When the answer to the question “Are we allowed to do this?” is a little unclear, as it often is in the world of crypto, it means an interesting challenge for Jennie Levin.

Levin, a former U.S. federal prosecutor, is chief regulatory and strategy officer at Figment, a Toronto-based company last valued at US$1.4 billion that takes care of the infrastructure and technical work of crypto staking.

Crypto staking is a process that lets those who hold digital assets lock them up for a period of time, contributing to the operation and security of a crypto protocol in exchange for rewards. While the world’s governments and financial regulators are scrambling to catch up to the crypto sector, almost none have issued clear rules for staking. That’s a challenge for Figment, but one Levin says she enjoys, since it forces her to think creatively about how existing legal principles might apply.

Canada, however, has just become the first country in the world to make her job a little easier. 

In late October, the country’s provincial securities regulators approved staking. The decision was made public only when fintech Wealthsimple announced it had been given the green light to offer the service, previously available as a pilot, to all its crypto customers. Bitbuy followed with an announcement of its own a week later, naming Figment as a service provider. In marketing posts, other platforms have suggested they’re planning to offer staking in Canada as well.

“In Canada, you have some guidance and you have some regulatory oversight,” Levin said. “There’s more certainty and there’s a path forward.”

It’s another example of the country leading the way on crypto regulation, with the approach of allowing certain businesses and products into the marketplace on the condition that those in the industry agree to follow the rules and submit to oversight. Before Canadian regulators announced a crackdown on crypto in the spring of 2021, some cryptocurrency-trading platforms resisted regulators’ insistence that such services fell within their jurisdiction. Today, most agree the regulators’ philosophy of approving with oversight rather than banning outright has put Canadian crypto holders in a better position to weather a sector-wide meltdown brought on by the collapse of crypto-trading giant FTX.

Approving staking “reflects that our regulators are open minded,” said Evan Thomas, head of legal at Wealthsimple Crypto. “They’re open to innovation, but they’re also conscious, and rightly so, of investor protection.”

Staking is a key part of a consensus mechanism called proof-of-stake, an alternative to Bitcoin’s proof-of-work. With Bitcoin, miners compete in an energy-intensive process to generate a random winning result that earns them the right to publish transactions to the blockchain and receive newly created bitcoins. It’s a process designed to make it more lucrative to act honestly than to cheat.

Proof-of-stake aims to similarly encourage honesty and good-faith participation, but without the carbon footprint. Participants known as validators or stakers agree to lock up their tokens for a certain time period. Meanwhile, they run software on their computers that processes transactions on the blockchain, helping to secure the network by proposing and voting on which blocks of transactions to publish. In exchange, they receive more tokens as a reward. If their computers go offline, or if they commit other infractions, they face penalties known as “slashing.”

Proof-of-stake cryptocurrencies have been around since 2012, but in early 2022 registered Canadian crypto-trading platforms started asking regulators for clarity on whether they can offer staking to their customers, in anticipation of Ethereum switching from proof-of-work to proof-of-stake. Torstein Braaten, chief compliance officer at Vancouver-based WonderFi, which owns the crypto-trading platforms Bitbuy and Coinberry, said he believes a letter he sent regulators in February 2022 may have started them thinking about staking.

Braaten said he asked regulators what their position is on staking, hoping to get guidance as to whether Bitbuy might eventually be able to offer it. At the end of March, they replied with a list of things they wanted more information on. That launched a dialogue that eventually ended in the approval, Braaten said.

“My approach has always been to ask for permission instead of forgiveness,” Braaten said. He compared that approach to the one typically followed in the U.S., where crypto firms push boundaries until they’re slapped with enforcement actions. “That is not a lot of fun for a compliance officer or for a legal department. We do not enjoy that type of work.”

The Ontario Securities Commission did not respond to The Logic’s request for comment. The British Columbia and Alberta Securities Commissions referred a request for comment to the national umbrella organization, the Canadian Securities Administrators. The CSA declined a request for an interview, but spokesperson Ilana Kelemen sent an emailed response.

After learning Canadian registered platforms wanted to offer staking, Kelemen said, the CSA determined that “the concept of staking is unique to crypto asset markets”—as opposed to determining it should be treated similarly to existing investment products like yield-generating bonds or dividend stocks. Because “the provision of the staking services is novel and raises investor protection concerns,” CSA members decided to address the risk by imposing new terms and conditions on registered platforms offering staking, such as using a vetted third-party service to run the validators and determining whether a staking account is appropriate for the client.

Jonathan Ip, a lawyer who advises blockchain and cryptocurrency companies, said there are still some outstanding legal issues surrounding staking in Canada. For one thing, it’s not clear how the Canada Revenue Agency will treat staking rewards for tax purposes, he said.

The CSA decision also only applies to staking through registered platforms, which don’t allow customers to participate in the governance of the protocol and which currently offer the service for a limited number of cryptocurrencies. As for the legal status of taking a do-it-yourself approach and running your own validator—something many crypto enthusiasts consider essential for the principle of decentralization—“there’s nothing clear about that,” Ip said.

The crypto crash brought on by the collapse of FTX and high interest rates have also changed the risk-reward proposition for staking. Given the decision between a high-interest savings account and locking up funds by staking a token with a value that’s currently dropping, the boring but dependable high-interest savings account starts to sound pretty attractive.

Regardless of the broader economic environment, the Canadian regulators’ decision offers some validation for Figment’s business model. The company provides staking services to some of the biggest crypto firms in the world. While regulators approve individual crypto-trading platforms, not Figment itself, Levin said they dug deeply into Figment’s business model and operations during the process of approving Bitbuy, one of its clients.

“We feel very proud to have been vetted and gotten the OK,” Levin said. “Canada’s super important to us.”