Analysis: The Legal Status of Liquid Staked Tokens: Security or Commodity? - Part 2

 

The Proof of Stake (PoS) network involved can have a considerable impact on the agreement between the Storage as a Service (StaaS) provider and network participant. PoS networks are broadly divided into three types: (1) pure or conventional, (2) delegated, and (3) bonded. To validate transactions and get rewards in pure networks, StaaS providers must take control of the participant's assets, thereby compelling the StaaS provider to stake the participant's primary using their own tokens. Participants in delegated or bonded networks, on the other hand, may retain ownership of their assets while delegating validation rights to the StaaS provider, who may stake the participant's primary on their behalf. These variations in network topology can significantly affect the risk assumed by the network member in the transaction, with failure of the StaaS provider to distribute rewards being a common risk across all networks.

The contrast between custodial and non-custodial networks and services can have an impact on the level of authority given to StaaS providers. Participants in pure networks basically give up their position in the blockchain network to the provider, who keeps their tokens in custody. It's worth noting that these pure networks don't properly support delegation, which explains why. In contrast to bonded or delegated systems, where agreements are formed with the network, StaaS contracts in pure networks are made with third parties, allowing providers to potentially have greater influence over the network's governance rules. This means that, in addition to validating transaction blocks, StaaS providers in pure networks can vote on network rule modifications.Third-party services are required in some networks to vote in accordance with participant instructions. Other networks, on the other hand, only allow members to select their StaaS provider and do not allow them to change their votes independently. In networks that only consider the input of the StaaS provider as the token holder, the members may lack autonomy.

Third-party services are required in some networks to vote in accordance with participant instructions. Other networks, on the other hand, only allow members to select their StaaS provider and do not allow them to change their votes independently. In networks that only consider the input of the StaaS provider as the token holder, the members may lack autonomy.This situation is comparable to what we've seen in India with regard to the taxation of virtual digital assets (VDAs), which are currently subject to taxation despite a lack of regulatory clarification from the RBI, SEBI, and ED. To avoid confusion and assure compliance with tax regulations, countries must develop a legal basis for the taxation of cryptocurrency.

The most important tax consideration is whether or not there has been a transfer of beneficial ownership in Liquid staked tokens.To evaluate whether a transfer of beneficial ownership has occurred, relevant facts and circumstances, the terms of the parties' agreements, and the legal content of the transaction are considered. If the platform holds tokens on behalf of the staker, the trustee relationship limits the platform's ability to handle the assets, but beneficial ownership remains unchanged. However, if the platform has no restrictions on what it can do with the tokens, including selling them to a third party, there will almost certainly be a transfer of beneficial ownership.

In the case of liquid staking, the protocol acting as the bailee takes voluntary ownership of the staker's assets and uses them as collateral in a smart contract. This results in the staker obtaining LSTs, which serve as confirmation of their legal and beneficial ownership of the staked assets, similar to a coat check ticket at a restaurant.

However, intangible assets, such as cryptocurrency holdings, are not subject to bailment under current legal frameworks because they cannot be "possessed." Some academics have proposed the concept of "quasi-bailment," which suggests that bailment is essentially about imposing a set of duties on the bailee rather than requiring them to keep an asset identical to the one given to them initially.

Existing categories are insufficient for liquid staking configurations unless the concept of "quasi-bailment" is recognised. However, it is important to note that these categories assume the existence of a relationship between parties, such as between a client and a trusted individual (e.g., a trust or bailment) or through an outright transfer. These categories were formed in accordance with US state law or the Uniform Commercial Code to define and impose specific duties on parties involved in the relationship, such as fiduciary obligations on trustees or the duty of care on bailees. State bailment for hire statutes may also govern the rights and obligations of bailment parties.

This raises the question of whether this transaction results in a contractual agreement. Smart contracts can be regarded legally enforceable contracts under English law if the standard contract formation requirements are completed. This will be determined by the nature of the arrangement and the circumstances of the scenario. The most difficult task, however, is going to be providing a purpose for legal ties. The mere presence of code that permits others to engage with it does not imply a wish to be legally bound only on the code without any plain language exchanges. The party dealing with the code may be doing so solely to take benefit of its functions rather than to form a formal contract.