https://docs.babylonlabs.io/papers/btc_staking_litepaper%28EN%29.pdf?utm_source=chatgpt.com)
As the price of cryptocurrencies rises, Bitcoin has established itself as “digital gold.”
Bitcoin and stablecoins are rapidly becoming popular for everyday payments, particularly in South America and Africa, where financial infrastructure is insufficient. For example, in El Salvador, Bitcoin has been adopted as legal tender and is also used for tax payments and person-to-person remittances. Even in the developed United States, an increasing number of companies are adopting crypto payments for online shopping and subscription services.
Meanwhile, in Japan, while Bic Camera’s introduction of Bitcoin payments in 2017 made headlines, the spread of crypto payments since then appears to have been limited. The main reasons for this are that profits are finalized at the time of crypto payment, and individuals are subject to tax of up to 55%, as well as the hassle of recording small payments and filing tax returns. However, if stablecoins, which have fewer price fluctuations, become more widespread, crypto payments may also become more widespread in Japan.
*This article is a revised version of “Crypto Payments and Japanese Law,” published by the author on January 30, 2025.
This article explains how crypto payments work and discusses legal issues surrounding their introduction in Japan.
While “crypto payments” in this article refers to a broad concept that includes crypto asset payments and stablecoin payments, the legal discussion will primarily focus on cryptoassets. Regulations regarding the trading and management of stablecoins are generally like those for cryptoassets, so please refer to them accordingly.
Examples of Crypto payments can be broadly divided into two categories. One is where Crypto is used for direct payments, and the other is where credit cards or debit cards are used. Below are some examples of these payments being made overseas.
Credit card1/Debit card type
Debit card type
Prepaid card type
| Cryptocurrency Law and Fund Settlement Law Cryptocurrency Regulations |
Installment Payment Act , Money Lending Business Law, Regulations on Prepaid Payment Instruments | Foreign Exchange Act | |
| Accepting Crypto payments at company stores | none | none | Foreign Exchange Act reporting is required for transactions of 30 million yen or more with non-residents or overseas entities. |
| Crypto payments using payment processors | Possibility of applying trading regulations to payment processing companies | none | Same as above |
| Credit card type | Applicability of storage and trading regulations | Applicability of the Installment Payment Act (Shopping) and the Money Lending Business Act (Cashing) | Same as above |
| Debit card type | Applicability of storage and trading regulations | none | Same as above |
| Prepaid card type | none | Application of prepaid payment instrument regulations as a self-operated or third-party type | Same as above |
This article explains the regulations for accepting cryptocurrency payments at your physical or online store.
In Japan, the buying and selling of cryptocurrencies, as well as their intermediation and management for others, are regulated as cryptocurrency exchange businesses. However, there are no regulations regarding accepting cryptocurrency payments at your store. There are also no regulations regarding holding received cryptocurrency in-house or exchanging it for cash using a cryptocurrency exchange.
However, in principle, any settlement of 30 million yen or more between non-residents or overseas accounts will trigger a reporting obligation under the Foreign Exchange and Foreign Trade Act (Article 55 of the Foreign Exchange and Foreign Trade Act). This reporting obligation also applies to settlements of 30-million-yen worth of cryptocurrency, and reporting by residents is required. This reporting obligation also applies to settlements described in section 3 and thereafter.
Some Japanese companies are reluctant to own or manage cryptoassets in-house. This is due to a number of factors, including price fluctuation risks, security risks such as hacking, and accounting and tax issues. Such companies sometimes use a third-party payment agent (hereinafter referred to as “payment agent”) to receive cryptoassets, convert them to Japanese yen, and hand them over to stores and other companies.
This scheme is a combination of the following actions:
1) Receiving cryptocurrency for someone else.
2) Converting the received cryptocurrency into Japanese yen for someone else.
3) Handing over the converted Japanese yen to the company.
However, the act of “(2)-converting cryptoassets into Japanese yen” is considered to be a cryptoasset exchange business for payment agents, and in principle, it is thought that they will need to be registered as a crypto asset exchange business. In this regard, a comparison with the collection agency services provided by convenience stores and courier companies in Japan, which are carried out without any particular regulations, becomes problematic. Is it possible to consider that the activities performed by payment agents are also collection agencies and therefore should not be regulated, or is it possible to summarize them as follows?
1) The store grants the payment agent the authority to collect the cryptocurrency.
2) The payment agent receives the cryptocurrency as its own.
3) The payment agent hands over Japanese yen as part of the processing of the delegated business.
4) This is not a conversion act, but merely a payment method for processing the delegated business.
While this approach may be possible in theory, in my experience, it is likely that discussions with authorities will be tough in actual practice. Therefore, it is safe to assume that in practice, registration of a cryptocurrency exchange business will likely be required. However, if the business is conducted in conjunction with other business or delegated duties, it may be permitted depending on the specific content. This point requires careful consideration on a case-by-case basis.
A typical example of a credit card-type crypto payment would look something like this:2
1) A cryptocurrency exchange or its affiliated company issues a credit card.
2) The user purchases goods in yen or dollars.
3) Unlike a regular credit card, payment is made in the form of Bitcoin or other currency deducted from the user’s cryptocurrency exchange account.
In Japan, when issuing a credit card that includes features such as “installment payments over two months,” “revolving payments,” or “bonus lump-sum payments,” this constitutes “credit purchase intermediation” and requires registration as a credit purchase intermediary under the Installment Sales Act (Article 31). Once registered, various regulations under the Act apply, including the obligation to provide information to customers, the obligation to prevent excessive credit, and restrictions on the severance of defenses.
On the other hand, cards that only allow payment methods of “one-time payments within two months (so-called monthly clear)” do not constitute credit purchase intermediation and do not require registration as a credit purchase intermediary. However, since this type of card falls under “two-month installment purchase intermediation” (Article 35-16, Paragraph 2 of the Installment Sales Act), it is subject to the obligation to implement appropriate management measures for card numbers, etc. (Article 35-16, Paragraph 1).
The above regulations also apply to credit cards linked to cryptocurrencies, depending on the features provided.
The cash advance function of a credit card is a borrowing rather than a purchase of goods or services, so it is subject to regulation under the Money Lending Business Act, not the Installment Sales Act.
Even if the credit card is linked to cryptoassets, if cash advances can be made in yen or foreign currency, money lending applies. However, if cryptocurrency can be used for cash advances, it is not subject to regulation as the Money Lending Business Act does not apply to cryptocurrency lending in principle (see definition in Article 2 of the Money Lending Business Act).
