Crypto staking is a process that allows users to earn rewards by locking up their coins in a network and participating in its consensus mechanism. Staking is seen as a way to generate passive income and support the security and decentralization of various blockchain platforms.
According to court documents, SBF’s FTX exchange and Genesis have jointly asked the bankruptcy court to issue a declaratory judgment on whether staked assets are property of the debtor or the creditor, and whether they are subject to automatic stay or turnover orders. The outcome of this request could have significant implications for the distribution of assets among creditors and for the future of crypto staking.
This is the situation that FTX and Genesis Global Capital are facing, as both companies have filed for Chapter 11 protection in the US after suffering massive losses from the crypto market crash in November 2022. FTX and Genesis are among the largest players in the crypto industry, offering services such as trading, lending, borrowing, and staking.
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FTX and Genesis claim that staked assets are not property of the debtor, but rather contractual rights that are held by the creditor. They argue that staking is a form of lending, where the creditor lends its assets to a third-party platform or protocol in return for rewards. Therefore, they say, staked assets should not be subject to automatic stay or turnover orders, which would prevent them from accessing or transferring their staked assets.
However, staking also involves some legal and regulatory challenges, especially in the US, where the Securities and Exchange Commission (SEC) has not yet clarified its stance on whether staked coins are securities or not.
This uncertainty has led two prominent crypto companies, FTX and Genesis, to ask a federal court in New York for a declaratory judgment on the status of their staking products. FTX is a leading crypto exchange that offers staking services for various tokens, while Genesis is a digital asset lender that provides staking loans to its clients.
According to the complaint filed on May 29, 2023, FTX and Genesis seek a ruling that their staking products do not constitute securities under the federal securities laws, and that they are not required to register them with the SEC or comply with its regulations.
The complaint argues that staked coins are not securities because they do not represent an investment contract, a debt instrument, or an equity interest in any entity. Rather, they are simply digital assets that users voluntarily lock up in a network to earn rewards and support its functionality.
The complaint also claims that FTX and Genesis do not act as intermediaries or brokers in the staking process, but rather as service providers that facilitate the access and use of the underlying networks. Therefore, they do not owe any fiduciary duties to their customers or have any control over their staked coins.
FTX and Genesis state that they have been operating their staking products in good faith and in compliance with the existing guidance from the SEC and other regulators. However, they also acknowledge that there is a risk of enforcement action from the SEC or other authorities if they deem their staking products to be securities.
The complaint concludes by asking the court to grant a declaratory judgment that FTX and Genesis’ staking products are not securities under the federal securities laws, and that they are not subject to SEC registration or regulation. The complaint also seeks an injunction against any enforcement action from the SEC or other regulators based on their staking products.