EU staking Screening threat to crypto gains, or pay the price for it

EU MiCA review focuses on escrow services, independent regulatory framework or will reshape the crypto industry landscape

Some of the most far-reaching financial regulation rules often start with a riddle.

On page 36 of the Commission's current MiCA review document, question 66 asks whether there is adequate EU treatment for 'staking', and if not what requirements should apply to companies providing collateral services.

The problem is short, but the consequences are not.

There are currently no proposed collateral licenses, new capital requirements or any agreed position within Brussels that these instruments should exist. The European Commission's MiCA review consultation is open until 23:59 CET on 30 September and may ultimately lead to legislation amending the MiCA, but the Commission has made it clear that this document is not a final policy position.

Nonetheless, the issue reveals a wealth of signals about where European crypto regulation is headed. MiCA already covers many aspects of centralized escrow service providers' custody of client assets and Brussels is now questioning whether escrow has evolved to be large enough in scale and structured complexity that it should be considered as an independent regulated service.

For users, this may ultimately mean more specific rules around fines (slashing), withdrawal delays and fees as well as liability for losses incurred in the event of a mistake. For businesses, it could mean an additional layer of authorization on top of MiCA and a more expensive compliance burden. The protocol itself faces trickier problems because collateral is both a financial service and one of the underlying mechanisms by which proof-of-stake blockchains operate.

This dual identity is what makes the regulatory debate so difficult.

Bail originated as a network infrastructure where participants lock assets, run validator software, follow protocol rules and are rewarded for helping the network reach consensus. Once exchanges, custodians, banks and bail platforms insert themselves between coin holders and verifiers, these same activities become much more familiar to financial regulators.

From that moment on, some form of regulation was bound to come.

Europe is already regulating custodial detention

It is often said that bail does not fall under the jurisdiction of MiCA, but this is only partly true.

The MiCA does not have an independently regulated service called collateral escrow. People who directly pledge their assets on the blockchain do not need a MiCA authorization simply because they participate in a proof-of-stake consensus.

The European Commission has distinguished between self-collateralization and collateralisation as a service. According to ESMA's guidance on collateralization, if a company receives client crypto assets or holds keys to access those assets and pledges them on behalf of clients, the service falls under MiCA rules regarding custody and management.

This sounds obvious, but it's complicated by how many different businesses are crammed together under the term escrow these days: a person with 32 ETH who keeps their own keys runs an ethereum verifier that is directly collateralized; professional validators can run technical infrastructure for customers who retain withdrawal keys, which may constitute non-trust relationships; exchanges can hold client ETH to determine the way they deposit, collect rewards and draw up fees, and then credit balances into customer accounts; and liquidity escrows add another layer of transferring underlying assets from users in exchange for tokens on behalf of the escrow holder that can be traded or used as collateral elsewhere.

The EBA and ESMA's joint crypto asset report estimates that liquidity pledges were worth $44 billion in October 2024, of which nearly 80% occurred on Ethereum. Lido alone accounted for around $25 billion at the time.

These models are not equivalent, as control is distributed differently. The service provider who owns the asset or holds the key can decide to whom it will be delegated and how the reward will be handled; they may also determine the speed with which a client retrieves the asset and what happens if verifiers are fined.

This is why MiCA already imposes detailed obligations when it comes to custody. Licensed trustees require a written agreement detailing the services and fees, while maintaining records of client positions and establishing procedures for safeguarding assets. Client cryptoassets must be separated from company-owned assets and there must be a process for returning them in accordance with section 75 of MiCA.

The MiCA also requires companies that hold customer crypto assets to protect customers' ownership, including in the event of bankruptcy, and prohibits treating these assets as company-owned under Article 70 of the Customer Asset Protection Clause.

ESMA goes further on the issue of collateral. According to ESMA's guidelines for using client assets as collaterals, CASPs are prohibited from pledging clients' crypto-assets in their own interest even if the client agrees. The service provider can enter into a collateralisation arrangement with the client where rewards are shared but the asset does not become the company's self-owned depository stock.

Therefore, Europe is not emerging from a regulatory vacuum and the existing framework has essentially demonstrated that escrow is an activity at the level of agreements until intermediaries step in with custody and turn it into a service. The Commission now asks whether this distinction still holds.

Independent custody oversight framework will regulate the layers around verifiers

The consultation paper does not specify what a dedicated collateral supervision regime would contain, so it is premature to assert that Europe will soon implement some kind of capital rule or require insurance for each verifier's services. However, the direction in which regulators are focused is not difficult to infer because EBA and ESMA have already spent considerable time sifting through the associated risks.