(i) Regulations on Custody Activities
In the case of credit cards linked to cryptocurrencies, if the issuer directly stores users’ cryptocurrencies, they are subject to regulation as a custodian under the Payment Services Act (Article 2, Paragraph 7).
However, the following cases may not constitute custody and may be exempt from regulation:
(ii) Regulations on Trading Activities
Converting cryptocurrencies into fiat currency during card payments constitutes the sale of cryptocurrencies and generally requires registration as a cryptocurrency exchange business. Typical examples are:
(a) A user purchases a product with a credit card.
(b) A user sells cryptocurrencies equivalent to the purchase price from their account, and the proceeds (e.g., yen) are paid to the card issuer. These cases constitute the sale of cryptocurrencies (or their intermediation).
Cryptocurrency Payment Schemes
On the other hand, if a card issuer typically bills in yen and allows users to choose to “deposit cryptocurrency in lieu of yen” by the due date, this can be considered a type of payment method designation and, in some cases, may be considered merely a substitute payment, not a sale. In this case, registration as a cryptocurrency exchange business is not required.
However, the Installment Sales Act imposes restrictions on the display of payment methods and calculation methods, and how to address these restrictions presents a challenge. Furthermore, there are likely many practical challenges, such as accounting and tax procedures when card issuers accept cryptocurrency, and how to handle cases where cryptocurrency prices fluctuate in the event of a chargeback.
As a supplement to the Act on Prevention of Transfer of Criminal Proceeds, comprehensive credit purchasing intermediaries, credit card number handling contract operators, cryptocurrency exchange operators, banks, and money transfer operators are considered specified businesses under the Act on Prevention of Transfer of Criminal Proceeds and are subject to AML/CFT regulations, including KYC requirements. In addition, acquirers (contractors that enter into contracts with credit card numbers, etc.) are required to investigate affiliated stores, which serves as an anti-money laundering measure.
A typical example of a debit card-type crypto payment works as follows:
1) A cryptocurrency exchange or its affiliated company issues a debit card.
2) The user deposits Bitcoin or other cryptocurrency with the cryptocurrency exchange.
3) The user can purchase goods in yen or dollars within the amount of the deposited cryptocurrency.
4) When purchasing goods, Bitcoin is automatically converted into yen.
In Japan, debit cards are not subject to the Installment Sales Act because they are instant payments. However, if a system is established in which users deposit funds and use them for card payments, a banking license or registered funds transfer business is required to accept that money. Because funds are transferred at the user’s instruction, they have the characteristics of a foreign exchange transaction, and from this perspective, a banking license or registered funds transfer business is also required.
On the other hand, the Banking Act does not apply to the issuance of debit cards linked to cryptocurrencies, which may raise the following issues:
While the Banking Act does not apply to debit cards linked to cryptocurrencies, the following issues arise:
– Managing other people’s cryptocurrencies as a business requires registration as a cryptocurrency exchange business.
– Selling cryptocurrencies at the time of payment and using the proceeds to pay constitutes the sale of cryptocurrencies and requires registration as an exchange business.
– If the card company bills in yen and the user deposits cryptocurrencies as a substitute payment, it does not constitute an exchange business.
A prepaid payment instrument is a system where you pay in advance, such as a book voucher, Apple gift card, or Amazon gift card, and are given a balance according to that amount, which can then be used to make payments.
The process for prepaid crypto payments is as follows:
1) The issuing company issues a prepaid card.
2) The user sends Bitcoin etc. to the issuing company.
3) The Bitcoin sent is charged according to its current value. For example, 0.001 BTC is equivalent to 15,000 yen.
4) When the user uses the card, the amount is deducted from the charged balance.
Prepaid payment instruments issued in Japan are divided into “in-house” and “third-party” types.
In the case of a self-owned type, notification is required, and in the case of a third-party type, registration is required, and in both cases, restrictions such as depositing half of the unused balance are imposed.
However, the regulations do not apply in the following cases:
Unlike credit cards and debit cards, prepaid cards are generally not subject to regulations governing cryptocurrency exchange businesses. The reasons for this are as follows:
1) The issuing company does not store cryptocurrency.
2) When a card is charged, a charge is made according to the amount of cryptocurrency, but this is not an exchange of money for cryptocurrency. It is merely the act of issuing a prepaid payment instrument.
3) It does not constitute an exchange between cryptocurrencies. However, if the scheme allows the charged cryptocurrency to be converted back into cryptocurrency (refund), it will essentially be considered a deposit of cryptocurrency, and custody regulations for cryptocurrency exchange businesses may apply.
With cryptocurrency payments, profits are considered confirmed at the time of settlement, and tax is levied on these profits. For example, if you acquire cryptocurrency for 10,000 yen and it increases in value to 50,000 yen, and you use that cryptocurrency to make a settlement, you will have a profit of 40,000 yen. For individuals, this profit is classified as “miscellaneous income” and is subject to comprehensive taxation, with a maximum tax rate of 55% being applied when combined with other income.
Crypto payments are subject to tax as described above, and as a general rule, require filing a tax return. Those with miscellaneous income of ¥200,000 or less who are salaried workers without a single source of income are not required to file a tax return.
However, those with miscellaneous income exceeding ¥200,000, or those with miscellaneous income of ¥200,000 or less who are self-employed, freelance, or have a side job and are required to file a tax return, must also report their crypto payment profits down to the last yen. For example, if you use cryptocurrencies for everyday purchases, you are required to record the market value of your cryptocurrencies at the time of each transaction and add up the profits to report. This recording and calculation process is extremely cumbersome, and can be a significant practical burden, especially when making frequent small payments.
This issue also applies if you later use leftover foreign currency from an overseas trip. For example, if you acquire $10 when the exchange rate is 120 yen to the dollar and then spend it on a trip abroad a few years later when the exchange rate is 150 yen to the dollar, the difference (30 yen x 10 dollars = 300 yen) will be taxed as miscellaneous income, and you may be required to file a tax return.
Some countries do not impose capital gains taxes on cryptoassets. Others exempt certain transactions from taxation, such as those involving small amounts or long-term holdings.
