Regulating Staking-as-a-Service & the Regulatory Framework for Intermediated vs Direct Staking

Introduction

The regulatory landscape for staking services in Australia is undergoing a significant transformation, creating a clear divide between different operational models. Driven by updated guidance from the Australian Securities and Investments Commission (ASIC) in Information Sheet 225 (INFO 225) and proposed Digital Asset Platform (DAP) legislation, the framework now distinguishes between providing technical infrastructure and offering a managed financial service. This distinction is crucial as it determines whether a staking service is considered a technical offering or a regulated financial product, such as a managed investment scheme (MIS), under the Corporations Act 2001 (Cth).

For staking providers, node operators, and exchanges offering “Earn” products, understanding this regulatory framework is essential for structuring compliant digital asset offerings. This guide provides a detailed analysis of the legal and technical architecture separating direct (technical) staking from intermediated (financial) staking. It focuses on the critical factors that trigger regulation, such as the pooling of user funds, to help providers navigate their obligations and potentially avoid the more onerous requirements of the MIS regime.

Regulatory Divide: Direct vs Intermediated Staking

Direct Staking as a Technical Service

Direct staking is a model where a service provider offers only the technical infrastructure required for a user to participate in a blockchain’s consensus mechanism. In this arrangement, the provider’s role is limited to operating the validator node software, while the user maintains complete control over their private keys and digital assets.

The user’s crypto assets are not mixed with those of other users, ensuring they remain segregated. This structure is generally considered a technical service rather than a financial service under the existing financial services regime.

According to guidance from ASIC, direct staking is unlikely to be classified as a financial product for several key reasons:

Feature	Description
User Control	Users maintain day-to-day control over their assets and can unstake or delegate as per protocol rules.
No Pooling	Each user’s assets are staked separately, preventing pooling or formation of a “common enterprise.”
Protocol-Driven Returns	Blockchain protocol generates rewards, sent directly to the user’s address; the provider only takes a transparent service fee.

Because the provider is essentially offering infrastructure support, similar to a server hosting service, and not managing an investment on the user’s behalf, this model typically falls outside the scope of financial services regulation.

Intermediated Staking as a Financial Product

Intermediated staking occurs when a third-party provider stands between the user and the blockchain protocol, managing the staking process on the user’s behalf. This model often involves the provider taking custody of the user’s digital assets and pooling them with funds from other users.

Pooling is frequently done to meet a protocol’s minimum staking threshold, such as the 32 ETH required to run an Ethereum validator. This arrangement is typically classified as a financial product, specifically a MIS, under Australian law.

The key characteristics that trigger this classification include:

Triggering Characteristic	Regulatory Implication
Pooling of Contributions	Users’ assets are pooled, forming a “common enterprise” and meeting a key test for managed investment schemes.
Lack of Control	Users relinquish operational control; provider manages all validator and fee decisions.
Expectation of Benefit	Users anticipate financial returns from the provider’s management of pooled assets.

By offering features that abstract or enhance native staking, such as allowing users to stake amounts below the protocol minimum or promising instant withdrawals, the provider is offering more than a technical service.

Consequently, operators of intermediated staking services are required to hold an Australian Financial Services Licence (AFSL) and comply with the regulatory obligations for managed investment schemes, including providing a Product Disclosure Statement (PDS).

Pooling Trap & Importance of Asset Segregation for Staking Providers

The Critical Role of 1-to-1 Segregation of User Assets

For staking providers in Australia, the strict implementation of 1-to-1 segregation of user assets is the most effective strategy to potentially avoid classification as a MIS. This principle is paramount because it directly addresses the core elements of what constitutes a collective investment under Australian law.

By ensuring each client’s digital assets are handled entirely separately, providers can demonstrate that no “pooling” or “common enterprise” has occurred. To achieve effective 1-to-1 segregation, a provider must structure their operations meticulously. This involves more than just internal accounting; it requires verifiable, on-chain separation.

