EU Staking Review Threatens Crypto Yields as Regulators Eye Stricter Rules

European regulators are considering stricter rules for staking services, which could impact cryptocurrency yields and network security. A recent MiCA review consultation asks whether Europe's treatment of staking is adequate, and if not, what requirements should apply to companies providing staking services.

The question on page 36 of the European Commission's current MiCA review highlights the dual identity of staking, which started as a network infrastructure mechanism but has evolved into a financial service. Regulators are concerned about the risks associated with staking, such as assets becoming unavailable during protocol withdrawal periods and validators being penalized or slashed.

According to the European Securities and Markets Authority (ESMA), custodial staking is already regulated under MiCA, which requires firms holding client crypto to protect customer ownership rights and maintain records of client positions. However, regulators are now considering whether a separate staking regime is necessary to address specific risks associated with this activity.

The consultation does not propose any new capital requirements or licenses for staking services but asks about the need for more specific rules around slashing, withdrawal delays, fees, and risk management. A standalone framework could make providers disclose who bears the risks in case of a validator being slashed, formalize withdrawal terms, and separate reward advertising to avoid misrepresenting complex combinations of protocol issuance and validator performance.

Smaller validator businesses face a significant challenge if they need to comply with additional regulatory requirements, which could increase costs and make it difficult for them to operate. A possible outcome is that these providers may choose to work behind a large licensed custodian instead, reshaping the staking landscape in Europe.