Analysis of stETH in Light of SEC Division of Corporate Finance’s Guidance on Liquid Staking Activities
Executive Summary
In its 5 August 2025 statement, the SEC’s Division of Corporation Finance clarified that certain liquid staking activities and staking receipt tokens generally do not involve the offer or sale of securities under U.S. federal law. The SEC reasoned that the parties involved in the process of minting, issuing, and redeeming staking receipt tokens do not provide entrepreneurial or managerial efforts to staking receipt token holders and any economic benefits realized by staking receipt token holders are not derived from any such efforts but from protocol-level staking. It further confirmed that staking receipt tokens, though evidencing ownership of deposited assets, are not securities because the underlying assets themselves are not securities.
The Lido protocol and stETH align with this framework: stETH (and its wrapped version, wstETH) functions as a staking receipt token that evidences a user’s staked ETH and the rewards associated with it, deposits and minting occur programmatically without managerial efforts or discretionary control, users retain ownership of their staked Ether, rewards are generated solely through Ethereum’s Proof-of-Stake consensus mechanism and governance is limited to protocol-level parameters, and there are no promises of returns.
Accordingly, Lido protocol’s activities do not involve the offer or sale of securities nor should stETH or wstETH fall within the definition of a “security” under Section 2(a)(1) of the Securities Act or Section 3(a)(10) of the Securities Exchange Act.
1. Lido Protocol and its Activities
The Lido protocol (“Protocol”) is a liquid staking middleware that lets users participate in Ethereum’s Proof-of-Stake (“PoS”) mechanism without the minimum stake of 32 Ether (“ETH”), the lock-up periods associated with direct staking, or needing to run validator infrastructure on their own. Staking users who stake their ETH through the Protocol (“Users”) receive stETH tokens, which represent their staked ETH combined with accrued staking rewards, minus potential validator penalties.
Users submit ETH to the Protocol which supports the operation of validator nodes and, in return, these Users’ ETH becomes eligible to receive staking rewards. These rewards, which are accrued based on the underlying validators’ participation in Ethereum’s PoS-based validation process, are reflected in Users’ stETH balances (i.e. via an increase in quantity of tokens) on a daily basis as a result of the Protocol rebase, in accordance with their proportional stake. The Protocol also enables Users to mint a non-rebasable version of stETH called wrapped stETH (“wstETH”), where accrued rewards are reflected as an increase in the value (in ETH terms) of the tokens, versus as an increase in the quantity of the tokens.
The Protocol operates via a set of smart contracts on the Ethereum network that allows for the programmatic and algorithmic operationalization of deposits, rewards distributions and withdrawals in a non-custodial, permissionless and autonomous manner, on-chain. The Protocol acts as decentralized middleware, facilitating staking without taking custody or control of users’ assets, with the general function that User-submitted ETH be utilized for staking on the Ethereum network, or for administrative functions of the protocol (e.g. servicing user withdrawal requests).
The underlying validator activities of the Protocol (where Users’ ETH is delegated to) are performed by software run by a diverse, geographically distributed network of independent node operators. Node operators are responsible for running validator nodes in accordance with the Protocol’s technical and operational requirements and play a critical role in maintaining the integrity, security and decentralization of the Ethereum network by validating transactions, proposing new blocks, and participating in the consensus mechanism.
Of the gross staking rewards generated by the Protocol, the lion’s share accrues to Users, while the remainder, which constitutes the Protocol fee, accrues to the Lido DAO and Node Operators The exact fee size is defined by the LDO token holders via Lido DAO vote. Currently, the Protocol fee is 10% of staking rewards, which is split algorithmically between node operators and Lido DAO’s treasury.
The Ethereum network’s staking rewards are not guaranteed, vary, are dictated solely by the Ethereum’s network’s code-enforced rules, which are not subject to modification by the Protocol.
The Protocol’s redemption mechanism is organized as a withdrawal queue served in the ‘first-in-first-out’ order that allows stETH holders to redeem the underlying amount of ETH corresponding to their share of stETH (the Protocol’s staking receipt token), subject to an “unbonding” period.
2. stETH
stETH is a rebasable liquid staking token minted by the Protocol’s smart contracts representing a User’s staked ETH as well as accrued rewards and penalties. Unlike directly staked ETH, stETH allows a User to support securing the network via staking activities and participate in staking, earning rewards while retaining liquidity through the flexibility of a transferable, tradable ERC-20 token.
Upon staking ETH through the Protocol, the User receives stETH at a one-to-one ratio. The stETH tokens reflect the nominal value of the deposited ETH at the time of minting, with daily automatic rebalancing to reflect accrued staking rewards and applicable slashing losses. It further acts as a receipt token, allowing for the User to redeem before the Protocol an equivalent amount of ETH.
Users can utilize the stETH token within decentralized applications, such as collateral, lending or liquidity provision, while their ETH remains staked.
