The recent announcement from the Securities and Futures Commission (SFC) regarding staking services for licensed virtual asset trading platforms (VATPs) introduces a clear regulatory framework that will have significant implications for the virtual asset ecosystem in Hong Kong. This development signals a notable shift in the SFC’s regulatory stance, aiming to provide more structure around staking while addressing growing demand from investors and market participants for greater clarity.

Understanding Staking

Staking is the process of committing or “locking up” virtual assets (VAs) within a blockchain protocol to support its validation process, usually under a proof-of-stake (PoS) consensus mechanism. By staking their assets, participants help validate transactions and secure the blockchain, in return for which they receive rewards, typically in the form of additional tokens.

While staking offers an avenue for investors to generate passive returns, it comes with several risks. Stakers are exposed to potential penalties, such as “slashing,” where a portion of their staked assets is forfeited due to mismanagement or misconduct by the validator. Additionally, staked assets are often locked for a fixed period, leading to liquidity risks for the investor.

The SFC’s Staking Guidelines

The SFC’s recent circular outlines its regulatory approach for VATPs wishing to offer staking services to clients. The guidance is focused on establishing clear standards for platforms providing staking, while ensuring that investor protections remain a key concern. Below are some key elements of the guidance:

1. Control and Safeguarding of Client Assets: VATPs must maintain control over the virtual assets involved in staking, ensuring they are not held by third-party service providers. This restriction aims to minimize the risk of mismanagement or fraud, ensuring that client assets remain secure within a regulated environment.
   
2. Operational Controls and Risk Management: VATPs are required to implement effective policies to detect errors, mitigate risks, and safeguard client assets. Platforms must ensure they have the necessary internal controls in place to manage the operational complexities of offering staking services. This includes addressing potential conflicts of interest that may arise.
   
3. Transparency and Disclosure: One of the key regulatory requirements is for VATPs to provide clear, detailed disclosures about their staking services. This includes outlining the risks involved, such as slashing, lock-up risks, blockchain errors, and the potential for validator inactivity. Platforms must also disclose any fees, lock-up periods, unstaking processes, and third-party involvement in providing staking services.
   
4. Due Diligence on Blockchain Protocols and Third Parties: VATPs must conduct thorough due diligence when selecting blockchain protocols for staking and when outsourcing any staking-related services to third-party providers. This ensures that platforms are able to assess the associated risks and choose protocols that align with their operational capabilities and risk management strategies.
   
5. Approval from the SFC: VATPs intending to offer staking services must first obtain the SFC’s prior written approval. The SFC will impose specific conditions on the platform’s license to ensure that it complies with regulatory requirements related to staking. This adds an additional layer of oversight and accountability for platforms entering the staking market.

Commercial Incentives for Offering Staking

Exchanges and trading platforms gain clear commercial benefits from adding staking products. First, staking creates new revenue streams. Exchanges can take a commission or “service fee” on the rewards earned by users who stake their tokens through the platform (for example, Coinbase charges roughly 25?% of ETH staking rewards, Binance about 20?%, Kraken ~15–20?%, depending on the asset). This effectively turns otherwise idle customer holdings into a source of recurring fee income for the platform. Second, staking locks up client assets and increases customer “stickiness.” When users delegate or lock tokens to earn rewards, those assets cannot be immediately withdrawn or traded, anchoring customer balances (and network effects) on the platform. Third, staking services differentiate the exchange’s offerings. By advertising passive-yield products, an exchange can appeal to a broader range of users (including those more interested in long-term staking returns than in active trading) and signal that it provides a full-service crypto ecosystem (trading, custody, yield, etc.). In highly competitive crypto markets, offering staking (and related yield products) has become a standard way for major platforms to compete and add perceived value.?

Examples of Staking Services and Regulatory Challenges

• Kraken. Kraken was among the first large U.S. exchanges to offer staking-as-a-service. It supported multiple PoS chains (e.g. Ethereum, Polkadot, Cosmos) and let customers delegate tokens via Kraken’s validators. In February 2023, Kraken agreed to pay a $30?million penalty and shut down its U.S. staking program to settle charges from the U.S. Securities and Exchange Commission (SEC). The SEC alleged that Kraken’s staking service amounted to the unregistered sale of investment contracts?. As part of the settlement, Kraken ceased staking services for U.S. customers but continues staking operations overseas.
  
• Coinbase. Coinbase offers staking on its retail platform (for tokens like ETH, Algorand, Tezos, etc.) and via its institutional arm (Coinbase Prime). In its 2023 lawsuit against Coinbase, the SEC specifically highlighted Coinbase’s “staking” Earn program as an unregistered securities offering. Coinbase has publicly disputed that characterisation, arguing staking is “a legitimate business model” outside traditional securities law requirements?. The litigation spotlight on Coinbase’s staking service underscores the regulatory risk: the SEC treated the staking-as-a-service program as a possible Howey-type “investment contract.” (Notably, in Feb 2025 Coinbase announced that the SEC had dropped its lawsuit, a sign of evolving regulatory approach, but as of 2024 the issue remained unresolved.)?
  
• Binance. Binance, the largest global exchange, offers staking through its “Binance Earn” suite (flexible and locked staking on dozens of tokens). Binance’s staking offerings are similar: customers lock tokens on Binance’s platform and earn a negotiated APY. While Binance has faced broad regulatory scrutiny on licensing, it has not (as of early 2025) been directly charged by U.S. authorities over its staking product. (Binance withdrew staking in some regions to comply with local laws.) Nonetheless, Binance’s staking business demonstrates the practice’s scale: billions of dollars of crypto are routinely staked through major exchanges, and platforms advertise competitive yields to attract assets.
  