(Tax systems by country = researched via Chat GPT, etc.)
| 1 | Countries with no capital gains tax on individual cryptocurrency transactions | Singapore, Portugal, Switzerland, Malaysia, UAE, El Salvador |
| 2 | Countries that do not tax capital gains on long-term holding by individual | Germany (tax exempt if held for more than one year) |
| 3 | Countries with no capital gains tax within certain limits | UK (up to 6,000 GBP per year = approximately 1.2 million JPY), Italy (up to 2,000 EUR per year = approximately 320,000 JPY), South Korea (up to 25 million KRW per year = approximately 2.5 million JPY), Brazil (up to 35,000 BRL per month = approximately 900,000 JPY) |
| 4 | Countries that do not tax small payments | Australia (tax exempt if a single transaction is deemed to be a “Personal Use Asset” of 10,000 Australian dollars (approximately 900,000 yen) or less) |
| 5 | Countries currently discussing tax exemptions for small payments | United States (Currently, taxes are levied separately for short-term holdings and long-term holdings of over one year. Discussions are underway to exempt small profit settlements up to $200 per transaction from taxation.) |
| 6 | Countries where even small payments are generally taxed | Japan (however, miscellaneous income up to 200,000 yen is exempt from tax for those who are not required to file a tax return), France, Canada, Argentina |
Discussions on exempting capital gains from taxation on cryptoassets in Japan are likely to be extremely difficult. Furthermore, within the G7, it may be challenging for Japan to persuasively request authorities to exempt small-value payments from taxation, given that the US, France, and Canada currently impose taxes.
However, as countries advance Web3 development, particularly if the US succeeds in exempting small-value payments from taxation, Japan may need to introduce a system that does not tax profits from small-value payments for competitive policy reasons.
When issuing cryptocurrency-linked cards, they often enter into a contract with an international brand (such as VISA, MasterCard, Amex, JCB, or Diners) and use their payment network. Since international brands are required to comply with regulations in their respective countries, they typically conduct the following types of screening with the card issuer:
Additionally, instead of contracting directly with international brands, cards can be issued as co-branded cards through Japanese credit card companies that already have strong relationships with these brands. While this approach may simplify parts of the card issuance process, it’s important to note that certain regulatory compliance requirements and costs still apply.
Crypto payments are not particularly popular in Japan. The biggest factors are thought to be taxation of up to 55% and the complicated process of recording and reporting small payments.
If stablecoins become more widespread, the risk of price fluctuations will be reduced and a certain degree of solution is expected, but the extent of their adoption is still unknown. Additionally, the development of systems such as user protection and AML compliance remains an issue.
Looking ahead, improvements in the tax treatment of crypto payments are anticipated, particularly from the perspective of international competition in the Web3 sector.
Disclaimer:
The content herein has not been reviewed by relevant authorities and merely reflects discussions considered reasonable under applicable laws and regulations. It also represents only the author’s current views, which are subject to change.
This document does not endorse the use of crypto payments.
This article is merely a summary for blog purposes. For specific legal advice on individual cases, please consult an attorney.
This article describes the structure of “Babylon,” a pioneering Bitcoin (BTC) staking project and considered the largest of its kind today, and the related issues under Japanese law.
Until now, staking has mainly taken place on Proof of Stake (PoS) chains such as Ethereum. Staking in PoS is a mechanism to increase the security of the chain by participating in the validation of transactions on the network, etc., in exchange for a reward.
In contrast, because Bitcoin employs Proof of Work (PoW), it has been believed that, in principle, there is no revenue opportunity from staking in the traditional sense of the term. The most common means of monetization using BTC has been through centralized lending services and tokenization solutions such as wBTC (Wrapped BTC).
Babylon is a project that aims to overcome these limitations of BTC utilization and realize trustless staking using BTC, and is currently one of the most popular protocols in this field. This paper examines its technical structure and issues under Japanese law.
In order to fully understand Bitcoin staking, it is helpful to have a foundational understanding of the staking mechanisms used in PoS chains, as well as the concepts of liquid staking (e.g., by LIDO) and restaking (e.g., by EigenLayer).
For more information on these topics, please refer to the following articles authored by our firm:
| (References) Our previous Article on POS chain staking (in English) ・https://innovationlaw.jp/en/staking-restaking-under-japanese-law/ Our previous Articles on POS chain staking (in Japanese) ・Organizing Legal Issues on Staking 2020.3.17 ・DeFi and the Law – LIDO and Liquid Staking Mechanisms and Japanese Law 2023.10.17 ・EigenLayer and other Restaking Mechanisms and Japanese Law 2024.5.10 |
| (1) The Babylon mechanism itself does not appear to fall under the custody regulations under the Payment Services Act (PSA). (2) The structure of Babylon is not considered to constitute a collective investment scheme (fund) under the Financial Instruments and Exchange Act (FIEA). (3) If a liquid staking provider holds custody of a user’s BTC private key, such a provider may fall within the scope of custody regulations under the PSA. Legal classification should be assessed on a case-by-case basis depending on the structure. (4) Japanese crypto asset exchanges are generally permitted to offer BTC staking services through Babylon under the current legal framework. (5) One practical issue for Japanese crypto asset exchanges is that the rewards granted through the Babylon protocol may be altcoins that are not classified as “handled crypto assets” for that exchange. In such cases, the exchange is not permitted to custody these altcoins on behalf of users under current Japanese regulations. Accordingly, alternative measures must be considered, such as (i) transferring the altcoins to the user’s unhosted wallet, or (ii) selling or swapping them via a DEX or an overseas partner, and then crediting the user with BTC or Japanese yen. |
Bitcoin uses PoW (Proof of Work), which means that staking is not possible in the same way as with Ethereum.
Babylon introduces a new mechanism that enables BTC staking, with the following key features:
| 1 BTC is staked not to secure the Bitcoin network itself, but to secure other networks that rely on PoS-like economic security mechanisms, collectively referred to as Bitcoin-Secured Networks (BSNs). 2 Rewards are determined by the secured networks, typically in the form of their native tokens. 3 BTC can be used to secure multiple such networks simultaneously, potentially increasing yield (albeit with higher associated risks). 4 Staking does not require transferring the BTC private key; instead, it is conducted in a trustless and non-custodial manner using one-time signatures (EOTS: Extractable One-Time Signatures). |
One of Babylon’s most important features is that it uses Bitcoin to enhance the security of “other” PoS networks.
The eligible networks are those that meet certain technical requirements and generally fall under the broad category of PoS-based systems—i.e., networks that have their own validator sets.
Currently, Babylon has announced test integrations and partnerships with various types of networks, including rollups, data availability (DA) chains, and oracle networks.
n a Proof-of-Stake network, security is provided by validators who stake assets—either their own or those delegated to them by third parties—to verify transactions and produce blocks.
