Raising the Stakes – The UK’s Incoming Rules for DeFi & Staking
Elise Soucie‘s monthly column will cover policy and consultation updates from around the world, as well as the latest digital innovations in institutional markets.
Over recent months Economic Secretary to the Treasury Bim Afolami has continued to champion the UK’s commitment to building staking regulation. But what is staking and why has it come to the forefront now?
In a DeFi technology stack, staking is the action of locking your digital tokens to a blockchain network. As tokens are locked to the network as collateral, this underpins the addition of new transactions to the blockchain through Proof-of-stake (‘PoS’) consensus mechanisms. The addition of new transactions stabilises the base protocol layer of the blockchain, while also enabling users to earn rewards on their collateral.
With the IOSCO DeFi consultation and subsequent policy statement spurring regulators to take action on DeFi, the UK could be one of the first jurisdictions to tackle regulating this aspect of digital assets markets.
Yet given how crucial PoS is for digital asset market actors, it is vitally important that regulators get this right. For example, one common misconception is about the nature of staking itself.
“It is important to underscore that staking activity be defined as separate and distinct from lending,” Laura Navaratnam, UK Policy Lead for CCI explained. “The objectives, underlying processes, and risks are different, and so the activities do not warrant the same treatment or regulation. For example, staking does not involve the transfer of title and does not present the same risks to consumers that lending does so it would be inappropriate to extend lending regulations to staking.”
As industry awaits the UK’s staking proposals, we encourage policymakers to not pick winners amongst nascent technologies, but to develop appropriate, proportionate requirements that support responsible innovation.