Key technical and operational steps include:

Segregation Step	Implementation Requirement
Dedicated Validator Instances	Run a separate validator for each user who meets the protocol minimum (e.g., 32 ETH), ensuring no cross-user operation.
Separate On-Chain Addresses	Hold each user’s assets in unique, traceable on-chain addresses; never commingle assets for staking purposes.
Direct Attribution of Risks and Rewards	Ensure all rewards and penalties are directly attributed to the individual user’s validator, with no socialising or averaging.

The primary regulatory benefit of this structure is that it negates the “pooling” and “common enterprise” limbs of the MIS test under the Corporations Act 2001 (Cth). Since the user’s funds are not combined with others, their return is derived solely from their specific validator’s performance. This positions the service as a technical infrastructure or custody offering rather than a collective financial product.

However, it is crucial to note that even with perfect segregation, if the provider holds the withdrawal keys, they are still providing a custodial service and will likely require an AFSL with a custody authorisation, even if they successfully avoid the more complex MIS regime.

How Pooling Funds Triggers MIS Obligations

The single most critical factor that classifies an intermediated staking service as a MIS is the pooling of user funds. Under Australian law, if a user’s assets must be combined with another’s to participate in staking, it is almost certainly a collective investment scheme. This action triggers significant regulatory obligations, including the requirement to hold an AFSL.

This issue is especially pronounced for blockchains like Ethereum, which has a minimum requirement of 32 ETH to operate a validator. Consider a common scenario where User A contributes 10 ETH and User B contributes 22 ETH. If a provider combines these amounts to create a single 32 ETH validator and splits the rewards proportionally, this arrangement meets all the criteria for a MIS:

Pooling Criteria	Description & Regulatory Consequence
Contribution of Money’s Worth	Users supply digital assets to the provider, meeting the first limb of the MIS test.
Pooling in a Common Enterprise	Assets are combined for staking, exposing all users to shared risks and returns—triggering collective investment rules.
Lack of Day-to-Day Control	Users depend on provider management for returns, lacking operational input—fulfilling the “efforts of others” test.

ASIC’s guidance in INFO 225 and the precedent set in cases like ASIC v Web3 Ventures Pty Ltd [2025] FCAFC 58 confirm this interpretation. The moment a provider aggregates funds to meet a protocol threshold, they create a common enterprise. Consequently, the service is no longer a simple technical offering but a regulated financial product, requiring the provider to register the scheme, hold an AFSL, and issue a PDS to retail clients.

Liquid Staking Tokens & Derivative Risk

Do Receipt Tokens Create a Derivative Interest?

Liquid staking introduces a specific type of digital token—often called a liquid staking token (LST) or receipt token—such as stETH, which is issued by specialised token issuers. These tokens:

Feature of Liquid Staking Token	Regulatory Relevance
Represents Ownership	Token reflects user’s stake and rewards, creating a potential financial product or derivative under Australian law.
Provides Liquidity	Enables trading or collateral use while original asset is locked, increasing classification risk as a derivative product.

Under Australian law, this structure presents a significant regulatory risk: receipt tokens may be classified as derivatives. A financial product is considered a derivative if:

• Its value is derived from another asset.
• Its value varies by reference to that asset.
• It trades distinctly—often at a premium or discount—due to factors like liquidity and unbonding periods.

Because an LST’s price is linked to, yet distinct from, the underlying staked asset, it fits this description. Furthermore, ASIC has indicated in INFO 225 that “wrapped tokens” are likely to be derivatives. By analogy, this classification often extends to LSTs. Consequently, any DAP issuing or dealing in liquid staking tokens may be required to hold an AFSL with specific derivatives authorisation.

MIS Implications of Liquid Staking

In addition to potential derivative classification, liquid staking arrangements carry a high risk of being considered a MIS. This arises because the process typically involves pooling multiple users’ digital assets into a common fund, which is then staked to generate returns.