If validators behave dishonestly, the staked assets may be slashed (i.e., partially confiscated), creating a strong financial incentive to act honestly and support the stability of the network.
In many PoS networks, delegated staking is possible, allowing token holders who do not run validators themselves to delegate their tokens to trusted validators.
In such cases, validators are responsible for the staked assets regardless of whether they are self-staked or delegated.
However, in order to participate in staking—either directly or via delegation—users must first acquire the native token of the target PoS network.
For emerging or smaller-scale networks, this presents several challenges:
Babylon aims to address these challenges by allowing Bitcoin holders to contribute to the security of such networks—collectively referred to as Bitcoin-Secured Networks (BSNs)—without requiring them to acquire the native token or transfer custody of their BTC.
Security participation is instead enabled through a trustless, signature-based mechanism.
As mentioned above, Babylon introduces a mechanism to enhance the security of PoS-based networks by leveraging BTC, an external asset, to address the inherent security limitations these networks may face.
Specifically, BTC holders contribute economic security by staking their BTC, which is used to support the security of external networks.
Importantly, this BTC collateral is not transferred directly to the PoS networks. Instead, it remains in the user’s self-managed script on the Bitcoin network, and staking is performed via the Babylon protocol through a cryptographic signature (digital proof of intent).
This design enables non-custodial and trustless participation, eliminating the need to deposit or lock up BTC with a third party.
By introducing such externally sourced security, PoS networks can leverage BTC’s high liquidity and market capitalization to reinforce their security infrastructure—without relying solely on their native tokens.
This mechanism is particularly promising for emerging PoS networks, where token distribution may be highly concentrated and the validator set small, leading to weaker security. Babylon’s BTC-based model may serve as a viable complement to address these vulnerabilities.
The rewards for staking BTC through Babylon are not paid in BTC itself, but in the native tokens designated by the PoS network that receives the security service.
From the perspective of the PoS network, this structure allows it to externally source economic security (in the form of BTC) by using its own native tokens as incentives. Through appropriate token issuance and incentive design, the network can attract BTC stakers without requiring external capital.
For BTC stakers, this provides the benefit of earning yield in the form of external PoS network tokens—without needing to transfer or wrap their BTC. This feature may present a new yield opportunity, particularly for long-term BTC holders looking to earn passive returns on their assets.
While Babylon offers BTC holders the opportunity to earn yield, there are several risks associated with the fact that rewards are paid in the native tokens of external PoS networks rather than in BTC.
This structure may also present practical and regulatory challenges, especially for users staking through crypto asset exchanges in Japan. As discussed in Section IV-3 below, it could act as a disincentive for such platforms to offer Babylon staking services.
| Risks Associated with Receiving Rewards in Other Tokens • Price Volatility Risk of Reward Tokens The reward tokens received from PoS networks generally have lower market capitalization and liquidity compared to BTC, making them more susceptible to price volatility. Even if the nominal reward amount is high, a sharp decline in the token price could result in a significantly reduced effective yield. • Liquidity and Redemption Risk If the reward tokens are issued by a relatively niche or illiquid chain, they may be difficult to redeem on the open market, or suffer from large bid-ask spreads, reducing the actual profitability of staking. • Continuity and Stability of Reward Design If the PoS network changes its reward policy or reduces incentives in the future, the economic appeal of Bitcoin staking may diminish. Moreover, if the chain’s operations are unstable, there is a risk that rewards may not be distributed properly or consistently. |
Babylon is designed to allow BTC holders to participate in network security as providers of economic collateral—autonomously and non-custodially, without transferring their private keys to any third party.
This architecture enables truly trustless staking, eliminating the need for traditional asset transfers or reliance on custodians.
In conventional staking and DeFi use cases, utilizing crypto assets typically requires one of the following actions:
Both methods effectively require giving up control of the private key, at least temporarily, which introduces risks such as asset leakage or loss due to smart contract vulnerabilities.
Babylon avoids these risks by enabling signature-based staking mechanism. This allows BTC holders to retain full control over their assets while still participating in economic security provision.
Babylon utilizes a cryptographic technique known as Extractable One-Time Signatures (EOTS) to allow BTC stakers to both prove their ownership of BTC and explicitly accept responsibility for contributing to the security of a PoS-based system.
The basic flow of this mechanism is as follows:
| 1.The BTC staker selects a finality provider and generates the transaction data necessary to initiate staking. 2.The transaction includes the following conditional clauses: (i) The designated BTC cannot be transferred for a fixed period (e.g., three days); (ii) If certain predefined conditions arise during that period, the BTC will be sent to a predetermined address (typically a burn address); (iii) However, the BTC staker retains the right to cancel (revoke) the transaction at any time before the fixed period ends, as long as no slashing condition has been triggered. 3.The “predefined conditions” referred to in (ii) generally correspond to slashing events—e.g., if the selected finality provider engages in dishonest behavior (such as submitting double signatures), the BTC will be forcibly sent to the burn address as a penalty. 4.The BTC staker finalizes the process by signing the transaction using a one-time EOTS (Extractable One-Time Signature), thereby proving BTC ownership and formally declaring their intent to participate in security provision. |
This design enables PoS networks to receive a security guarantee backed by BTC, a highly liquid external asset, while the Babylon protocol itself provides a comprehensive framework for detecting malicious behavior and executing slashing penalties.
The BTC staking mechanism enabled by Babylon is characterized by a trustless and non-custodial architecture, in the following respects:
This structure, which minimizes the need for trust in third parties, is closely aligned with Bitcoin’s foundational principles of self-custody and decentralization.
However, it is important to note that the system is not entirely “trustless.”
Certain functions—such as verifying signatures, executing slashing, and distributing rewards—are handled by the Babylon Genesis Chain, described below.
In other words, while BTC itself is never directly deposited or locked up, a degree of “protocol trust” is still required—specifically, trust in the legitimate operation and correct implementation of the Babylon protocol, including the Babylon Genesis Chain.
The entities involved in the Babylon ecosystem are diverse, but some of the key participants include following:
Figure: Babylon Overview
• Summary:
Bitcoin-Secured Networks (BSNs) refer to a category of networks (or chains) that enhance their security by integrating Bitcoin’s economic security via Babylon. These networks typically operate on PoS or PoS-like systems and utilize BTC as external collateral to strengthen their security infrastructure.
• Role:
PoS networks, particularly in their early stages, often face security challenges due to a small or overly centralized validator set and insufficient economic collateral. By incorporating BTC through Babylon, BSNs can achieve the following:
• Typical Use Cases (Examples):
• Summary:
Entities that observe and verify block finality on PoS networks secured by Babylon, and submit cryptographic finality signatures accordingly.