• Others. Crypto.com, Gemini (Gemini Earn), Kraken’s overseas arm, and many smaller exchanges and custodians also offer staking or yield services. (For example, Crypto.com lets users stake CRO tokens for higher rewards; Gemini’s Earn – now wound down after partner Genesis’s collapse – was a crypto lending product, illustrating that yield products can also be lending not pure staking.) Each has encountered its own challenges – Gemini Earn stopped payouts after Genesis froze customer funds, and Singapore’s KuCoin introduced staking tokens in partnership with validator firms. Overall, the common thread is that leading trading platforms have actively rolled out staking to meet customer demand, even as regulators scrutinise the arrangements.

Staking and Global Regulatory Trends

Regulators worldwide are grappling with where staking fits in existing law. A central question, especially in the U.S., is whether staking service returns are akin to interest on a security (an “investment contract” under Howey). The SEC under Chair Gensler took an aggressive stance: the Kraken settlement and SEC warnings to Coinbase implied that staking-as-a-service could be an unregistered securities offering. This view is contentious. For instance, in early 2025 a bipartisan group of U.S. senators urged the SEC to allow staking in crypto-exchange traded funds, arguing staking is integral to many blockchain protocols’ security. In other words, U.S. enforcement policy treated staking yields like bond interest, but some lawmakers and industry groups contend that view stifles innovation and investor benefits.

Outside the U.S., approaches differ. The European Union’s Markets in Crypto-Assets (MiCA) regulation does not ban staking; in fact, providers of crypto-asset services (which under MiCA includes custodians and exchanges) are generally expected to inform regulators about how they manage client assets, including those used in staking. MiCA explicitly regulates token issuance and stablecoins but largely leaves non-security tokens and related services to national authorities and AML/KYC rules. In practice, staking-as-a-service in the EU likely requires the provider to be a licensed Crypto-Asset Service Provider (CASP) under MiCA/EMD2 or equivalent national law, meaning compliance costs may rise but outright prohibition is unlikely. Other jurisdictions vary: for example, Singapore’s regulator licenses digital asset brokers and custodians but has not forbidden staking, while countries like China and India have taken far stricter anti-crypto stances overall (effectively banning retail crypto trading, which by extension limits any exchange staking). In summary, regulatory trends show a tug of war: points of contention include investor protection, the potential for staking pools to concentrate risk, and legal classification. U.S. regulators have so far signaled that staking products may be “securities” under existing law, whereas some other regulators are still formulating clear guidance or taking a more permissive view on proof-of-stake networks’ economic role.

Key Risks and Operational Challenges

Staking services pose several risks for platforms and customers:

• Custody and Cybersecurity Risk: To stake on behalf of clients, exchanges must take custody of users’ private keys or delegate stakes to validators. This greatly increases the value of the assets the platform holds, making it a lucrative target for hackers. A security breach (or insider theft) could lead to large losses. Moreover, since the platform effectively controls the staked tokens, a platform bankruptcy or fraud (as seen in past crypto incidents) could imperil those staked funds. (Regulators note that staking services involve custody of client assets, implicating custodial regulations and audit requirements.)
  
• Technical/Operational Risk: Running and maintaining validator nodes involves operational complexity. If a node malfunctions (software bug, cloud outage, misconfiguration) or is compromised, it may fail to participate in consensus. For many proof-of-stake networks, this can trigger slashing penalties that permanently burn a portion of the stake (e.g. for double-signing or long downtime). Thus, a staking platform must build robust, redundant validator infrastructure. Outages during major network events (like hard forks or upgrades) pose additional hazards; the platform must stay in sync with protocol changes or risk losing rewards or funds.
  
• Liquidity and Market Risk: Staked tokens are typically locked for a period or at least subject to unbonding delays (for example, Ethereum’s minimum 2-week exit queue). If customers suddenly want to withdraw or sell their crypto, they cannot instantly do so. This creates liquidity risk for both users and the platform. Some platforms offer “liquid staking” derivatives or internal IOUs to provide apparent liquidity, but those introduce counterparty risk and potential mismatches. In a market crash, staked asset values can drop like any other crypto, and the inability to quickly exit can exacerbate losses.
  
• Regulatory/Legal Risk: As noted above, staking services sit in a gray regulatory area. A platform’s business model depends on the outcome of lawsuits or rule changes (e.g. if a regulator suddenly deems staking returns to be “interest” requiring registration, a platform might be forced to suspend services or register as a securities entity). This legal uncertainty is an operational risk in itself.
  
• Business and Competitive Risk: Offering staking typically requires sharing rewards with customers (since yields are transparent and driven by the protocol). If an exchange’s commission on rewards is too high, customers can defect to higher-yield competitors or decentralized protocols. Conversely, low fees squeeze the platform’s revenue. Additionally, staking has become ubiquitous; platforms without competitive yields or user-friendly staking options risk losing market share to rivals that do.

In sum, while staking services can be lucrative and attract customers, platforms must manage complex technical infrastructure and navigate evolving legal frameworks. Successful staking operations require robust custody security, clear risk disclosures, and adaptability to regulatory changes – all to ensure that the promised rewards do not expose the exchange (or its users) to undue harm.

For Hong Kong, the SFC’s new guidelines on staking reflect the evolving nature of virtual asset regulation in Hong Kong. By providing clear rules on how staking services should be offered, the SFC aims to balance the growth of the virtual asset ecosystem with the protection of investors. And while the guidelines bring much-needed clarity, the risks inherent in staking remain present. Both platforms and investors must approach staking with an understanding of the potential pitfalls. The regulatory framework laid out by the SFC establishes a foundation for future developments in the virtual asset space, and it will be important to monitor how these regulations evolve as the industry continues to mature.