Legal Compass: FINMA Guidance on Staking

1. Staking

Whereas there is no single definition of staking, staking is a process enabling cryptoasset holders to support the operational functionality of a blockchain based on a Proof-of-Stake consensus mechanism by blocking their cryptocurrencies as collateral for validation services. By participating in staking, users can earn rewards as a compensation.

2. Licensing and Capital Requirements

Licensing Requirements?

Non-custodial staking does not trigger any licensing requirements as the customer maintains exclusive control over the private keys.

On the other hand, in case of custodial staking, the customer transfers the cryptoassets to a third party. As the service provider or another third party receives control over the private keys, the question arises as to whether and under which circumstances the custodial staking of payment tokens may constitute commercial acceptance of public deposits and thus require a licence according to art. 1a and 1b of the Swiss Banking Act.

• In general, a full banking licence is required for payment tokens held in collective custody without clear customer shares.
• No licence is required if payment tokens are held in individual custody or, provided that several additional conditions are met, only a FinTech licence may be required if payment tokens are held in collective custody with clear customer shares. However, in order to benefit from these exemptions, the payment tokens must be held in readiness for customers at all times. In light of the lock-up periods for unstaking and the slashing risks for misconduct of the validator node, the question arose whether the readiness for customers at all times is given and the cryptoassets can be returned at any time.

Capital Requirements?

Irrespective of the type of custody, i.e. whether individual or collective custody with or without clear customer shares, cryptoassets in custody are on-balance sheet and subject to capital requirements if not held in readiness for the customers at all times. As a consequence, the definition of readiness at all times is also crucial for determining potential capital requirements.  

3. FINMA Staking Guidance 08/2023

In its Staking Guidance, FINMA has now provided supervisory guidance:

Licensing Requirements

No banking or Fintech licence is required for custodial staking, provided that the staked payment tokens are held in individual custody in direct staking, i.e. there is a separate and assignable blockchain address for each customer. Nevertheless, irrespective of any licensing requirements, the custodial staking service provider is always subject to AML regulation and must join a self-regulatory organisation for anti-money laundering supervision.

Capital Requirements

For financial institutions holding the private keys for the customer and thus acting as direct staking providers, FINMA has made clear that at present it will not require them to meet the capital requirements for staked cryptoassets, provided that several conditions are met:

• the customer has given a specific instruction about the type and number of cryptoassets to be staked;
• appropriate steps have been taken to ensure that the cryptoassets placed on a particular validator address, and a particular withdrawal address after unstaking, can be allocated unambiguously to the customer;
• the customer is informed transparently and clearly of all risks (including slashing, lock-up periods and risks relating to the legal uncertainties in the event of bankruptcy);
• appropriate steps are taken to mitigate the operational risks of operating a validator node (including business continuity management), in order to avoid slashing and other penalties; and
• a Digital Assets Resolution Package (DARP) is prepared to ensure adequate risk management.

If the cryptoassets being staked are passed on by the institution to one or more other institutions which operate the validator node and hold the private keys (staking chain), capital requirements can only be avoided if, inter alia, the financial institution selects a node operator which is itself or as part of a financial group subject to prudential supervision with a good credit standing. In addition, the requirements listed above for direct staking as well as some additional conditions need to be met in order to consider the claim on the counterparty a fiduciary claim within the meaning of art. 16 no. 2 of the Banking Act and thus as custody asset.

4. What’s next?

FINMA has emphasized that its guidance is a result of the present legal uncertainty and a lack of case law or further clarification in legislation. As such, FINMA's guidance and practice only applies on an interim basis until the interpretation is clarified by new legislation, court decisions or international developments.