• Role:
• Note:
Finality providers differ from traditional validators in other chains. Their core responsibility is to observe the finality of blocks on the target PoS network and report that information to the Babylon chain.
However, they play a somewhat validator-like role in that they create and submit cryptographic signatures, earn rewards for doing so, and are subject to slashing in case of misconduct.
Comparison of Finality Providers and General PoS Validators
| Item | Finality Provider (Babylon) | General PoS Chain Validator |
| Block Generation | ❌ Not performed | ✅ Performed |
| Finality Observation | ✅ Performed | ❌ Typically not involved (finality is emergent) |
| Signature Type | ✅ Signs finality data | ✅ Signs blocks and voting messages |
| Slashing Risk | ✅ Yes (for fraudulent finality signatures) | ✅ Yes (for double signing, downtime, etc.) |
| Reward Mechanism | ✅ Yes (based on submitted signatures) | ✅ Yes (based on block production and delegation) |
• Role:
Hold BTC and contribute to the security of PoS networks by submitting off-chain cryptographic signatures to Babylon.
• Reward:
Receive staking rewards from the PoS networks in return for providing BTC as collateral via Babylon.
• Key Characteristics:
BTC stakers can also delegate their staking to finality providers.
Even in such cases, no BTC or private key is transferred, and the delegation is completed through a non-custodial mechanism.
| Function | Description |
| Signature Verification | Receives and verifies signatures from BTC stakers and finality providers. |
| Slashing Enforcement | Executes slashing penalties when fraudulent or malicious signatures are detected. |
| Finality Recording | Records the finality of blocks from PoS networks on Bitcoin (e.g., via timestamping). |
| Cross-Chain Relay | Relays verified security information and signatures to other BSNs. |
A protocol that facilitates BTC staking via Babylon on behalf of BTC holders, aiming to improve operational efficiency, usability, and liquidity. While the main focus is on liquid staking, a hybrid model that combines restaking (reuse of the same BTC for multiple networks) may also be adopted where appropriate.
| Key functions: (i)Streamlining Operations Since it is burdensome for BTC holders to individually generate signatures and monitor activity across multiple PoS networks, the protocol handles the following tasks: ・Selection of PoS networks for staking ・Automatic generation and management of EOTS signatures ・Collection and distribution of staking rewards (ii) Issuance and Utilization of Liquid Staking Tokens (LSTs) The protocol issues liquid staking tokens (e.g., stBTC) backed by the user’s staked BTC position. This allows the user to retain liquidity of their assets even while staking, enabling secondary use in DeFi and other ecosystems. (iii) Complementary Use of Restaking By carefully managing risk, the protocol may reuse the same BTC signature across multiple PoS networks (i.e., multi-staking), thereby maximizing yield. |
The relationship between the Babylon ecosystem and the Babylon Genesis Chain is nuanced and may require clarification.
The Babylon Genesis Chain is a PoS Layer 1 blockchain that plays a central role within the Babylon ecosystem. However, it is not synonymous with the ecosystem itself.
The Babylon protocol refers to a broader framework encompassing multiple Bitcoin-Secured Networks (BSNs) that utilize Bitcoin-based economic security via Babylon.
If a participant joins Babylon as a finality provider and provides finality to the Babylon Genesis Chain, they receive “BABY”, the native token, as a reward.
Finality providers currently serve the Babylon Genesis Chain, where they contribute to finality and receive BABY, the native token, as compensation. Although the Babylon protocol is designed to be extendable to other Bitcoin-Secured Networks (BSNs), finality provisioning beyond the Genesis Chain has not yet been implemented. In the future, other BSNs may adopt the Babylon finality mechanism and offer their own tokens as rewards to finality providers.
In addition, the Babylon Genesis Chain has its own set of validators, who stake BABY and participate in block production and consensus. These validators are also rewarded in BABY for their contributions to the network’s operation.
| Item | Details |
| Token Name | BABY (Native token of the Babylon Genesis Chain) |
| Means of Acquisition 1 | Stake BABY and participate as a validator in block production and validation on the Babylon Genesis Chain |
| Means of Acquisition 2 | Provide finality to the Babylon Genesis Chain using BTC as a finality provider |
| Primary Use Case 1 | Staking collateral for validator participation |
| Primary Use Case 2 | Governance (proposal creation and voting rights) |
| Primary Use Case 3 | Network fees (planned in the future) |
| Additional Notes | Rewards in other BSNs are typically paid in each BSN’s own native token, not BABY |
| Item | Finality Provider | Validator (Babylon Genesis Chain) |
| Staked Asset | BTC (non-custodial) | BABY token (non-custodial) |
| Primary Role | Provide finality (submit signatures) to BSNs | Block production and validation on Babylon Genesis Chain |
| Target Chain(s) | Babylon Genesis Chain and other BSNs | Only the Babylon Genesis Chain |
| Reward Token | BABY or BSN-native token (depending on the chain) | BABY token |
| Slashing Risk | Signature invalidation and BTC burn (e.g., double signing) | Slashing of staked BABY (e.g., double signing or downtime) |
| Staking Method | Declaration of intent via BTC signature (held in a self-managed script; delegation also possible) | On-chain BABY token staking (self-custodied; delegation also possible) |
Based on the above assumptions, this section outlines the key legal issues related to providing or using a Bitcoin staking service such as Babylon.
In particular, the analysis focuses on two core questions:
In the context of BTC staking via Babylon, a key legal issue is whether the provision of BTC as economic security constitutes the “management” or “custody” of crypto assets under Japanese law.
Under custody regulations based on the Payment Services Act, the primary legal criterion is generally understood to be whether the service provider holds the private key required to transfer the user’s crypto assets.
This interpretation is supported by an official public comment issued in connection with the 2019 amendments to the Act:
“If a business operator does not possess any of the private keys necessary to transfer the cryptographic assets of a user, the business operator is not considered to be in a position to proactively transfer the cryptographic assets of the user, and therefore, basically, is not considered to fall under the category of ‘managing cryptographic assets for others’ as stipulated in Article 2, Paragraph 7, Item 4 of the Payment Services Act.”
In this regard, the private key required to transfer BTC is never shared with or transferred to any entity, including the Babylon Genesis Chain or finality providers.
The technical structure of the system is as follows:
This design enables BTC to serve as economic security without transferring control of the private key, ensuring that the BTC remains in the staker’s custody unless slashing conditions are triggered.