According to the EBA-ESMA collateral risk assessment, risks include: assets may not be usable during a contract withdrawal; verifiers may be penalized or forfeited; customers may not understand how rewards are calculated or how much is drawn by service providers; trading prices of liquidity collaterals may deviate from underlying position values and using these tokens as collateration can add leverage.

An independent framework may require service providers to specify who bears these risks. For example, if a validator is fined, customers can be informed in advance whether the loss will be borne by themselves or by the service provider; enterprises may also be required to explain how they select operators for verifiers and what one party would do in case of operational failures.

Withdrawal terms may also be more formalized, as a user clicking on the button to unlock the escrow box might think that assets are immediately available when in fact there is an opt-out period within the agreement itself and brokers could add processing time based on this.

Revenue publicity is another prominent area of regulation, as a percentage displayed next to the pledge button may package a complex combination of agreement increment, verifier performance, fees and temporary incentives into ordinary savings income. Regulators might want service providers to present these components more clearly broken down.

This makes the service easier to understand, but also increases the cost of providing it.

For large exchanges or banks that already hold a MiCA authorization, another layer of regulation primarily means adding collateral-related policies to the existing compliance system. Smaller verifier firms face an entirely different problem: their advantage may come from having reliable infrastructure rather than operating something like a financial institution.

If direct-service customers in Europe begin to require more regulatory reporting, legal input and insurance and customer service infrastructure, providers will have to weigh whether the market is still worth doing. Some companies will bear the cost, some will withdraw, while others may stop dealing directly with users and hide behind large holding trusts.

In the end, this resulting change in collateral may outweigh any disclosure rules that banks or large exchanges might have as a threshold for clients' access to numerous independent verifiers. Clients face only one regulated counterparty rather than having to evaluate each verifier individually, but will gain greater influence over who is entrusted with client collaterals by the regulated enterprise.

For proof-of-stake networks, this is not just a business problem because the distribution of validators is itself part of cybersecurity. Therefore, a framework designed to protect customers may make access more secure while also concentrating more decision making power in the hands of institutions that can afford regulatory circles.

Users get more protection, but lose more freedom

Users will feel this trade-off most directly. Specialized collateral frameworks may force service providers to explain what factors delay withdrawals, how much the company extracts from protocol rewards before a customer deposits, whether an external validator is involved, and the fate of client assets if that operator makes costly mistakes.

This is probably an improvement for retailers who don't want to understand the underlying architecture of product validators.

Institutional investors are likely to benefit more as large funds and banks avoid collateral, often not because the mechanisms for proof of stake are too complex but when legal ownership, liability, custody, exit rights and counterparty obligations cannot be seamlessly embedded in their existing risk frameworks.

A more formal European system could make these issues easier to resolve internally, but the costs would be reflected elsewhere. If compliance costs rise, service providers will either absorb them themselves or charge their customers higher fees that depress net margin revenues; and smaller proof-of-stake networks may simply disappear from product menus if they are not worth investing in compliance efforts.

A verifier's due diligence may also favor large operators who are already familiar with the agency's admission process. A small operator that is technically excellent might lose its business simply because it cannot produce the documents sought by a regulated trustee.

There is also the difficulty of writing uniform financial rules for blockchains that operate in different ways. The penalty and verifier mechanisms on Ethereum differ from Solana's, both of which are different from delegation models elsewhere, so a rule written with the largest network as its blueprint may look distorted when applied to technical assumptions about different systems.

Users who don't like the regulated version still have another option: transferring assets to self-hosted, directly interacting with validators or decentralized protocols.

MiCA itself acknowledges that completely decentralized, unmediated services may not fall within its scope. The current MiCA review paper also separately explores where this boundary should be drawn, including managing keys and governance centralization or identifiable operators making the protocols less decentralised than advertised.

This could lead to two very different collateral markets in Europe: one operated by a network of exchanges, banks, custodians and approved validators with identity verification and regulatory oversight processes around customer relationships; the other continuing directly on-chain for users willing to hold their own assets and take technical responsibility.

The worrying thing is the middle ground: those protocols that have foundations, front-end interfaces, governance organizations or upgrade keys may find that decentralizing their software doesn't automatically mean that regulators consider their services to be fully decentralized.

The issue goes far beyond bail itself, but it may be the first time in Europe that this boundary has been drawn in a way that affects everyday users.

The financial industry has been through this before. What's next for the crypto sector is worth keeping an eye on.