When a user exchanges their crypto asset—such as ETH—for an LST, they effectively acquire a “share” or interest in that pooled collection. This structure aligns with the legal definition of a MIS under the Corporations Act 2001 (Cth), which involves:

MIS Trigger in Liquid Staking	Explanation
Pooled Contributions	Users’ digital assets are combined to acquire shared rights and benefits, meeting the MIS pooling requirement.
No Day-to-Day Control	Investors lack operational input; provider manages all staking operations and strategy.
Expectation of Financial Benefit	Users anticipate returns (e.g., staking rewards) generated by the provider’s management of the pool.

Because these elements are present, the liquid staking service is likely operating as a MIS. Moreover, this classification means the provider must:

• Hold an AFSL,
• Register the scheme with ASIC,
• Provide a PDS to retail investors.

Managing Slashing Risk & Regulatory Impact

Regulatory Risks if Providers Absorb Slashing Losses

The legal allocation of slashing risk—the penalty imposed by a blockchain on a validator for misconduct or downtime—is a critical dividing line in the regulatory classification of a staking product.

If a service provider guarantees returns or absorbs slashing losses to protect users from validator penalties, the arrangement risks being recharacterised as a different type of financial product. This structure can make the offering resemble a banking-like product or a deposit-taking facility with a guaranteed return.

When a provider shields users from downside risk, the service begins to look like a debenture or a deposit account, which attracts much heavier regulation under Australian law. In particular:

Provider Action	Regulatory Consequence
Guaranteeing Slashing Losses or Fixed APY	Creates a capital guarantee, making the service resemble a deposit or debenture product.
Triggers Banking/Finance Licence Requirement	May require a banking or finance licence, which is more burdensome than an AFSL for a managed investment scheme.

The US Securities and Exchange Commission’s settlement with Kraken highlighted this danger, as Kraken’s failure to disclose slashing risks contributed to its staking program being deemed an unregistered security.

Allocating Slashing Risk to Users to Avoid Banking Regulation

To avoid being classified as a banking product, staking providers can structure their services to pass slashing risk through to the users. This model aligns with direct market participation, where the user understands they are exposed to the operational risks of the validator they are using.

In this arrangement:

Structure Element	Regulatory Impact
Market-Driven, Non-Guaranteed Rewards	Aligns the service with investment products, not deposit-taking or banking products.
Provider Does Not Absorb Slashing Risk	Limits provider’s role, reducing regulatory burden and avoiding banking product classification.

When the user bears the slashing risk, it is essential that this is communicated with complete transparency. For any intermediated staking service classified as a MIS, this information must be explicitly and prominently disclosed in a PDS.

The PDS must:

• Clearly state who bears the loss if a validator is penalised for issues like downtime or double-signing.
• Detail the mechanics of slashing, its potential frequency, and the impact it could have on the user’s principal investment and rewards.

Disclosure Obligations & Product Disclosure Statement

Mandatory Disclosures for Slashing Risks & Unbonding Periods

When an intermediated staking service is classified as a MIS, the provider must issue a PDS to retail clients under the Corporations Act 2001 (Cth). This document is required to provide clear and comprehensive information about the specific risks associated with the financial product. ASIC places a strong emphasis on detailed disclosures that go beyond generic warnings about crypto asset volatility.

Two critical risks that must be explicitly addressed in the PDS are:

Disclosure Requirement	Key Details to Include in PDS
Slashing Risk	Clearly state who bears financial loss from validator penalties; highlight if provider absorbs losses (triggers further regulation).
Unbonding Periods	Explain liquidity risks, duration of lock-up, and clarify any “instant” withdrawal promises and their implications.

Transparency on Reward Volatility & Counterparty Risks

In addition to slashing and liquidity, the PDS must ensure complete transparency regarding the potential returns and any third parties involved in the staking process. This ensures that investors have a realistic understanding of the potential benefits and the operational structure of the service.

