Swiss FINMA publishes guidance on staking services
The Swiss Financial Market Supervisory Authority (FINMA) today published guidance on staking services.
The guidance sets out FINMA’s supervisory practice. The focus is on protecting customers from the risk of the staking service provider falling into bankruptcy.
Staking services raise a range of questions about how to interpret the law in relation to custody of cryptoassets. In particular, there is legal uncertainty about whether staked cryptoassets are protected in the event of the staking service provider going bankrupt. Protection is contingent on the cryptoassets being held in readiness for customers at all times. It is currently unclear whether this requirement is met.
FINMA’s guidance is intended to enhance transparency about the treatment of staking services under financial market law. Until such time as there is further clarification of the issue of segregating assets in legislation or case law, and in the event of a supervised entity’s bankruptcy, the staked cryptoassets are to be segregated from a bankrupt estate and returned to custody account customers according to FINMA’s current assessment.
Moreover, staking will not attract capital requirements for the supervised institution, provided it has implemented risk-mitigating measures and informed customers of the risks in an appropriate manner.
The guidance also provides a summary of the different forms of staking cryptoassets, describes the risks and sets out the risk-mitigating steps that need to be implemented by the supervised institution.
Staking involves a number of risks. In addition to the legal uncertainties, these comprise a number of additional risks, including:
- technical risk of a malfunction of the staking process;
- in addition there is the risk of the cryptoassets being slashed due to misconduct by the validator node;
- counterparty risk due to the unclear legal position in the event of bankruptcy; this legal uncertainty is even greater if the custody or staking is delegated to institutions outside Switzerland;
- market risk, as it may not be possible to sell staked cryptoassets at the right time in a volatile market if the unstaking process includes a lock-up or exit period, causing a delay in returning blocked cryptoassets.