FCA Handbook - PERG 18.10 Activity: arranging qualifying cryptoasset staking

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PERG 18.10 Activity: arranging qualifying cryptoasset staking

Question 10.1: What does the arranging qualifying cryptoasset staking activity include?

Arranging qualifying cryptoasset staking means the use of a qualifying cryptoasset in blockchain validation. Blockchain validation refers to the validation of transactions on a blockchain or a network that uses distributed ledger technology or other similar technology, and includes proof of stake distributed ledger technology consensus mechanisms. Article 9Z6 (Qualifying cryptoasset staking) of the Regulated Activities Order defines arranging qualifying cryptoasset staking as the activity of ‘making arrangements on behalf of another person (whether as principal or agent) for qualifying cryptoasset staking’.

Therefore, this is only a regulated activity if the arrangement relates to the use of qualifying cryptoassets in blockchain validation.

In the FCA’s view, a person ‘makes arrangements on behalf of another person’ for arranging qualifying cryptoasset staking where they perform an intermediation role enabling qualifying cryptoassets to be staked. Arranging is a broad activity. However, the involvement must go beyond merely introducing a person to an authorised person or enabling one party to communicate with others (both introducing and enabling communication are excluded).

Arranging qualifying cryptoasset staking can include a range of different models where one person arranges qualifying cryptoasset staking for another. This can include models such as ‘pooled custodial staking’, where a client transfers control of their qualifying cryptoassets to a staking provider, who pools cryptoassets together from multiple clients to be used in blockchain validation. It can also include arrangements where a person provides services such as an interface to stake qualifying cryptoassets. This is subject to exclusions (see PERG 18.10.2, PERG 18.10.4 and PERG 18.10.5).

Examples of making arrangements in relation to staking that may fall within scope of the arranging qualifying cryptoasset staking activity include:

(1) managing the end-to-end staking lifecycle – where a person oversees or enables a process through which qualifying cryptoassets are staked, and rewards are generated, distributed or reinvested;
(2) pooling of assets for staking – where a person aggregates, or organises the aggregation of, qualifying cryptoassets from multiple customers to facilitate participation in staking activities (eg, pooling assets to meet validator thresholds); and
(3) distribution of staking rewards – where a person is responsible for allocating and delivering staking rewards to the customer, whether periodically or upon completion of the staking period.

Although these are examples of arrangements that would likely be in scope, they are not necessarily indicative of all types of arrangements that would constitute arranging qualifying cryptoasset staking. The activity is a broad one and can encompass many different qualifying cryptoasset staking models. Reference to the specific features of the arrangements in question on a case-by-case basis is therefore necessary to determine whether the activity is in scope.

Question 10.2: Is the operation of a staking validator node captured in the arranging qualifying cryptoasset staking activity?

Article 9Z9 (Article 9Z6 exclusion: technical services exclusion) of the Regulated Activities Order provides an exclusion to the arranging qualifying cryptoasset staking activity, such that a technical service provided by a person (P) will not constitute the regulated activity of arranging qualifying cryptoasset staking, provided that:

(1) the service allows another person to participate in qualifying cryptoasset staking, including by operation of a validator node for that staking; and
(2) P does not hold itself out as offering qualifying cryptoasset staking to the public.

However, a person performing a technical service, such as operating a validator node, may nevertheless still fall within scope of arranging qualifying cryptoasset staking if their service or activities go beyond purely technical services. This could be, for example, by providing a facility that enables other persons to participate in staking which goes beyond merely performing the technical service of operating a validator node to validate transactions on the blockchain.

If the provision of a service includes added value, such that it is no longer a purely technical service, this is unlikely to be excluded under article 9Z9. In the FCA’s view, the concept of ‘added value’ should not be understood as meaning that any feature which makes a service more useful, convenient or attractive will prevent reliance on the exclusion. The relevant question is whether the person’s role remains limited to providing the technical means through which another person may participate in qualifying cryptoasset staking, or whether the arrangements offered facilitate, support or enable that person’s participation in qualifying cryptoasset staking beyond the provision of those technical means.

For example, a validator node operator that provides the technical means through which users may participate in staking services offered by third parties may be able to rely on the exclusion, provided that it does not hold itself out as offering qualifying cryptoasset staking to the public.

Similarly, a person who provides users with a software interface to access qualifying cryptoasset staking services offered by third parties, without itself having any involvement in the staking services, may be able to rely on the exclusion, provided that its role remains limited to the provision of that technical service and it does not hold itself out as offering qualifying cryptoasset staking to the public.

By contrast, a person who offers arrangements also designed to simplify participation in staking, such as by providing a facility that provides easy access to staked assets and rewards, the compounding of rewards, identifying and recommending validators based on past performance or fees, and the offer of other additional benefits and services, is likely to be unable to rely on the exclusion.

A person arranging qualifying cryptoasset staking or operating a validator node may also provide additional services alongside those activities, such as safeguarding cryptoassets in respect of the staked qualifying cryptoassets or qualifying cryptoassets generated as rewards, which may fall within the scope of the regulated activity of safeguarding cryptoassets or arranging cryptoasset safeguarding for which permission may be required. See PERG 18.6.

Question 10.3: Is offering clients the ability to operate their own validator node for solo staking captured in the staking activity?

