishing to offer staking services to clients. The guidance focuses on establishing clear standards for platforms providing staking services, while ensuring investor protection remains a core concern. Below are the key points of the guidance:
1. Control and Safeguarding of Client Assets
VATPs must retain control over virtual assets involved in staking, ensuring they are not held by third-party service providers. This restriction aims to minimize risks of mismanagement or fraud, safeguarding client assets within a regulated environment.
2. Operational Controls and Risk Management
VATPs must establish effective policies to detect errors, mitigate risks, and protect client assets. Platforms must ensure they have necessary internal control measures to manage the operational complexities of offering staking services, including addressing potential conflicts of interest.
3. Transparency and Disclosure
A key regulatory requirement is that VATPs must provide clear and comprehensive disclosures regarding staking services, including explanations of associated risks (e.g., slashing, lock-up risks, blockchain bugs, and potential validator downtime). Platforms must also disclose fee structures, lock-up periods, unstaking procedures, and any involvement of third parties in staking services.
4. Due Diligence on Blockchain Protocols and Third Parties
VATPs must conduct rigorous due diligence when selecting blockchain protocols for staking and when outsourcing any staking-related services to third-party providers. This ensures platforms can assess relevant risks and select protocols aligned with their operational capabilities and risk management strategies.
5. Prior Approval from the SFC
VATPs intending to offer staking services must first obtain written approval from the SFC. The SFC will impose specific conditions on the platform’s license to ensure compliance with staking-related regulatory requirements. This adds an additional layer of oversight and accountability for platforms entering the staking market.
Commercial Incentives for Offering Staking Services
Exchanges and trading platforms gain clear commercial benefits by adding staking products:
First, staking creates new revenue streams. Exchanges can earn commissions or "service fees" from rewards users receive through platform-based token staking (for example, Coinbase charges approximately 25% of ETH staking rewards, Binance around 20%, and Kraken about 15–20%, varying by asset). This effectively converts customers’ idle assets into recurring fee income for the platform.
Second, staking locks up customer assets and increases user “stickiness.” When users delegate or lock tokens to earn rewards, these assets cannot be immediately withdrawn or traded, anchoring customer balances (and network effects) to the platform.
Third, staking services create a competitive differentiation for exchanges. By promoting passive income products, exchanges can attract a broader user base—including those more interested in long-term staking returns than active trading—and signal that they offer comprehensive crypto-ecosystem services (trading, custody, yield, etc.). In the highly competitive crypto market, offering staking (and related yield products) has become a standard practice for major platforms to compete and enhance perceived value.
Staking and Global Regulatory Trends
Regulators worldwide are struggling to define how staking fits within existing legal frameworks.
The central debate—especially in the United States—is whether staking rewards resemble interest on securities (i.e., an "investment contract" under the Howey test). The agency under SEC Chair Gary Gensler has taken an aggressive stance:
Kraken Settlement
As one of the first major U.S.-based exchanges to offer "staking-as-a-service," Kraken supported multiple PoS chains (such as Ethereum, Polkadot, and Cosmos), allowing customers to delegate tokens via its validator nodes. In February 2023, Kraken agreed to pay a $30 million fine and shut down its U.S. staking program to settle charges brought by the U.S. Securities and Exchange Commission (SEC). The SEC alleged that Kraken’s staking service constituted the sale of unregistered investment contracts. Under the settlement, Kraken ceased offering staking services to U.S. customers but continues operations overseas.
Coinbase Warned
Coinbase offers staking services on both its retail platform (supporting ETH, Algorand, Tezos, and others) and institutional line (Coinbase Prime). In its 2023 lawsuit against Coinbase, the SEC specifically cited its "Staking" yield program as an unregistered securities offering. Coinbase publicly rejected this characterization, arguing staking is a "legitimate business model" not subject to traditional securities law requirements. The ongoing litigation over Coinbase’s staking service highlights regulatory risk: the SEC views staking-as-a-service as potentially meeting the criteria of an "investment contract" under the Howey test. (Notably, in February 2025, Coinbase announced the SEC had dropped the case, signaling a possible evolution in regulatory attitude, though the issue remained unresolved as of 2024.)
However, there are exceptions, such as Binance.
Binance, the world’s largest exchange, offers staking through its "Binance Earn" suite (supporting flexible/fixed staking for dozens of tokens). Binance’s staking model is similar: customers lock tokens on the platform and receive annual percentage yields (APY). Despite facing broad regulatory scrutiny over licensing, as of early 2025, U.S. authorities had not directly charged Binance over its staking products (though Binance has delisted staking services in certain regions to comply with local laws). Nonetheless, Binance’s staking business demonstrates the scale of this activity: cryptocurrencies staked via major exchanges often reach billions of dollars, with platforms attracting capital by advertising competitive yields.
Meanwhile, the SEC’s position remains controversial. For instance, in early 2025, a bipartisan group of U.S. senators urged the SEC to allow cryptocurrency exchange-traded funds (ETFs) to engage in staking, arguing that staking is essential to the security of many blockchain protocols. In other words, while U.S. enforcement policy treats staking rewards similarly to bond interest, some lawmakers and industry groups argue this stance suppresses innovation and investor interests.
