staking

KEY TAKEAWAYS The UK Treasury has amended the FSMA to exempt "qualifying crypto asset staking" from CIS regulations, effective 31 January 2025. Staking will no longer be classified as a CIS, reducing compliance burdens and offering a clearer regulatory framework for blockchain networks. In the UAE, crypto staking offered by VASPs is regulated under VARA’s Custody Services or Management & Investment Services (depending on the applicable licence) frameworks, ensuring compliance while allowing innovation in the virtual assets sector. The ADGM Consultation Paper proposes new classifications for staking activities—including Solo Staking, Staking-as-a-Service, and Pool Operators—to bring regulatory clarity and align oversight with the level of intermediation and business activity. This regulatory shift supports innovation, improves the UK's reputation for crypto-friendliness, and may influence global regulatory trends. INTRODUCING THE CRYPTO STAKING EXEMPTION FROM CIS REGULATIONS The United Kingdom ("UK") Treasury has introduced an amendment to the Financial Services and Markets Act 2000 ("FSMA"), explicitly excluding "qualifying crypto asset staking" from the definition of a collective investment scheme ("CIS"). This amendment signals an important moment in the UK's stance towards staking, providing much-needed clarity and paving the way for broader adoption within the blockchain ecosystem. Such forward-thinking measures reflect the UK's evolving stance on fostering a crypto-friendly environment, as highlighted in our recent article, 'From Chain to Claims: UK to Put Crypto in Property Basket.' The amendment effectively resolves a long-standing grey area regarding the treatment of staking in the UK. By delineating the boundaries of what constitutes collective investment in the context of crypto assets, the change establishes a clearer regulatory framework, offering much-needed certainty for market participants and investors. As we delve further, this shift has wide-ranging implications for the UK's crypto landscape and the global digital asset community. AMENDMENT OVERVIEW The key aspects of this amendment include: Definition of Qualifying Crypto Asset Staking: Under English law, qualifying crypto asset staking is the process of validating transactions on blockchain networks, distributed ledger technology systems, or similar technologies. Staking means locking up your cryptocurrency holdings in a wallet to support the operations of a blockchain network. The staking activity involves committing or staking crypto assets to support the network's operation and security, and in return, stakers receive rewards, typically in the form of additional cryptocurrency. Explanation of CIS Regulations: CIS regulations govern investment arrangements where multiple investors pool their resources to invest in assets or ventures managed by a third party. These regulations aim to protect investors through strict authorisation requirements, oversight, and compliance obligations under the Financial Conduct Authority ("FCA"). A CIS is managed by professional fund managers and regulated by the FCA. Investors contribute funds to the scheme and benefit from diversification and experienced management, while fund managers make investment decisions on their behalf. CISs are governed by the FSMA and must be authorised by the FCA to ensure compliance with regulatory standards Exclusion of Qualifying Crypto Asset Staking: By removing qualifying staking from the scope of CIS regulations, the amendment ensures that staking activities are no longer subject to the regulatory requirements imposed on traditional collective investments. This creates a distinct legal category for staking activities, clarifying and reducing compliance complexities. Effective Date: This legal change will be effective from 31 January 2025. Impact on Regulatory Burden: The exclusion of qualifying crypto asset staking from CIS regulations reduces the regulatory burden arising from investment schemes. This includes the removal of authorisation requirements and ongoing compliance obligations under the FCA, making it easier for entities engaging in staking activities to operate within the UK. THE RATIONALE BEHIND THE AMENDMENT Crypto staking is critical to maintain blockchain networks, enabling participants to validate transactions and secure the network in return for rewards. However, prior to the amendment, there was ambiguity regarding whether staking activities fell under CIS regulations. CIS regulations were designed to govern pooled investment vehicles, which involve collective management and risk-sharing. In contrast, staking functions as a blockchain security measure, where participants independently validate transactions by locking up their assets to support the network. This difference meant that applying CIS regulations to staking was both misaligned and overly burdensome, leading to unnecessary compliance challenges and stifling innovation within the sector. By excluding staking from the CIS framework, the UK has removed these barriers, aligning its regulatory approach with the operational realities of blockchain technology. This allows the crypto industry to grow within a structured yet innovation-friendly environment. IMPACT AND IMPLICATIONS OF THE CHANGE Eased Regulatory Compliance: By exempting staking from CIS rules, the amendment lowers compliance costs for businesses providing staking services. This change promotes innovation and removes uncertainty, encouraging more participants to enter the market. Clearer Guidelines for Market Participants: Businesses and investors now have clear regulatory guidance on staking activities, fostering confidence and stability in the UK crypto market. Additionally, by distinguishing staking from traditional investment schemes, the amendment addresses regulatory concerns of institutional players. Aligning Regulation with Blockchain Technology: The amendment recognises that staking is integral to the functioning of blockchain networks, ensuring that it is not regulated as a pooled investment activity. UNITED ARAB EMIRATES' TREATMENT OF CRYPTO STAKING Under the United Arab Emirates ("UAE") regulatory framework, crypto staking services are governed by the Virtual Assets Regulatory Authority ("VARA") and