3. wstETH
To allow for the use of staked ETH in some decentralized finance protocols that require a constant token balance, the Protocol enables Users to wrap their stETH into wstETH. wstETH is a non-rebasing version of stETH that, like stETH, utilizes an underlying shares model. While stETH reflects a User’s balance through a rebasing formula - calculated as the User’s number of shares divided by the total stETH supply multiplied by the total ETH in the Protocol - wstETH maintains a constant balance of the ratio of shares held to the total stETH supply, and thus increases in value over time. Accordingly, unlike stETH, the balance of wstETH tokens remains fixed over time, but the value of each wstETH token increases to reflect the User’s staked ETH together with accrued rewards or penalties, in the same manner as stETH.
wstETH is created by wrapping stETH via the wstETH contract, or by submitting ETH directly to the wstETH contract. A User’s wstETH balance can only change through transfers, minting, or burning. At any time, holders of wstETH may unwrap it back into stETH. Upon conversion, the amount of stETH received will have increased in comparison to the amount originally wrapped to reflect the accrued rewards, unless reduced by applicable penalties.
4. SEC’s View on Liquid Staking Activities
In its August 2025 statement, the SEC’s Division of Corporation Finance clarified that liquid staking arrangements, where depositors receive staking receipt tokens representing ownership of deposited crypto assets, do not generally involve the offer or sale of securities under the Securities Act or the Exchange Act.
“Liquid Staking”, as used in this statement, refers to a form of protocol staking where users deposit crypto assets with a service provider and receive newly minted staking receipt tokens (“SRTs”) in return. These tokens evidence ownership of the deposited assets and any rewards that accrue, while allowing users to maintain liquidity without having to withdraw the staked assets. Holders can redeem the tokens for the underlying assets, subject to an unbonding period, freely transfer them, exchange them, and may use them as collateral or in other crypto applications, including those that can provide a return to the holder (although any such transactions are separate and independent of the actual staking activity itself).
Liquid staking can be carried out either through protocol-based providers, which rely on smart contracts and self-executing code without intermediaries (also known as “smart contracts”), or through third-party custodians, which hold assets in wallets and issue tokens themselves.
In protocol-based Liquid Staking, users deposit their assets into a protocol where deposited assets are held in a smart contract on behalf of the users, and the deposited assets are staked on behalf of the users and an SRTs is issued to the users, all in a programmatic manner through smart contracts. The minting, issuing and redeeming of the SRTs is performed without the need for or reliance upon a third-party intermediary.
When using a third-party service provider, such as a custodian, users deposit their assets with the third-party service provider, who holds the deposited assets in a digital wallet on behalf of the users, stakes the deposited assets on behalf of the users, and issues SRTs to the users. The minting, issuing and redeeming of the SRTs is performed by the third-party service provider.
In both cases, rewards and losses are reflected programmatically, either by changing the value represented by each token or by increasing or decreasing the number of tokens issued, and at all times the deposited assets remain in the control of the Liquid Staking provider and the user (or any subsequent transferee of the user’s SRTs) is intended to retain ownership of the deposited assets.
The SEC’s Division of Corporation Finance concluded that these activities, when structured as described, as well as the offer and sale of SRTs (including in secondary markets), in the manner and under the circumstances described in such statement, do not involve the offer or sale of securities within the meaning of Section 2(a)(1) of the Securities Act of 1933 (the “Securities Act”) or Section 3(a)(10) of the Securities Exchange Act of 1934 (the “Exchange Act”).
Consequently, neither the participants in Liquid Staking activities nor Liquid Staking providers involved in the process of minting, issuing and redeeming SRTs need to register those transactions with the SEC under the Securities Act or fall within one of the Securities Act’s exemptions from registration, unless the deposited assets are part of or subject to an investment contract.
Investment Contract
Sections 2(a)(1) of the Securities Act and 3(a)(10) of the Exchange Act define “security” by listing various instruments such as stocks, notes, and bonds. Crypto assets are not included in this list, so when assessing transactions involving them in the context of Liquid Staking, the SEC applies the Howey test, which focuses on the economic realities of a transaction. Under Howey, an arrangement constitutes an investment contract if there is an investment of money in a common enterprise with a reasonable expectation of profits derived from the managerial or entrepreneurial efforts of others. Courts have clarified that only significant managerial efforts affecting the enterprise’s success satisfy this standard, while administrative or ministerial tasks do not.
The SEC clarifies that, in Liquid Staking, providers do not supply the kind of entrepreneurial or managerial efforts that would meet the Howey test. They act merely as agents, staking assets on behalf of depositors without deciding whether, when, or how much to stake. Even where providers hold deposited assets, or select a node operator, the SEC argues that these are administrative functions rather than managerial ones. Liquid Staking providers also do not guarantee or determine the level of staking rewards, though they may deduct a fee from those rewards. Ancillary services they may offer, such as facilitating deposits, withdrawals, or token issuance, are similarly administrative and do not involve entrepreneurial judgment.