Accordingly, Babylon and finality providers would generally not be considered to fall under custody regulations under the Payment Services Act.
However, it should be noted that certain Liquid Staking Protocols may offer services that involve taking custody of users’ private keys. In such cases, those entities may indeed be subject to custody regulations, and a case-by-case legal assessment would be required.
In Babylon, BTC is provided as economic security, and BTC stakers receive compensation while bearing certain risks such as slashing. From this structure, a legal question arises as to whether Babylon might be classified as a “fund” (collective investment scheme) under Japanese law.
Article 2, Paragraph 2, Items 5 and 6 of the Financial Instruments and Exchange Act (“FIEA”) broadly define a “fund” (collective investment scheme) as follows:
| (A)Covered Forms of Rights (any of the following): 1. Partnership agreement 2. Silent partnership agreement 3. Investment limited partnership agreement 4. Limited liability partnership agreement 5. Membership rights in a general incorporated association 6. Other similar rights (excluding those established under foreign laws) Note: Items 1–5 are illustrative; “other rights” are interpreted broadly, regardless of legal form. (B)Description of the Scheme (all of the following must be satisfied): ・Investors contribute cash or assets (including crypto assets, per Cabinet Order); ・The contributions are used in a business; and ・Investors have rights to receive dividends or a share in the property derived from that business. (C)Exclusions: The scheme does not apply where all investors are actively and substantially involved in the business (per Cabinet Order requirements); or Where investors are entitled to returns only up to the amount they invested (limited liability form). (D)Foreign Funds: Similar rights based on foreign laws may also be regulated under separate provisions. |
While Babylon might fall within the category of “other similar rights” in (A) above and does not appear to meet the exclusions under (C), it is unlikely to satisfy all of the conditions under (B). Accordingly, it may not constitute a fund under the FIEA, for the following reasons:
From these perspectives, Babylon’s BTC staking mechanism does not appear to meet the definition of a fund under the FIEA.
Babylon allows BTC stakers to delegate their staking authority to finality providers. However, since this process does not involve the transfer of private keys, such delegation is not likely to fall under a fund regulation.
On the other hand, certain Liquid Staking Protocols may offer services that involve taking custody of users’ private keys. In such cases, a careful legal analysis is required to determine whether such schemes meet the definition of a fund under the FIEA, particularly in light of the structure of asset control and contribution.
This section examines the legal and operational issues that may arise when a Japanese crypto asset exchange operator performs BTC staking via the Babylon protocol using assets deposited by users.
Many crypto asset exchanges in Japan provide staking services as part of their business operations.
To our understanding, as long as users do not bear the risk of slashing (i.e., potential loss)34, such services are generally treated as part of the core business of “receiving deposits of crypto assets” as defined in Article 2, Paragraph 15, Item 4 of the Payment Services Act.
This legal interpretation should remain applicable even when Babylon is used as the underlying protocol—no special legal treatment or additional licensing is expected to be required.
Under Article 60-11, Paragraph 2 of the Payment Services Act and Article 27, Paragraph 3, Item 1 of the Cabinet Office Ordinance on Crypto Asset Exchange Services, crypto asset exchanges in Japan are required to segregate users’ crypto assets from their own assets and hold them in cold wallets.
In most PoS staking systems, private keys used for asset transfers do not need to be moved; rather, a separate validator key is used. This practice is generally considered not to conflict with cold wallet requirements.
In Babylon, there is no concept of a validator key. Instead, staking is performed via cryptographic signatures called Extractable One-Time Signatures (EOTS). Importantly, the private key for BTC remains in the possession of the BTC staker—in this case, the exchange operator—and is never transferred or exposed to third parties.
Therefore, since the exchange does not move or manage private keys externally, Babylon staking is not expected to conflict with cold wallet custody obligations.
A unique practical issue with Babylon staking is that while BTC is used as the staked asset, the rewards are typically paid in the native tokens (i.e., altcoins) of the target PoS network, rather than in BTC itself.
For example, when staking ETH, both the staked asset and the reward are ETH, which poses no legal or operational issues for exchanges that have already registered ETH as a “handled crypto asset” with the Financial Services Agency (FSA).
In contrast, when staking BTC via Babylon, the resulting rewards may be in the form of tokens such as BABY or other native tokens of PoS networks that are not registered as handled crypto assets. This presents a compliance challenge under the Payment Services Act.
Several operational approaches can be considered:
In this approach, the exchange holds the altcoins it receives as rewards and allocates them to users.
While it may be possible to register certain major tokens (e.g., BABY) as handled crypto assets, and some tokens associated with Babylon partner networks (e.g., ATOM, SUI) are already listed in Japan, it is not realistic to file individual registrations for every potential reward token.
Here, the exchange does not custody the reward tokens but transfers them directly to each user’s self-managed wallet. This bypasses the need to register the tokens as handled crypto assets.
However, this approach presents practical challenges: requiring users to manage wallets for a wide range of altcoins is burdensome from both a UX and operational support perspective. It also introduces potential transaction costs and operational risks.
Under this method, the exchange converts the reward altcoins into BTC or JPY (e.g., via a DEX or an overseas partner), and then distributes those converted assets to users as rewards.
While this may raise concerns that the exchange is engaging in crypto asset exchange services involving unregistered crypto assets, such risks may be mitigated through appropriate contractual arrangements.
Specifically, if the agreement with the user clearly states that:
then the exchange’s sale or swap of the altcoins can be viewed as part of its internal process for sourcing rewards, rather than as a crypto asset exchange activity involving third parties.
In this structure, the exchange merely acquires and disposes of unregistered tokens on its own account, which is generally not considered a regulated activity under current law.
In light of the above, under the current regulatory framework, it appears that the most realistic and effective approach for crypto asset exchanges is to structure their operations based on scheme (3).
That said, from the perspective of BSNs, there are concerns about potential ongoing selling pressure caused by continuous liquidation of reward tokens. Therefore, the sustainability of the system as a whole should also be carefully considered in future discussions.
Acknowledgments
In preparing this article, I received valuable input from the teams at Kudasai Inc. and Next Finance Tech Inc., both of whom are well-versed in Babylon staking. I also benefited from informal yet insightful suggestions from individuals involved with the Babylon protocol.
However, any remaining errors or interpretations are entirely my own and do not represent the official views of any specific entity
Disclaimer
The content of this document has not been reviewed by any regulatory authority and represents a general legal analysis based on interpretations currently considered reasonable under applicable Japanese law. The views expressed herein reflect the current thinking of our firm and are subject to change without notice.
