Staking Infrastructure Providers unite in the European Blockchain Association

Numerous European Proof-of-Stake Infrastructure providers have formed the Proof-of-Stake Working Group together with blockchain consultants, community members and lawyers in order to drive the European blockchain regulation and advise policy makers about regulatory uncertainties for validators in Europe.

founding members of the working group

Over the course of the last few years we and other European validators have struggled with unclear regulations. To address these uncertanties, we co-founded the Proof of Stake Working Group under the hood of the European Blockchain Association (EBA). The goal of the working group is to help regulators understand the benefits of Proof of Stake, the Staking-as-a-Service business model as well as to provide potential regulatory solutions for European validators. Additionally, the EBA as well as the PoS working group are set out to provide a platform for interactive discourse, exchange of ideas and networking.

Today we are finally ready to publish our jointly written Proof of Stake position paper!

This post will give a brief overview of the EBA, the content of the paper and shed some light on the motivation of the working group as well as our longterm goals.

The European Blockchain Association

Founded as a semi-autonomous-decentralised-organisation in 2018, the European Blockchain Association aims to combine, synchronize and leverage blockchain-related activities of European corporations, startups, venture capitalists, and scientific institutes. It serves as a superior, neutral body to aggregate and coordinate blockchain activities throughout Europe and to provide Non-European parties with a direct API into the European blockchain ecosystem.

The Proof of Stake Working Group

The Proof of Stake Working Group was founded as a interdisciplinary forum that aims to support the adoption of Proof of Stake based consensus protocols. This includes comprehensive educational work and lobbying efforts directed towards political decision-makers within the European Union. The working group will also seek to improve the state of the industry as a whole through self-regulation, standards-setting and the development of best practices within the industry.

The longterm vision:

Co-create a solid regulatory framework within the European Union in order to establish a healthy, thriving and collaborative validator ecosystem.

The Proof of Stake Position Paper

Most of the legislative and regulatory work that has been done so far focussed on financial services, and in particular custody of crypto assets and requirements for issuing securities on blockchain networks. This paper first and foremost addresses issues regarding blockchain infrastructure providers and their corresponding services, independent of the specific purpose of the underlying network.

This paper is just a starting point, as legislators and stakeholders have only just begun to think about the ruleset necessary to fully realize the potential of blockchain technology.

We took some of the major insights from the paper and compiled this short summary in order to give you a quick glimpse on what it’s all about.

Part 1 — The Staking Industry and its Relevance

Without going too much into technical details, the first part of the document explains Proof of Stake technology, the validator business model as well as the current and expected economic significance while key concepts and terms are explained in the appendices.

Key take-aways:

• the staking industry has already gained economic significance with a market capitalization of €7 billion (June 2020)
• the industry is expected to grow considerably with new projects launching and Ethereum switching to PoS in the near future
• Why PoS: requires far less energy than other mechanisms; sophisticated economic incentives are natively built into the system; faster finality & transaction processing; upgradeability & built-in governance; transparency

Part 2 — Staking Providers under current Regulatory and Fiscal Rules

In the second part, we outline the reasons why we believe that staking companies are not qualifying as obligated entities for anti-money laundering purposes and why staking should be considered as a VAT exempt service under Union law.

Key take-aways:

VAT exemptions for staking rewards

• Due to the open and permissionless character of public PoS Systems, token-holder can freely choose whom they want to delegate to. Furthermore, it is close to impossible for validators to identify the origin of their delegators
• Staking is very similar to mining with regard to the unknown service recipient. Against this backdrop, the Court of Justice of the European Union’s (CJEU) ruling of 22 October 2015 (C-264/14 — David Hedqvist) appears relevant. In this case, the CJEU ruled that transactions involving the exchange of a traditional currency for a virtual currency and vice versa constitutes a supply of services for consideration, which is exempt from VAT.

No obligation for validators to apply AML/CTF rules

Article 2(1) of the AMLD5 qualifies two services provided in connection with crypto assets as relevant for AML/CFT purposes: (1) “Providers engaged in exchange services between virtual currencies and fiat currencies” i.e. cryptocurrency exchanges and (2) “Custodian wallet providers” i.e. cryptocurrency wallet services (where the service provider holds its users’ private keys). Reasons why we believe that validators do not qualify as the obligated entities:

• Governance structures provide no information on delegators
• KYC / AML is carried out by licensed crypto exchanges
• No legal tender involved
• No custody of private keys

Part 3 — Risk Analysis and Mitigation Measures

The way forward for the industry has to be one focussing on user protection, quality criteria and certification and audit schemes for the staking industry.

Staking related risks:

• malfunctions in the blockchain software
• attacks on the infrastructure,
• network, internet and power outages
• hardware defects

To mitigate these risks, the Working Group evaluates the following measures:

• Inform as well as educate users and stakeholders about economic, security and legal affairs of PoS systems
• General terms and conditions (voluntary)
• ISO infrastructure certificates (voluntary)
• Insurance
• European staking infrastructure provider certificate (voluntary)

Concluding remarks

We hope that we could shed some light on the EBA, the Proof-of-Stake Working Group as well as its Position Paper. Makes sure to check out the full paper here.

Please support us by sharing this paper and spreading the word about the working group. As always, feel free to leave questions, feedback and comments down below.