High Stakes Litigation: Time to End the War on Staking

The Evolution of Staking Regulation

The regulatory landscape for cryptocurrency staking services has undergone significant transformation in recent years. In 2023, the SEC and ten states initiated legal action against a major cryptocurrency platform, alleging that its staking services constituted unregistered securities offerings. Several states escalated their actions by issuing cease-and-desist orders that immediately prevented this platform—and only this platform—from staking new assets for users.

These cease-and-desist orders represent an extraordinary regulatory measure typically reserved for emergency situations involving serious securities fraud, such as ongoing Ponzi schemes. Their application to routine staking services raised fundamental questions about regulatory proportionality and the classification of blockchain-based services. Notably, throughout the entire period of offering these services, no user of this particular platform ever experienced financial losses through its staking operations.

From the outset, the targeted platform maintained that both the SEC and the state regulators were incorrect in their legal interpretation and factual assessment. The company committed to a vigorous defense strategy, not only in the courtroom but also through comprehensive education efforts aimed at policymakers nationwide regarding the benefits and mechanics of digital assets and staking services.

These sustained efforts have begun yielding positive results. In early 2025, the SEC dismissed its lawsuit against the platform with prejudice—a significant legal outcome that prevents the agency from refiling similar claims. Subsequently, five states that had initially followed the SEC's enforcement approach—Illinois, Kentucky, South Carolina, Vermont, and Alabama—also agreed to withdraw their cases. This development has created regulatory parity across state lines, allowing residents in previously restricted jurisdictions to access the same staking opportunities as their counterparts in neighboring states.

However, despite these victories, regulatory actions in California, New Jersey, Maryland, Washington, and Wisconsin continue to adversely affect residents in those states. All but one of these jurisdictions maintain cease-and-desist orders that have already resulted in tens of millions of dollars in foregone staking rewards for residents, while simultaneously limiting consumer choice and perpetuating regulatory uncertainty in the digital assets space.

What is Staking?

Staking represents a fundamental mechanism within proof-of-stake blockchain networks, serving as the cornerstone of network security and transaction validation. The process involves participants temporarily locking up a specified amount of cryptocurrency to support the network's operational infrastructure. This includes validating transactions, maintaining consensus among network participants, and securing the blockchain against malicious actors.

In return for their contribution to network security and functionality, participants—commonly referred to as stakers—earn rewards, typically distributed in the form of additional tokens. These rewards serve as an economic incentive that aligns individual participant interests with the overall health and security of the blockchain network.

Staking plays a crucial role in building and protecting the decentralized internet infrastructure of the future. By allowing those who secure the network to earn tokens for their efforts, staking creates a sustainable economic model for blockchain maintenance. However, effective staking often requires substantial technical knowledge, including understanding of node operations, network protocols, and security best practices.

To address this technical barrier, staking-as-a-service platforms have emerged to democratize access to staking opportunities. These platforms provide the necessary technology infrastructure that enables users to participate securely in network validation without requiring deep technical expertise. This service model has significantly expanded the pool of potential stakers, contributing to greater decentralization and security across proof-of-stake networks.

Professional Staking Service Infrastructure

The platform in question operates as one of the most established digital assets platforms in the industry, distinguished by being the only publicly traded cryptocurrency exchange in the United States. This public company status subjects the platform to rigorous financial transparency requirements, including audited financial statements and comprehensive quarterly and annual disclosures mandated by securities regulations.

The regulatory framework governing this platform's operations extends across multiple jurisdictions and regulatory bodies. At the federal level, the company maintains registration as a money services business with the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department. This registration obligates compliance with extensive anti-money laundering (AML) protocols and know-your-customer (KYC) regulations designed to prevent financial crimes and protect the integrity of the financial system.

At the state level, the platform holds 46 state money-transmission licenses, subjecting its operations to a comprehensive array of state-specific regulations. These include consumer protection statutes, financial reporting requirements, and operational standards designed to safeguard user assets. The company employs a dedicated team of over 400 compliance, legal, and investigative professionals who work continuously to maintain the platform's position as one of the most secure cryptocurrency platforms globally.

