DeFi
Raising the Stakes – UK’s New Rules for DeFi and Staking
Monday May 20, 2024 6:43 a.m.
Elise Soucie’s monthly column will cover policy updates and consultations 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 defend the UK’s commitment to developing staking regulations. But what is staking and why has it come to the forefront now?
In a DeFi tech stack, staking is the action of locking your digital tokens onto a blockchain network. Since tokens are locked to the network as collateral, this underpins the addition of new transactions to the blockchain via proof-of-stake (“PoS”) consensus mechanisms. Adding new transactions stabilizes the core protocol layer of the blockchain, while allowing users to earn rewards on their collateral.
With IOSCO’s DeFi consultation and subsequent policy statement urging regulators to take action on DeFi, the UK could be one of the first jurisdictions to tackle the regulation of this aspect of asset markets digital.
Yet, given the critical importance of PoS to digital asset market participants, it is vitally important that regulators get it right. For example, a common misconception concerns the nature of staking itself.
“It is important to emphasize that staking activity should be defined as distinct from lending,” explained Laura Navaratnam, head of UK policy for CCI. “The objectives, underlying processes and risks are different and therefore the activities do not warrant the same treatment or regulation. For example, staking does not involve the transfer of title and does not pose the same risks to consumers as lending, so it would be inappropriate to extend loan regulation to staking.
As industry awaits the UK’s staking proposals, we encourage policymakers not to pick winners among emerging technologies, but to develop appropriate and proportionate requirements that support responsible innovation.
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