UK exempts crypto staking from collective investment scheme rules

The UK Treasury has amended financial legislation to clarify that crypto staking—an essential component of proof-of-stake blockchains like Ethereum and Solana—does not fall under the definition of a "collective investment scheme."

The amendment of the Financial Services and Markets Act 2000 provides clarity for cryptocurrency firms operating within the UK, enabling them to offer staking services without being subject to the stringent regulations governing CIS activities. The UK Treasury’s amendment to the legislation introduces a new provision specifying that arrangements for "qualifying cryptoasset staking" do not constitute a CIS.

The amendment defines "qualifying cryptoasset staking" as the process of validating transactions on a blockchain or similar distributed ledger technology network. This clarification acknowledges the constraints that the regulatory framework for CIS would have on staking activities.

"The Government’s view is that it would be undesirable for arrangements for qualifying cryptoasset staking to be treated as a collective investment scheme," the updated legislation said. "The regulations for the establishment, operation, and winding up of collective investment schemes were not designed with cryptoasset staking in mind, and their application would represent a significant hindrance to the effective operation of blockchains and staking arrangements provided to customers in the United Kingdom."

The amended legislation was laid before the UK Parliament on Thursday,and is set to take effect on Jan. 31, 2025.

The amended legislation welcomed by UK crypto industry

UK crypto industry participants have welcomed the change. Cordial Systems Co-Founder Sebastian Higgs highlighted the FCA's prior stance, which assumed staking was likely a CIS unless proven otherwise. "This amendment represents significant progress," he posted on LinkedIn.

Staking involves locking up cryptocurrency to participate in the validation of transactions on proof-of-stake blockchains. In return, participants earn rewards, often in the form of additional tokens. Some staking services involve pooling users' assets, which had raised questions about whether these arrangements should be regulated as CIS.

In the UK, CIS regulations apply to schemes where participants pool funds to generate profits or income, such as investment funds and exchange-traded funds (ETFs). These schemes require registration, authorization, and ongoing compliance with rules set by the Financial Conduct Authority (FCA). Applying these rules to crypto staking could have created significant regulatory hurdles for blockchain networks and related businesses.

The UK's Financial Services and Markets Act 2000 established the Financial Services Authority as the primary regulator for insurance, investment businesses, and banking. Additionally, it created the Financial Ombudsman Service to provide a free and accessible alternative to the courts for resolving financial disputes. The Act has undergone substantial amendments over the years, notably through the Financial Services Act 2012 and the Bank of England and Financial Services Act 2016.