This document does not constitute an endorsement of any specific staking mechanism, including Bitcoin staking, the Babylon protocol, liquid staking services, or any related technologies or platforms.
This material is provided solely for informational and blog purposes. It does not constitute legal advice, nor is it intended to be a substitute for legal counsel. For advice tailored to your specific circumstances, please consult with a qualified attorney.
As seen in Ethereum network, staking—the process of locking a certain amount of crypto assets on a blockchain for a set period to contribute to transaction validation (Proof of Stake), earning rewards in return—is gaining traction globally as well as in Japan. Major Japanese crypto asset exchanges now offer staking services, contributing to its expansion. This paper outlines key legal issues related to staking under Japanese law and briefly addresses the concept of restaking, which is a mechanism in which existing staked crypto assets or staking rewards are staked again to earn additional rewards, with the aim of enhancing network security and enabling new services.
Regulatory applicability depends on the manner in which staking is conducted and its legal framework. Relevant regulations include those governing Crypto Asset Exchanges and Funds as referenced and further explained below.Staking one’s own crypto assets remains unregulated under such regulations, therefore, this discussion focuses on cases where a service provider stakes on behalf of users. To summarize the key conclusions in advance:
| Staking Structure and Legal Framework | Applicability of Crypto Asset Exchange Regulations / Fund Regulations as per Japanese Law |
| Service provider does not receive the user’s private key (only delegation) | No applicable regulations |
|
Service provider gets the user’s private key |
|
| Legal structure: “Custody” | Crypto Asset Exchange regulations apply (registration as a Crypto Asset Exchange) |
| Legal structure: “Investment” | Fund regulations apply (registration as a Type II Financial Instruments Business Operator) |
| Legal structure: “Lending” | No applicable regulations |
Custody, Investment, and Lending are key legal classifications in the regulatory framework for staking services. While details will be discussed later, these terms can be briefly defined as follows:
✓Custody refers to the management of crypto assets on behalf of users. Possession of private keys is a key factor in determining regulatory applicability of Custody. If structured as Custody, it falls under Crypto Asset Exchange regulations under the Payment Services Act (PSA).
✓Investment refers to a scheme where users contribute funds (including crypto assets) to a service provider, which then utilizes them for business operations (e.g., staking) and distributes profits to the users. If structured as Investment, it falls under Fund regulations governed by the Financial Instruments and Exchange Act (FIEA).
✓Lending refers to an arrangement where users lend their crypto assets to a service provider, which manages the crypto assets at its discretion and returns them after a specified period. If recognized as a Lending agreement, it is generally not subject to PSA or FIEA regulations.
Under Japanese law, Crypto Asset Exchange regulations under the PSA, Article 2, Paragraph 15, apply to the following activities:
Among these, staking is particularly relevant to Item 4., which refers to the Custody services.
Regarding “managing crypto assets on behalf of others” (hereinafter referred to as “Custody”), the Financial Services Agency (FSA) guideline5 states:
“[…] in a case where the business operator is in a state in which the business operator is able to proactively transfer a Crypto-Asset of a user, such as a case where the business operator holds a secret key [Author’s Note: referring to a private key] sufficient to enable the business operator to transfer the Crypto-Asset of the user without any involvement of the user, either alone or in cooperation of an affiliated business operator, such a case falls under the management of Crypto-Assets.”
This indicates that possession of private keys is a key factor in determining regulatory applicability of Custody.
Additionally, staking may also be subject to Fund regulations governed by FIEA (Article 2, Paragraph 2, Item 5). This FIEA applies where users contribute funds (including crypto assets) to a service provider, which then utilizes them for business operations and distributes profits to the users.
If a service provider only receives delegation from users without holding their private keys6, it does not qualify as a Custody activity under the FSA guideline as quoted above and is not subject to Crypto Asset Exchange regulations under the PSA.Additionally, in this case, since users do not contribute funds to the service provider —given that the service provider cannot transfer the crypto assets for business operations without possessing the private key— it does not constitute an “Investment” and therefore, Fund regulations under the FIEA do not apply either.
If a service provider holds the user’s private key, it may be classified as a Custody activity under the PSA. Additionally, depending on the legal structure of the arrangement, the user’s contribution could be considered an “Investment,” making it subject to Fund regulations under the FIEA.
First, if the arrangement is structured as a “Custody,” the provider is deemed to be managing the user’s crypto assets on their behalf. This qualifies as a Custody activity under Crypto Asset Exchange regulations and falls under the Payment Services Act (Article 2, Paragraph 15, Item 4).
If the legal structure is such that the provider receives “Investment” of crypto assets from users, it does not meet the Custody regulation requirement of “managing crypto assets on behalf of others,” as the assets are received for business use rather than for custodial management on behalf of users. Therefore, Custody regulations under the PSA do not apply. However, since the provider uses the contributed funds to operate a business (staking) and distributes the revenue to users, it is likely subject to Fund regulations under FIEA.
If the arrangement is structured as Lending, where the user lends crypto assets to the service provider, which manages them at its discretion and returns them after a specified period, rather than making a Custody (where assets are held and managed on behalf of the user) or an Investment (where assets are contributed with an expectation of return), no specific regulations apply. However, according to the aforementioned FSA guideline7, “The borrowing of Crypto-Assets […] falls under the management of Crypto-Assets […] if a business operator substantially manages a Crypto-Asset on behalf of another person under the name of the borrowing of a Crypto-Asset such that the user can receive the return of the Crypto-Asset borrowed at any time at the request of the user. “
Therefore, regulatory authorities may classify such circumvention schemes as a Custody activity, making them subject to Custody regulations under the PSA.
Thus, even when a service provider holds the user’s private key and conducts staking, the applicable regulations vary depending on the legal structure of the arrangement. However, in practical business operations, the distinction between “Custody”, “Investment” and “Lending” is not always clear. To determine the applicable regulations, it is useful to analyze the staking scheme based on the following factors:
Based on these factors, the conclusions for typical cases are summarized as follows. However, if a case does not fit within these typical scenarios, determining whether it qualifies as Custody service or a Fund Investment can be challenging.
The licenses required for service providers under each scheme are summarized as follows:
Restaking is a scheme where crypto assets that have already been staked are staked again in another protocol.
The demand for restaking arises from two key factors: enhance security of certain decentralized finance (DeFi) protocols and similar services and enabling users to obtain higher yields.
