The memorandum outlines a meeting between Jito Labs, Inc., Multicoin Capital Management, LLC, and the SEC’s Crypto Task Force to discuss the inclusion of staking as a feature in exchange-traded products (ETPs) and potential models for implementing staking in these financial products. Below is a breakdown of the document and an explanation of how staking would work.

Breakdown of the Filing

Participants and Purpose

  • Participants: Representatives from Jito Labs, Multicoin Capital Management, and the SEC’s Crypto Task Force.
  • Purpose: To discuss regulatory considerations and propose solutions for incorporating staking into cryptoasset ETPs.

Key Topics Discussed

  1. Staking as a Feature in ETPs:
    • Staking reflects the true nature of proof-of-stake (PoS) native tokens by aligning validators with the network’s consensus mechanism.
    • Validators “lock up” native assets (e.g., ETH, SOL) to secure the network and earn rewards, which include transaction fees and newly minted tokens.
    • Staking is essential for network security and is an inherent feature of PoS assets.
  2. Liquid Staking (LST):
    • Liquid staking allows users to stake assets via smart contracts and receive liquid staking tokens (LSTs) as receipts.
    • LSTs represent staked assets and rewards earned, are freely transferable, and can be redeemed for native assets plus rewards after a short lag time.
    • Example: In Solana’s ecosystem, staking SOL through Jito’s stake pool generates JitoSOL as an LST.
  3. Challenges with Staking in ETPs:
    • Efficient redemption timelines (e.g., T+1 settlement cycle) may conflict with blockchain unbonding periods.
    • Tax implications for staking within grantor trusts.
    • Determining whether staking constitutes a securities transaction.
  4. Proposed Solutions:
    • Addressing redemption timelines by limiting the portion of staked assets or using LSTs to bypass unbonding periods.
    • Structuring ETP agreements to manage tax implications and compliance with securities regulations.

Proposed Models for Staking in ETPs

  1. Services Model:
    • ETP issuers collaborate with service providers like Jito Labs to stake assets securely.
    • Only a portion of the assets (e.g., 40%-60%) is staked to ensure liquidity for redemptions within required timelines.
    • Staking rewards accrue to the value of shares or are distributed pro-rata to investors.
  2. LST Model:
    • ETPs hold liquid staking tokens instead of directly staking native assets.
    • LSTs allow for immediate redemptions without unbonding delays, simplifying compliance with settlement cycles.
    • Can be structured as dual-commodity (native asset + LST) or single-commodity (100% LST) ETPs.

Benefits of Including Staking in ETPs

  • Enhances network security by increasing staked asset participation.
  • Aligns investor incentives with the unique features of PoS networks.
  • Provides investors with additional returns from staking rewards.

Summary of How Staking Would Work

Staking involves locking native cryptocurrency on a PoS blockchain to secure the network and earn rewards. Validators participate in consensus mechanisms by staking their assets, ensuring proper performance. Rewards are distributed transparently and include transaction fees and newly minted tokens.

Two methods were proposed for integrating staking into ETPs:

  1. Direct Staking via Service Providers: A portion of ETP-held assets is staked through validators while maintaining liquidity for redemptions.
  2. Liquid Staking Tokens (LSTs): Investors hold LSTs that represent staked assets and rewards, enabling immediate redemption without unbonding delays.

Both models aim to balance regulatory compliance, investor returns, and network security while addressing challenges like redemption timelines and tax implications.  https://www.sec.gov/files/jito-memo-020525.pdf (link to SEC filing)