As a result, Liquid Staking arrangements lack the managerial or entrepreneurial efforts required under Howey for an investment contract to exist.
5. SEC’s View on Staking Receipt Tokens
The SEC argues that the SRTs issued to a user as part of a Liquid Staking arrangement do not constitute any of the financial instruments specifically enumerated in the definition of “security” in Sections 2(a)(1) of the Securities Act and 3(a)(10) of the Exchange Act. This is because whilst users are entitled to rewards accruing with respect to their deposited assets, the SRT itself does not generate rewards. Rather, rewards are generated from the underlying protocol staking activities, which do not involve securities transactions.
It also states that, although the definition of “security” specifically includes “receipt for” any security, the SRTs, which act as “receipts” evidencing ownership of the underlying deposited crypto assets, are not securities since the deposited assets (e.g., ETH) are also not securities.
If SRTs are not securities in themselves, the question becomes whether they might still be offered or sold as part of an investment contract, which must be assessed under the Howey test. The SEC concluded that SRTs do not meet this standard because the parties involved in minting, issuing, and redeeming them do not provide the entrepreneurial or managerial efforts on which investors would rely to realize any economic benefits. The value of the SRTs is tied directly to the underlying deposited crypto assets, not to the efforts of a liquid staking provider or any other third party. Rewards accrue through protocol-level staking, which the SEC has already determined does not involve securities transactions.
However, the SEC cautioned that this view only applies where providers remain limited to administrative and ministerial activities. If providers were to go beyond that scope or issue tokens under different conditions, such activities could fall outside the scope of the statement and securities laws could become applicable.
6. Comparison: Lido Protocol, stETH and wstETH vs. SEC Guidance
When compared against the SEC’s guidance, the Protocol and its issuance of stETH and wstETH appear to fit squarely within the type of liquid staking activities and SRTs that the SEC has stated do not involve the offer or sale of securities.
The Protocol
The Protocol operates through smart contracts on the Ethereum network. These smart contracts function without discretionary involvement or managerial efforts from its developers or contributors. Users can interact directly with such smart contracts to deposit ETH and, in return, receive newly minted stETH at a one-to-one ratio. The stETH token evidences ownership of the underlying staked ETH as well as any rewards and penalties, which are reflected programmatically. The token allows Users to maintain liquidity that they can use as collateral or to participate in crypto applications, notably within the decentralized finance ecosystem.
The role of the Lido DAO is limited to setting parameters, such as protocol fees. No centralized entity guarantees returns or exercises discretion over the amount or timing of staking. In accordance with the SEC’s guidance, such governance framework does not amount to the type of entrepreneurial or managerial efforts required under the Howey test to establish an investment contract.
In addition, the redemption process, structured through a withdrawal queue and subject to an unbonding period, is likewise consistent with the SEC’s view that such mechanisms do not alter the analysis of whether staking receipt tokens constitute securities. Similarly, secondary market use of stETH, including its use as collateral or in decentralized applications, does not implicate the registration of those transactions with the SEC under the Securities Act or fall within one of the Securities Act’s exemptions from registration.
stETH and wstETH
The stETH and wstETH tokens do not generate staking rewards by themselves nor are such rewards attributable to the Protocol or to the entrepreneurial or managerial efforts of third parties. All rewards derive solely from the participation in Ethereum's PoS consensus mechanism. Functionally, both stETH and wsETH merely serve as a receipt token representing a User's deposited ETH as well as any staking rewards and slashing penalties.
With regards to its underlying asset, SEC’s representatives have previously noted that ETH should not be classified as a security and that offers and sales of ETH are not securities transactions. Accordingly, because the underlying asset of both stETH and wsETH is ETH and both tokens simply reflect a User’s exposure to staked ETH using the Lido protocol, neither stETH nor wstETH should not be considered securities or receipts for a security.
7. Conclusion
Based on the SEC’s 5 August 2025 statement, the Protocol’s activities do not involve the offer or sale of securities nor should stETH or wstETH fall within the definition of a “security” under of Section 2(a)(1) of the Securities Act or Section 3(a)(10) of the Securities Exchange Act.
Disclaimer: This document is for informational purposes only and does not constitute an offer or solicitation to participate in liquid staking. Any decision to participate should be based solely on your own due diligence and should be made only after consulting with your own legal, financial, and tax advisors. The information contained in this document has been obtained from sources believed to be reliable, but we do not guarantee its accuracy or completeness. Past performance is no guarantee of future results. The value of crypto assets may fluctuate, and you may lose some or all of your contribution. Crypto products are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The risks associated with purchasing, storing, and trading in cryptocurrencies in general, including but not limited to regulatory, technological, and market risks, are significant and should be very carefully considered. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local laws or regulations. As the Lido middleware is a decentralised software application, it is your own duty to research and understand the laws applicable to your participation in liquid staking. No financial, legal, regulatory, tax, or accounting advice.