Abu Dhabi Global Market ("ADGM"). In a consulting paper published by FTI Consulting (where our founder Soham Jethani was quoted), VARA's treatment of staking activities was explained in detail, which have also been reproduced below: Custody Services: VARA regulates crypto staking under its custody services framework. This involves the safekeeping of virtual assets on behalf of another entity and acting only on verified instructions from or on behalf of that entity. All virtual asset service providers ("VASPs") must adhere to strict rules regarding storing and custody of clients' virtual assets. Notably, only VASPs that segregate each client's assets in separate wallets qualify for a custody services Licence. In August 2023, VARA updated its rulebook to permit staking from custody services, provided the prescribed requirements of the amended rulebook are met. This update enables VASPs to offer staking without requiring a separate virtual asset management and investment services license. Management and Investment Services: VARA also governs crypto staking under its Management and Investment Services framework. This includes acting on behalf of an entity as an agent, fiduciary, or otherwise taking responsibility for the management, administration, or disposition of that entity's virtual assets. Examples include investment management services or overseeing the staking of virtual assets to earn fees or other rewards paid to validators and node operators. This approach ensures that entities offering staking services as part of broader investment management adhere to regulatory standards and maintain transparency. The UAE's regulatory clarity and flexibility regarding crypto staking reflect its commitment to fostering innovation in the virtual assets sector while ensuring robust investor protection and compliance standards. Additionally, as discussed in our earlier article published on the ADGM's Transformative Consultation Paper, significant changes are being proposed to the staking regime in the UAE. These include a detailed classification of staking activities, distinguishing between Solo Staking, Staking-as-a-Service, and Pool Operators and Centralised Intermediaries. The new framework focuses on two key factors: the level of intermediation (i.e., the extent of control or discretion over staked assets) and the extent of business activity (whether staking is conducted for related or non-related participants). By introducing these classifications, the ADGM aims to bring regulatory clarity to staking-related activities, ensuring that entities operating in this space comply with the appropriate licensing requirements while fostering innovation within the digital asset ecosystem. CONCLUSION The UK Treasury's decision to exclude crypto staking from CIS regulations marks a turning point for the crypto industry. By reducing regulatory burdens and aligning with the realities of blockchain technology, this amendment fosters innovation and positions the UK as a growing leader in crypto regulation. However, the true success of this approach will depend on its seamless integration with broader crypto regulations to ensure sustainable growth, investor protection, and global competitiveness. As stakeholders embrace this clarity, they must also prepare for the forthcoming comprehensive regulatory framework to be implemented. The UK's approach aims to attract blockchain projects and investors while maintaining strong regulatory standards, ultimately driving the country toward becoming a hub for blockchain technology and digital assets. However, the UK has significant strides to take to catch up to established leaders in this sector like the UAE and Singapore. Time will tell if measures like this one are too little too late. *** TLP Advisors is a dynamic and forward-thinking consulting, strategy and law firm specialising in providing cutting-edge solutions to our diverse clientele. With our roots deeply embedded in financial services, gaming, web3, and emerging tech, we offer unparalleled knowledge and support tailored to these rapidly evolving sectors’ unique challenges and opportunities. TLP Advisors has consistently been the firm of choice for L1 chains, DeFi protocols, gaming companies, fintech and payment companies, foundations, funds, and investors. We have built a reputation for excellence through frequent collaborations with regulators, funds, and technology incubators. Our deep understanding of the intricate regulatory landscapes and industry dynamics allows us to provide strategic guidance and innovative solutions that empower our clients to navigate complex challenges and seize emerging opportunities. www.techlawpolicy.com. *** FSMA 2000 (Collective Investment Schemes) (Amendment) Order 2025 (SI 2025/17), art 2, made 8 January 2025, in force 31 January 2025, https://www.legislation.gov.uk/uksi/2025/17/article/2/made. UK Treasury Confirms Crypto Staking Falls Outside Collective Investment Scheme Regulations, Crypto News, 10 January 2025, https://crypto.news/uk-treasury-confirms-crypto-staking-falls-outside-collective-investment-scheme-regulations/ Soham Jethani, et. al., From Chain to Claims: UK to put Crypto in Property Basket, TLP Advisors (13 January 2025), https://techlawpolicy.com/2025/01/from-chain-to-claims-uk-to-put-crypto-in-property-basket/. 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FTI Technology Report, Understanding the Digital Assets Landscape and Ecosystems in the Middle East Region PART I: Dubai as World Innovation Incubator, 10 October 2024, https://static2.ftitechnology.com/docs/white-papers/Understanding+the+Digital+Assets+Landscape+and+Ecosystems+in+the+Middle+East+Region+-+Part+1+and+2.pdf. Soham Jethani, et. al., A New Block in the Chain: Exploring ADGM’s Transformative Consultation Paper TLP Advisors (26 December 2024), https://techlawpolicy.com/2024/12/a-new-block-in-the-chain-exploring-adgms-transformative-consultation-paper/. Consultation Paper No. 11 of 2024, Proposed Amendments to the Digital Asset Regulatory Framework, The Financial Services Regulatory Authority, ADGM (05 December 2024), https://assets.adgm.com/download/assets/Consultation+Paper+No.+11+of+2024+-+Proposed+Amendments+to+the+Digital+Asset+Regulatory+Framework.pdf/3acc8760b2f411ef8da15eec0cc5c1b0.