The platform's commitment to user protection extends beyond regulatory compliance. The company has implemented a user indemnification policy specifically for staking services, pledging to compensate users in the unlikely event that company actions result in staking-related losses. This financial commitment demonstrates the platform's confidence in its security infrastructure and operational procedures. The company's safety record substantiates this confidence: throughout its entire history of offering staking services, no user has experienced financial losses attributable to the platform's staking operations.

Consumer Impact of Selective Enforcement

Despite the platform's exemplary safety record and the SEC's decision to dismiss its case with prejudice, five states—California, New Jersey, Maryland, Washington, and Wisconsin—continue to assert that the platform's staking services constitute unregistered securities offerings. Four of these states maintain active cease-and-desist orders that specifically prohibit the platform from offering staking services to state residents.

A critical aspect of these enforcement actions is their selective nature: they target exclusively one platform while leaving other staking service providers operating in these jurisdictions entirely unaffected. This selective enforcement raises fundamental questions about regulatory fairness and equal treatment under the law.

The legal foundation for these continuing state actions appears increasingly tenuous. The SEC's dismissal with prejudice of its securities claims against the platform's staking services represents a significant legal development. Furthermore, 40 states have never attempted to restrict these staking services, and five states that initially pursued enforcement actions have subsequently withdrawn their claims, effectively acknowledging the weakness of the securities classification argument.

While the platform maintains its readiness to challenge and ultimately defeat these remaining enforcement actions through litigation, the immediate consequence of these state actions is measurable harm to state residents. The cease-and-desist orders in California, New Jersey, Maryland, and Wisconsin have prevented residents from accessing staking services that remain freely available to users in other states and even to residents of these same states using alternative platforms.

The financial impact of these restrictions is substantial. Residents of the four states with active cease-and-desist orders have collectively foregone an estimated amount exceeding tens of millions of dollars in potential staking rewards since mid-2023. This figure continues to grow with each passing month that these restrictions remain in effect, representing a direct economic cost imposed on state residents by their own regulatory authorities.

Beyond the direct financial harm, these selective enforcement actions create perverse market distortions. By singling out one highly regulated, publicly traded platform while leaving other providers untouched, state regulators are effectively picking winners and losers in the marketplace—a role that should properly belong to consumers exercising their freedom of choice. This regulatory approach not only deprives consumers of competitive options but paradoxically may push them toward potentially less regulated or entirely unregulated staking platforms.

Many alternative staking providers lack the comprehensive consumer protections, public financial disclosures, and multi-layered regulatory oversight that characterize the targeted platform's operations. If the stated objective of these state actions is consumer protection, the practical effect of driving users toward less transparent and less regulated alternatives appears counterproductive to that goal.

Regulatory Uncertainty and Policy Development

The fundamental question of cryptocurrency regulation, including staking services, should ultimately be resolved through legislative action by elected officials rather than through protracted litigation in courts. This approach ensures democratic accountability and provides the comprehensive, forward-looking framework that emerging technologies require.

After years of industry advocacy for clear regulatory standards, meaningful progress has finally emerged. Members of Congress from both major political parties are actively collaborating on comprehensive legislative frameworks for digital assets. This bipartisan approach reflects growing recognition that the United States must establish clear rules to maintain its competitive position in the global digital economy while protecting consumers and maintaining financial system integrity.

Regulatory agencies have also begun taking proactive steps to address the regulatory gap. The White House issued an Executive Order specifically designed to protect and promote individual participation in staking activities, signaling high-level policy support for these blockchain mechanisms. The SEC has established a dedicated Crypto Task Force charged with developing appropriate regulatory approaches to staking and other cryptocurrency-related activities.