In the FCA’s view, a person solely performing the function of providing clients with the technical means to stake their qualifying cryptoassets on a blockchain themselves (eg, by providing the software necessary to do this), without any further involvement or input from that person, would not fall within scope of arranging qualifying cryptoasset staking.

However, as above, if the person went beyond this and also engaged in other activities with respect to arranging qualifying cryptoasset staking, such as those mentioned in PERG 18.10.2, this may fall within the scope of the arranging qualifying cryptoasset staking activity. Further, if the person provided additional services, such as safeguarding cryptoassets in respect of the staked qualifying cryptoassets or qualifying cryptoassets generated as rewards, this may fall within scope of safeguarding cryptoassets or arranging cryptoasset safeguarding for which permission may be required.

In considering whether a service goes beyond a technical service for these purposes, relevant considerations may be similar to those discussed in PERG 18.8.22 concerning services that go beyond merely facilitating communication. The relevant question is whether the person’s services extend beyond the provision of the technical means through which staking may occur and amount to arranging qualifying cryptoasset staking.

Question 10.4: Is introducing clients to persons offering to arrange qualifying cryptoasset staking captured in the staking activity?

Article 9Z7 (Article 9Z6 exclusion: introducing) of the Regulated Activities Order excludes from the regulated activity of arranging qualifying cryptoasset staking the provision of services by a person (‘A’) solely for the purpose of introducing a person (‘B’) to an authorised person with Part 4A permission to carry on the regulated activity of arranging qualifying cryptoasset staking (‘C’). Therefore, if C, being the person offering to arrange qualifying cryptoasset staking, is an authorised person, and all A does is introduce B to C, this is not a regulated activity that would require authorisation in its own right.

Readers may also benefit from reading the guidance in PERG 18.8.21 regarding the introducing exclusion from the activity of arranging deals in qualifying cryptoassets.

Question 10.5: Is enabling parties to communicate with each other captured in the arranging qualifying cryptoasset staking activity?

Article 9Z8 (Article 9Z6 exclusion: enabling parties to communicate) of the Regulated Activities Order provides that a person does not carry on the regulated cryptoasset activity of arranging qualifying cryptoasset staking merely by providing the means by which one party to an arrangement, or potential arrangement, is able to communicate with other parties. If they do more than merely provide the means of communication, however, this would not be excluded.

Readers may also benefit from reading the guidance in PERG 18.8.22 regarding the mere communications exclusion from the activity of arranging deals in qualifying cryptoassets.

Question 10.6: Does a person offering liquid staking services require authorisation?

The provision of a liquid staking token for a staked qualifying cryptoasset and subsequent exchange for the staked asset is not within the scope of the arranging qualifying cryptoasset staking activity. This is more likely to constitute dealing in qualifying cryptoassets (as principal or agent) (see PERG 18.8.3) The person arranging for a liquid staking token to be issued and/or arranging the exchange of a liquid staking token for the staked qualifying cryptoasset may be arranging deals in qualifying cryptoassets. (See PERG 18.8.4 on arranging activity.)

Where the person also arranges qualifying cryptoasset staking as part of their service, whether or not related to the provision of any liquid staking tokens, this would exceed the scope of dealing or arranging activities and likely require permission for arranging qualifying cryptoasset staking.

Question 10.7: Does a person arranging qualifying cryptoasset staking also require safeguarding cryptoassets permission?

In the course of their business, persons carrying on the activity of arranging qualifying cryptoasset staking may also safeguard clients’ staked qualifying cryptoassets or their qualifying cryptoassets earned as rewards through blockchain validation (or arrange for another person to do this). As such, they may also require permission for safeguarding cryptoassets or arranging cryptoasset safeguarding (see PERG 18.10.2 and PERG 18.10.3).

Question 10.8: Does a person offering a return generated through the use of qualifying cryptoassets without engaging in blockchain validation require authorisation?

A person would only be carrying on the regulated activity of arranging qualifying cryptoasset staking if their arrangements relate to the use of a qualifying cryptoasset in blockchain validation or a network that uses distributed ledger technology or other similar technology. In the FCA’s view, a service which generates returns through the use of qualifying cryptoassets, but does not involve blockchain validation, would not fall within scope of the arranging qualifying cryptoasset staking activity, though it may constitute one or more other regulated cryptoasset activities.

Question 10.9: When does a service go beyond merely providing information, communication or technical functionality?

Certain exclusions referred to in this chapter apply where a person’s role is limited to providing communications, information or technical functionality. Whether a person can rely on those exclusions depends on the substance of the service provided and the role that service plays in relation to transactions in qualifying cryptoassets.

The fact that a service is useful, convenient, commercially valuable or designed specifically for the cryptoasset sector does not, of itself, mean that the person is carrying on a regulated activity. The relevant question is whether the person is merely providing information, communications or technical functionality, or whether the service forms part of the arrangements by which transactions in qualifying cryptoassets are facilitated, brought about or otherwise enabled.

The presence of one or more of these features does not necessarily determine the outcome. The assessment depends on the service as a whole and the role a person performs in the relevant arrangements. The assessment is not dependent on the way a person describes themselves or on the terminology used.

Conversely, services that are limited to the passive display of information, the provision of general communications facilities, or the provision of technical tools that users may employ independently are less likely, on their own, to amount to arrangements for transactions in qualifying cryptoassets. Whether a person is carrying on the regulated activity of arranging deals in qualifying cryptoassets will always depend on the facts of the particular case.