If a DeFi service uses its own Proof of Stake token for validation of transactions and hence its security, its effectiveness may be limited due to low token value or poor distribution and can be open to security vulnerabilities through holding a significant number of the related tokens. Restaking solves this by reusing staked crypto assets (e.g., ETH) to provide the security of major public blockchains like Ethereum.
In return, DeFi services share rewards with crypto assets holders, who also bear slashing risks. This allows holders to earn additional rewards on top of their staking returns, boosting overall yields.
The key legal issues related to restaking under Japanese law include:
Regarding Custody regulations, the applicability of Custody regulations depends on the structure of the restaking service. However, based on the previously mentioned stance of the FSA on Custody, if the crypto assets are managed by a smart contract and the restaking service provider does not have the technical ability to transfer the crypto assets, Custody regulations would not apply.
Regarding Fund regulations, the application of Fund regulations requires that the contributed assets be used to conduct a business. In the case of restaking, if crypto assets are merely locked as a form of collateral to cover potential penalties from slashing, rather than being allocated for business operations, it would not meet the legal definition of an Investment. Therefore, Fund regulations would not apply.
Note that, as with staking, the applicable regulations may vary depending on the specific structure of the restaking scheme.
This article discusses the structure of EigenLayer, which has recently gained rapid attention in the DeFi space, and the applicable regulation on it under Japanese law.
Our firm is a law firm well-versed in the Web3 domain, and we have published numerous articles in both Japanese and English on legal issues related to the Web3 field7. In May 2024, we published a Japanese article titled “Structure of Restaking Services such as EigenLayer and Japanese Law8.”
While the Japanese version of the article provides a more detailed analysis, this article summarizes the conclusions of the Japanese version to facilitate easy understanding for overseas entities considering offering restaking services in Japan.
The Structure of Restaking in EigenLayer
EigenLayer is a service designed to ensure secure execution for programs running outside of the Ethereum Virtual Machine (EVM) by using ETH.
For instance, when a DeFi application that uses the Ethereum blockchain consists of parts that operate within the EVM and parts that do not, the security for the EVM parts is guaranteed by the Ethereum blockchain. However, the parts that run outside the EVM are not covered by the security of the Ethereum blockchain, making them vulnerable. The traditional approach to this issue has been to issue native tokens for that application, but this comes with several problems:
EigenLayer aims to provide a solution to these problems.
In simple terms, EigenLayer “reuses” ETH that is already staked on Ethereum to provide security to services built on EigenLayer (Actively Validated Services, or AVS). For example, consider an AVS that periodically surveys numerous crypto exchanges and DeFi protocols to collect token price information and calculate their average values. In this case:
A key feature is that ETH staked for the regular Proof of Stake mechanism on Ethereum can also be used as collateral for multiple AVS, allowing operators to earn additional rewards. Furthermore, users who are not operators can deposit their ETH, etc. into EigenLayer, restake it through selected operators, and receive a share of the rewards that operators earn from the AVS. The advantage for users is that they can earn multiple layers of rewards through EigenLayer restaking compared to simple ETH staking.
Liquid Restaking
In addition, external entities offer a service related to EigenLayer known as Liquid Restaking. This service involves users depositing their ETH with a liquid restaking provider, who then stakes the ETH on Ethereum and restakes it through EigenLayer once the minimum staking unit of 32 ETH is accumulated. In this case, users only interact with the liquid restaking provider, while the provider handles transactions with EigenLayer. This arrangement frees users from the responsibility of selecting operators. Liquid restaking services thus play an important role in providing users with the opportunity to generate revenue through EigenLayer.
Restaking and Japanese Law
When considering restaking services such as EigenLayer under Japanese law, it is primarily necessary to evaluate the applicability of:
If the act of depositing ETH, etc. into EigenLayer is viewed as the entrustment of crypto, the custody regulations under the Crypto Act may apply. However, if the deposit is made to a smart contract and the smart contract technically prevents EigenLayer, the AVS, the operators and other people except for users to transfer the ETH, etc., we believe the custody regulations would not apply.
FIEA regulates funds that collect money, use such money for some kinds of investment or some business activities, and distribute the profits to investors. There is a concern about whether the fund regulations under the FIEA apply to the mechanism where EigenLayer receives deposits of ETH, etc., operators provide security to the AVS in return for rewards, and a portion of these rewards is distributed to users, who also bear the risk of penalties such as slashing. However, if the deposited ETH, etc. is not used for investment or business activities but merely locked in a smart contract as a form of collateral to address penalties like slashing, we believe that the fund regulations under the FIEA would not apply.
In restaking services such as EigenLayer, users may receive points10.as rewards. These points might lead to future airdrops. The potential applicability of the UPMR, which prohibits excessive premiums provided in connection with transactions of goods and services, needs to be considered. Under UPMR, premiums refer to (1) economic benefits such as goods or money that are provided (2) as a means to attract customers, and (3) in connection with transactions. In this respect, users of restaking services likely view these points as part of the rewards associated with restaking, and the high yields might incentivize them to restake. Therefore, these points can be seen as part of the primary transaction, not as “premiums” provided in connection with the transaction, implying that the UPMR might not apply.
Liquid Restaking and Japanese Law
Liquid restaking providers, being external entities, likely operate under various structure. It is necessary to evaluate the applicability of:
If the act of depositing ETH for liquid restaking is deemed as custody, the custody regulation under the Crypto Act may apply. Whether liquid restaking providers manage private keys is a critical issue. We believe, however, it seems that most liquid restaking providers do not own private keys and thus the custody regulation do not apply.
There is a concern about whether issuing Liquid Restaking Tokens upon depositing ETH constitutes crypto exchange. Legally, if tokens are issued as proof of deposit, it would not be considered trading or exchange under the Crypto Act, and thus, the trading and exchange regulations would not apply.
Fund regulations must also be considered for liquid restaking providers. Key considerations include how private keys are managed. If the smart contract ensures that the deposited ETH is used solely as collateral and cannot be otherwise utilized, we believe the operation may not be classified as a fund. Conversely, if the smart contract is not properly set up and allows the provider to use the private keys and crypto assets, the operation may be subject to fund regulations.
Disclaimer
The content of this article has not been confirmed by the relevant authorities or organizations mentioned in the article but merely reflects a reasonable interpretation of their statements. The interpretation of the laws and regulations reflects our current understanding and may, therefore, change in the future. This article does not recommend the use of staking, liquid staking, liquid restaking, EigenLayer or LIDO, etc.. This article provides merely a summary for discussion purposes. If you need legal advice on a specific topic, please feel free to contact us.