SEC Issues FAQs Clarifying Crypto Asset Classification, Staking Receipts, and Buybacks

The Securities and Exchange Commission's (SEC) Division of Corporation Finance has issued new FAQs clarifying how federal securities laws apply to crypto assets. The guidance, released on September 25, builds on the March 17 interpretive release and the August 18 Regulation Crypto Assets proposal.

The FAQs address how the SEC classifies staking receipt tokens and wrapped tokens. A Staking Receipt Token that represents a digital commodity free of an investment contract is considered a digital tool, serving as evidence of the holder's ownership of the underlying asset.

When issued by protocol-based liquid staking providers, these tokens can be classified as digital commodities due to their value being derived from the operation of functional crypto systems. Redeemable Wrapped Tokens are treated similarly, with the issuer unable to transfer, lend, pledge, or rehypothecate the deposited asset.

The guidance also explains that the definitions of 'functional' and 'decentralized' in the interpretive release govern how the Commission classifies a crypto asset. Issuers determine their own thresholds for meeting these standards in marketing, with once a system is functional, services to secure, maintain, improve, or enhance it do not involve essential managerial efforts.

The FAQs address issuer buyback programs used for treasury management, supply reduction, protocol-funded burns, and rebalancing. Announcing a buyback would not constitute a representation or promise to undertake essential managerial efforts if the system is functional. However, if the system is not functional, such an announcement could qualify as creating yield or return for holders.