Author: Bai Qin, Iris

The recent announcement by the Hong Kong Securities and Futures Commission (SFC) on the provision of staking services by licensed virtual asset trading platforms (VATPs) has introduced a clear regulatory framework for the Hong Kong virtual asset ecosystem, which will have a significant impact. This move marks a significant shift in the SFC's regulatory stance, aiming to provide structural regulations for staking activities while responding to the growing demand for policy clarity from investors and market participants.

Understanding the staking mechanism

Staking is the act of pledging or "locking" virtual assets into a blockchain protocol to support its validation process (usually based on a Proof of Stake (PoS) consensus mechanism). By staking assets, participants assist in validating transactions and maintaining blockchain security, and in return, they are typically rewarded in the form of additional tokens.

Although staking provides investors with a way to earn passive income, it comes with multiple risks: Stakers may face penalty mechanisms such as "slashing" (i.e., part of the staked assets are confiscated due to poor management or improper behavior of the validator). In addition, the staked assets are usually locked for a fixed period, which exposes investors to liquidity risks.

CSRC’s Pledge Guidelines

The CSRC recently issued a circular outlining its regulatory approach to VATPs that wish to provide staking services to clients. The guidelines focus on establishing clear standards for platforms that provide staking services, while ensuring that investor protection remains a core concern. The following are the key points of the guidelines:

1. Control and protection of customer assets

VATP must maintain control over the virtual assets involved in the pledge to ensure that they are not held by third-party service providers. This restriction is intended to minimize the risk of mismanagement or fraud and to ensure the safety of customer assets in a regulated environment.

2. Operational Control and Risk Management

VATP needs to develop effective policies to detect errors, mitigate risks and protect customer assets. The platform must ensure that the necessary internal controls are in place to manage the operational complexity of providing staking services, including resolving possible conflicts of interest.

3. Transparency and Information Disclosure

One of the key regulatory requirements is that VATP must provide clear and detailed information disclosure on staking services, including explanations of related risks (such as penalties, lock-up risks, blockchain errors, and the possibility of validator sabotage). The platform must also disclose the fee structure, lock-up period, unstaking process, and third-party participation in staking services.

4. Due diligence on blockchain protocols and third parties

VATP is required to conduct rigorous due diligence when selecting a staking blockchain protocol and outsourcing any staking-related services to a third-party provider. This ensures that the platform is able to assess the associated risks and select a protocol that is consistent with its operational capabilities and risk management strategy.

5. Prior approval from the Securities and Futures Commission

VATPs that intend to provide staking services must first obtain written approval from the CSRC. The CSRC will attach specific conditions to the platform license to ensure that it complies with regulatory requirements related to staking. This adds an additional layer of supervision and accountability for platforms entering the staking market.

Business motivations for providing staking services

Exchanges and trading platforms gain clear commercial benefits from adding new staking products:

• First, staking creates new revenue streams. Exchanges can extract commissions or "service fees" from the rewards users receive from staking tokens through the platform (for example, Coinbase charges about 25% of ETH staking rewards, Binance about 20%, and Kraken about 15-20%, depending on the asset). This actually converts idle customer assets into a recurring fee income source for the platform.

• Second, staking locks up customer assets and increases user "stickiness." When users delegate or lock up tokens to earn rewards, those assets cannot be immediately withdrawn or traded, thus anchoring customer balances (and network effects) to the platform.

• Third, staking services form a differentiated competitive advantage for exchanges. By promoting passive income products, exchanges can attract a wider user base (including those who are more interested in long-term staking returns rather than active trading) and send a signal that they provide a full range of crypto ecosystem services (trading, custody, income, etc.). In the highly competitive crypto market, providing staking (and related income products) has become a routine means for major platforms to compete and enhance perceived value.

Staking and global regulatory trends

Regulators around the world are working to define where staking fits within existing legal frameworks.

The core dispute, especially in the United States, is whether returns on collateral services are akin to interest on securities (i.e., an "investment contract" under the Howey test). The SEC, under Chairman Gary Gensler, has taken an aggressive stance:

• Kraken Settlement

As one of the first large exchanges in the United States to offer "staking as a service", Kraken supports multiple PoS chains (such as Ethereum, Polkadot, Cosmos), allowing customers to delegate tokens through their verification nodes. In February 2023, Kraken agreed to pay a $30 million fine and close the US staking program to settle charges from the US Securities and Exchange Commission (SEC) . The SEC believes that Kraken's staking service constitutes an unregistered sale of investment contracts. According to the settlement agreement, Kraken stopped providing staking services to US customers, but continued to operate overseas.

• Coinbase is warned

Coinbase provides staking services on its retail platform (supporting ETH, Algorand, Tezos and other token staking) and institutional business line (Coinbase Prime). In the 2023 lawsuit against Coinbase, the SEC specifically pointed out that its "staking" income plan was an unregistered securities offering. Coinbase publicly refuted this characterization, arguing that staking is a "legitimate business model" and is not subject to traditional securities law requirements. The focus of the lawsuit against Coinbase's staking service highlights regulatory risks: the SEC regards staking as a service as an "investment contract" that may meet the Howey test. (It is worth noting that in February 2025, Coinbase announced that the SEC had withdrawn the lawsuit, which was seen as a signal of an evolution in regulatory attitudes, but as of 2024, the dispute has not been fully resolved.)

However, there are exceptions, such as Binance.

Binance, the world's largest exchange, offers staking services through its Binance Earn suite (supporting flexible/regular staking of dozens of tokens). Binance's staking model is similar: customers lock tokens on the platform and earn a protocol annual interest rate (APY). Although Binance faces extensive regulatory scrutiny in terms of licensing, as of early 2025, US authorities have not directly charged its staking products (Binance has removed staking services in some regions to comply with local laws). However, Binance's staking business shows the scale of the business: cryptocurrencies staked through major exchanges are often in the billions of dollars, and the platform attracts funds by advertising competitive yields.