In recognition of this evolving policy landscape and to provide space for the development of a coherent regulatory framework, the SEC and several state regulators have withdrawn their litigation against the platform's staking services. This coordinated de-escalation reflects an understanding that regulatory clarity is best achieved through deliberate policy development rather than adversarial litigation.

Against this backdrop of emerging regulatory consensus and policy development, the continued litigation by the five holdout states appears increasingly difficult to justify. Rather than protecting consumers, these ongoing legal actions create confusion about the regulatory status of staking services and expose residents to greater risks by limiting their access to well-regulated platforms while leaving less transparent alternatives available.

The regulatory uncertainty generated by these inconsistent state approaches undermines the development of a coherent national framework for digital assets. It creates a patchwork of state-by-state restrictions that impedes innovation, limits consumer choice, and places U.S. companies at a competitive disadvantage relative to international competitors operating in jurisdictions with clearer regulatory frameworks.

The Path Forward

The platform's legal victories against the SEC and multiple state regulators represent significant milestones in establishing appropriate regulatory treatment for staking services. However, these victories remain incomplete as long as California, New Jersey, Maryland, Washington, and Wisconsin maintain their enforcement actions.

The optimal resolution would involve these remaining states following the example set by the SEC and 45 other states by ending their legal challenges to the platform's staking services. Such action would restore regulatory consistency, protect consumer interests, and allow residents of these states to access the same opportunities available to users in other jurisdictions.

Should these states decline to voluntarily withdraw their actions, the platform remains committed to continued litigation to defend its users' interests and establish clear legal precedents. The stakes extend beyond any single platform or service—they encompass fundamental questions about the appropriate regulatory treatment of blockchain technologies and the ability of Americans to participate in the emerging digital economy.

The broader cryptocurrency community has a crucial role to play in this ongoing regulatory dialogue. As policymakers work to establish comprehensive frameworks for digital assets, sustained engagement from industry participants, users, and advocates remains essential. The United States stands closer than ever to achieving regulatory clarity that could allow digital assets and blockchain technologies to flourish domestically, but realizing this potential requires continued collective effort and advocacy.

For those who support reasonable regulation of staking services and wish to see consistent treatment across jurisdictions, engagement with policymakers and participation in public comment processes represents an effective avenue for influence. The outcome of these regulatory debates will shape not only the immediate availability of staking services but the broader trajectory of blockchain technology development and adoption in the United States for years to come.

FAQ

What is cryptocurrency staking and how does it differ from mining?

Staking is securing blockchain networks by holding and locking cryptocurrencies to earn rewards. Unlike mining, staking requires no expensive hardware investment—only cryptocurrency holdings. Stakers validate transactions through proof-of-stake consensus, while miners use computational power in proof-of-work systems.

Why are regulators litigating staking? Is staking considered a security?

Regulators scrutinize staking due to concerns about investor protection and potential securities classification under the Howey Test. However, many argue staking rewards from network participation don't meet securities criteria, as they derive from validation work rather than investment contracts expecting profits from third-party efforts.

What are the legal risks of Staking? How should investors protect themselves?

Staking may involve unregulated financial activities. Investors should consult legal experts to ensure compliance with local regulations, verify project legitimacy, understand smart contract risks, and avoid platforms engaging in unauthorized deposit-taking activities.

What are the differences in staking regulatory attitudes across different countries?

North America focuses on cryptocurrency legality, Europe emphasizes regulation, while China prohibits crypto trading. Staking regulations vary by country with different legal frameworks. Each nation adopts distinct approaches based on their policy priorities.

How are staking rewards taxed?

Staking rewards are treated as ordinary income and must be reported and taxed when received. The fair market value at receipt is your taxable amount. Keep detailed records of all staking transactions and dates for tax compliance purposes.

What is the impact of high stakes litigation on the staking market and users?

High stakes litigation may trigger market trust crises, causing users to worry about platform legitimacy and reduce participation. Legal challenges could force platforms to adjust strategies, affecting user experience and staking rewards.