Key disclosures in this area include:

Disclosure Area	Required PDS Content
Reward Volatility	Disclose that staking rewards are variable and depend on network and validator performance; avoid “fixed” APY claims.
Counterparty Risk	Identify third-party node operators and describe the due diligence undertaken to ensure their reliability and security.

Kraken Settlement & Australian Regulatory Parallels

Lessons from Kraken US Settlement for Australian Providers

The settlement between the U.S. Securities and Exchange Commission (SEC) and crypto exchange Kraken in February 2023 provides a significant cautionary tale for Australian staking providers. Kraken agreed to pay a US$30 million penalty and shut down its U.S. staking service after the SEC deemed the program an unregistered securities offering. This case serves as a clear example of the enforcement risks associated with intermediated staking models.

The SEC’s action against Kraken was based on several key characteristics of its staking-as-a-service product, which Australian providers should view as regulatory red flags. These features included:

Red Flag Identified in Kraken Case	Regulatory Risk for Australian Providers
Pooling of Customer Funds	Centralised management and pooling triggers MIS classification.
Lack of User Control	Users’ reliance on provider’s efforts aligns with financial product/managed scheme definitions.
Marketing of Returns	Promoting fixed or high yields frames the service as a passive investment, increasing regulatory scrutiny.
Inadequate Risk Disclosure	Failure to disclose key risks exposes the provider to enforcement action and legal liability.

For Australian digital asset platforms, the primary lesson is that structuring a staking product with these features positions it as a financial product, not a technical service. The case highlights the danger of marketing staking as a guaranteed or passive income stream without transparently disclosing the conditions for non-payment and the operational risks involved.

US Investment Contracts vs Australian MIS Laws

The legal reasoning behind the Kraken settlement in the US has strong parallels within the Australian regulatory framework. The SEC classified Kraken’s staking program as an “investment contract,” a type of security defined by the Howey Test. This test identifies an investment contract where there is:

US “Howey Test” Element	Australian MIS Law Parallel
Investment in a Common Enterprise	Pooling of contributions in a managed investment scheme (MIS) under the Corporations Act 2001 (Cth).
Expectation of Profits from Others	Returns generated by provider’s management, with members lacking day-to-day control over scheme operations.

This concept is strikingly similar to the definition of a MIS under section 9 of the Corporations Act 2001 (Cth). An arrangement is considered a MIS in Australia if it meets the following criteria:

• People contribute money or money’s worth to acquire rights to benefits.
• These contributions are pooled or used in a common enterprise to produce financial benefits.
• The members do not have day-to-day control over the operation of the scheme.

The elements of the Howey Test and the Australian MIS definition align closely, meaning a staking service structured like Kraken’s would almost certainly be classified as a MIS in Australia. The pooling of user funds creates a “common enterprise,” and the reliance on the provider’s management to generate returns satisfies the “efforts of others” and “lack of day-to-day control” components.

This interpretation is reinforced by local precedent, such as the ASIC v Web3 Ventures Pty Ltd [2025] FCAFC 58 case, where a crypto-based yield product was found to be an unregistered MIS due to similar features of pooling and promised returns.

Conclusion

The Australian regulatory framework creates a clear distinction between direct staking, treated as a technical service, and intermediated staking, which is typically regulated as a financial product like a MIS. Key factors determining this classification include whether digital assets are pooled, if liquid staking tokens are issued, how slashing risk is allocated, and the level of disclosure provided to users, as reinforced by ASIC’s guidance and legal precedents like ASIC v Web3 Ventures Pty Ltd [2025] FCAFC 58.

Navigating this complex regulatory landscape requires specialised knowledge to avoid significant compliance pitfalls and structure a compliant DAP. For trusted expertise and tailored solutions regarding your AFSL obligations, contact our AFSL lawyers at AFSL House in New South Wales today to ensure your financial services are structured for success.

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