At the same time, the SEC's view is also controversial. For example, in early 2025, a bipartisan group of U.S. senators urged the SEC to allow crypto exchange-traded funds (ETFs) to be pledged, arguing that pledges are indispensable to the security of many blockchain protocols. In other words, U.S. law enforcement policy treats pledge income as bond interest, but some legislators and industry groups believe that this position inhibits innovation and investor interests.

Regions outside the United States take a different approach: the EU’s Markets in Crypto-Assets Directive (MiCA) does not prohibit staking; in fact, crypto-asset service providers (including custodians and exchanges under MiCA) are generally required to report to regulators how they manage customer assets (including assets used for staking). MiCA explicitly regulates token issuance and stablecoins, but leaves non-security tokens and related services primarily to national regulators and anti-money laundering/know your customer rules. In practice, EU staking as a service may require providers to obtain a crypto-asset service provider (CASP) license under MiCA/EMD2 or an equivalent national license, which means that compliance costs may increase but the likelihood of a direct ban is low.

The situation in other jurisdictions varies: for example, Singapore regulators implement a licensing system for digital asset brokers and custodians but do not prohibit staking, while countries such as China and India generally take a tougher anti-crypto stance (indirectly restricting exchange staking by banning retail crypto trading).

In this context, although Crypto.com, Gemini (Gemini Earn), Kraken’s overseas branches and many small exchanges/custodians are also providing staking or yield services (for example, Crypto.com allows users to stake CRO tokens to obtain higher rewards; Gemini Earn - which was terminated after its partner Genesis went bankrupt - is a crypto lending product, indicating that yield products may also involve lending rather than pure staking), each platform faces unique challenges: Gemini Earn stopped paying after Genesis froze customer funds; Singapore’s KuCoin launched staking tokens by cooperating with verification node companies.

Overall, leading exchanges are actively rolling out staking services to meet customer demand, even as regulators continue to review arrangements. Global regulatory trends are also showing a tug-of-war: focus areas include investor protection, the potential for concentration risk in staking pools, and legal classification. US regulators have so far signaled that staking products may be "securities" under current law, while other regulators are still developing clear guidance or are more lenient on the economic role of proof-of-stake networks.

Key risks and operational challenges

The staking service poses multiple risks to the platform and customers:

1. Hosting and network security risks

To stake on behalf of their clients, exchanges must take over user private keys or delegate the stake to a validator. This move significantly increases the value of the assets held by the platform, making it a high-value target for hackers. Security breaches (or internal theft) can result in huge losses. In addition, since the platform actually controls the staked tokens, platform bankruptcy or fraud (as shown in past crypto industry events) may jeopardize the staked funds. (Regulators point out that staking services involve custody of customer assets, which involves custody regulations and audit requirements.)

2. Technical/operational risks

Running and maintaining a validator node involves operational complexity. If a node fails (software bug, cloud service outage, configuration error) or is hacked, it may be unable to participate in the consensus mechanism. For most proof-of-stake networks, this may trigger a slashing penalty, permanently destroying part of the staked assets (e.g. due to double signing or long-term offline). Therefore, staking platforms must build a robust and redundant validator node infrastructure. Downtime during major network events (such as hard forks or upgrades) will bring additional risks: the platform must keep pace with protocol changes, otherwise it may lose rewards or funds.

3. Liquidity and market risk

Pledged tokens usually require a lock-up period or at least an unbinding delay (e.g. Ethereum's at least 2-week exit queue). If a customer suddenly requests to withdraw or sell crypto assets, it will not be possible to do so immediately. This poses liquidity risks to both users and platforms. Some platforms offer "liquid pledge" derivatives or internal IOUs to provide superficial liquidity, but this will introduce counterparty risk and potential mismatches. In the event of a market crash, the value of pledged assets may plummet like other crypto assets, and the inability to exit quickly may exacerbate losses.

4. Regulatory/Legal Risks

As mentioned above, staking services exist in a regulatory grey area. The platform’s business model depends on the outcome of litigation or rule changes (for example, if regulators suddenly determine that staking income is “interest” that needs to be registered, the platform may be forced to suspend services or register as a securities entity). This legal uncertainty itself is an operational risk.

5. Business and competition risks

Providing staking services usually requires sharing revenue with customers (because the yield is transparent and driven by the protocol). If the exchange's reward commission is too high, customers may turn to high-yield competitors or decentralized protocols. Conversely, low rates will squeeze platform revenue. In addition, staking services have become homogenized: platforms that lack competitive yields or user-friendly staking options may lose market share to competitors that have these advantages.

Attorney Mankiw's Summary

While staking services can be lucrative and appealing to customers, platforms must manage complex technical infrastructure and navigate an evolving legal framework. Successful staking operations require robust custody security measures, clear risk disclosures, and the flexibility to adapt to regulatory changes—all to ensure that promised returns do not expose the exchange (or its users) to undue risk.

For Hong Kong, the SFC’s new pledge guidelines reflect the dynamic evolution of local virtual asset regulation. By establishing rules for the provision of pledge services, the SFC seeks to balance the development of the virtual asset ecosystem with investor protection. While the guidelines provide much-needed clarity, the inherent risks of staking remain. Both platforms and investors need to participate in staking activities with a full understanding of the potential pitfalls. The regulatory framework established by the SFC lays the foundation for future developments in the virtual asset sector, and it will be important to closely track the evolution of these regulations as the industry continues to mature.