Regions outside the U.S. have taken different approaches: the European Union’s Markets in Crypto-Assets Regulation (MiCA) does not prohibit staking. In fact, crypto-asset service providers (CASPs)—including custodians and exchanges under MiCA—are generally required to report how they manage client assets, including those used for staking. MiCA explicitly regulates token offerings and stablecoins but leaves non-security tokens and related services primarily to national regulators and anti-money laundering / know-your-customer rules. In practice, staking-as-a-service in the EU may require providers to obtain a CASP license under MiCA/EMD2 or equivalent national authorization, meaning compliance costs may rise but outright prohibition is unlikely.
Other jurisdictions vary: for example, Singapore’s regulators require licensing for digital asset brokers and custodians but do not ban staking, whereas countries like China and India have adopted stricter anti-crypto positions overall (indirectly restricting exchange-based staking by banning retail crypto trading).
In this context, Crypto.com, Gemini (Gemini Earn), Kraken’s overseas branches, and numerous smaller exchanges/custodians also offer staking or yield services (e.g., Crypto.com allows users to stake CRO tokens for higher rewards; Gemini Earn—discontinued after partner Genesis collapsed—was a crypto lending product, illustrating that yield products may involve lending rather than pure staking). However, each platform faces unique challenges: Gemini Earn halted payouts after Genesis froze customer funds; Singapore-based KuCoin launched staking tokens through partnerships with validator firms.
Overall, leading trading platforms are actively launching staking services to meet customer demand, despite ongoing regulatory scrutiny of such arrangements. Meanwhile, global regulatory trends reflect an ongoing tug-of-war: key issues include investor protection, potential concentration risks in staking pools, and legal classification. U.S. regulators have so far signaled that staking products may fall under the definition of "securities" under current law, while other regulators continue developing clear guidelines or maintain a more permissive view of PoS networks' economic roles.
Key Risks and Operational Challenges
Staking services pose multiple risks for both platforms and customers:
1. Custody and Cybersecurity Risks
To stake on behalf of clients, exchanges must either take control of users’ private keys or delegate staking to validator nodes. This significantly increases the value of assets held by the platform, making it a high-value target for hackers. Security breaches (or insider theft) could result in massive losses. Moreover, since the platform effectively controls the staked tokens, platform insolvency or fraudulent behavior (as seen in past crypto industry incidents) could jeopardize staked funds. (Regulators note that staking services involve custody of client assets, implicating custody regulations and audit requirements.)
2. Technical / Operational Risks
Operating and maintaining validator nodes involves operational complexity. If a node fails (due to software bugs, cloud outages, configuration errors) or is compromised, it may be unable to participate in consensus. For most PoS networks, this could trigger slashing penalties, permanently destroying part of the staked assets (e.g., due to double-signing or prolonged offline status). Therefore, staking platforms must build robust, redundant validator infrastructure. Downtime during major network events (like hard forks or upgrades) introduces additional risks: platforms must stay synchronized with protocol changes or risk losing rewards or funds.
3. Liquidity and Market Risks
Staked tokens typically require lock-up periods or at least have delayed withdrawal times (e.g., Ethereum has an exit queue of at least two weeks). If customers suddenly wish to withdraw or sell their crypto assets, they cannot do so immediately. This poses liquidity risk for both users and platforms. Some platforms offer "liquid staking" derivatives or internal IOUs to provide apparent liquidity, but this introduces counterparty risk and potential mismatches. During market crashes, the value of staked assets may plummet like other crypto assets, and the inability to exit quickly could exacerbate losses.
4. Regulatory / Legal Risks
As previously discussed, staking services exist in a regulatory gray area. A platform’s business model depends on litigation outcomes or rule changes (e.g., if regulators suddenly classify staking rewards as taxable "interest" requiring registration, platforms might be forced to suspend services or register as securities entities). This legal uncertainty itself constitutes an operational risk.
5. Commercial and Competitive Risks
Offering staking services usually requires sharing rewards with customers (since yields are transparent and protocol-driven). If an exchange charges too high a commission, customers may switch to higher-yield competitors or decentralized protocols. Conversely, low fees squeeze platform margins. Furthermore, staking services are becoming commoditized: platforms lacking competitive yields or user-friendly staking options may lose market share to rivals offering better terms.
Manqun Lawyer Summary
While staking services may generate substantial profits and attract customers, platforms must manage complex technical infrastructure and navigate an evolving legal landscape. Successful staking operations require robust custody security, clear risk disclosures, and flexibility to adapt to regulatory changes—all aimed at ensuring promised returns do not expose the exchange (or its users) to undue risk.
For Hong Kong, the SFC’s new staking guidance reflects the dynamic evolution of local virtual asset regulation. By setting rules for offering staking services, the SFC seeks to balance the development of the virtual asset ecosystem with investor protection. Although the guidance provides much-needed clarity, inherent staking risks remain. Both platforms and investors must participate in staking activities with a full understanding of potential pitfalls. The regulatory framework established by the SFC lays the foundation for future development in the virtual asset space, and closely monitoring the evolution of these regulations will be crucial as the industry continues to mature.
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