Proof of Stake Alliance publishes white papers on legal aspects of liquidity staking

The Proof of Stake Alliance (POSA), a non-profit industry alliance, released two white papers on Feb. 21 regarding the status of US securities deposit tokens and tax law. The papers are authored by representatives of more than 10 industry groups.

Liquid staking is a blockchain practice that uses the Proof-of-Stake consensus mechanism to issue transferable receipt tokens to show ownership of the staked crypto assets or rewards accumulated from staking. Tokens are often referred to as liquid staking derivatives, and POSA objects to this term as inaccurate, recommending that they be called liquid staking tokens instead. Liquid staking has sparked a surge of interest since the Ethereum merger.

Neither the US Treasury nor the Internal Revenue Service have issued guidance on liquid rates, POSA said in a statement. marked in “U.S. Federal Income Tax Analysis for Liquid Rates”, but according to general principles, it should be subject to capital gains tax rules. The newspaper said:

“Receipt tokens testify to the ownership of intangible goods in the digital world in much the same way that warehouse receipts, bills of lading, dock warrants, and other title documents attest to the ownership of tangible goods in the physical world.”

Under the taxation of capital gains, the argument went on, “a liquidity betting agreement will only be a taxable event if there is a sale or other disposition of cryptoassets in exchange for property that is materially different in kind or size,” which is commonly referred to as as a “realization” of an asset.

This reasoning is supported by the argument that the liquid staking protocol (smart contract) should not be considered as a separate entity, since it lacks a second party that shares the profit. “If a liquid staker does not have a taxable event, as discussed above, the liquid staker will have to face taxation of continued ownership of staking cryptoassets,” he concludes.

In “U.S. Federal Securities and Commodity Law Analysis of Receipt Staking Tokens”, POSA said that determining whether a receipt token is an investment contract is a matter of choice.

He argued that liquid staking is not an investment contract, and therefore not a security, using a case analysis based on the famous Howey test. He then examined all four aspects of the Howey test and concluded that tokens generally do not meet any of them.

Expect the SEC to use its Kraken game against staking protocols.

The paper also addresses the Reeves test from a 1990 Supreme Court ruling that determined when an instrument was a “note” based on its “family resemblance” to an investment contract. The SEC and federal courts have recognized some crypto assets as banknotes. Additionally, the document claims that the receipt token is not a swap under the Commodity Exchange Act.

The receipt token serves security purposes by allowing the owner to transfer ownership of staked funds between wallets in the event of a key compromise, as well as for commercial purposes, similar to warehouse receipts, the document concludes.

The papers were intended for offer “a basis for meaningful legislative codification or clarification,” the accompanying statement said. They were also to be the basis for self-regulatory standards.

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