In a crypto transaction, there are two ways to validate transactions through a blockchain network; proof of work and proof of stake.

Proof of work is initiated through a mining process that uses computational power. Proof of stake, in contrast requires validators to stake their own cryptocurrency. By using cryptocurrency as collateral, the validator is prevented from acting dishonestly or eliciting fraudulent acts.

There are three ways in which virtual assets can be staked:
1. Solo staking: the participant acts as the validator carrying out staking on its own account.
2. Staking as a service: the participant outsources staking to a service provider with staking infrastructure.
3. Staking from Custody Services: an authorised person delivers custody services and stakes assets (whether directly or through a service provider) as part of that service.

The current regulatory perimeter in VARA’s Custody Services Rulebook is limited to the third limb. The rationale here is that a virtual asset service provider (VASP) that holds or controls virtual assets on behalf of a client should be prevented from exposing the client’s assets to operational, slashing and outsourcing risks in the course of staking.

The ADGM is looking to impose a similar regulatory perimeter to VARA under consultation paper no. 10 of 2025 which applies to intermediated staking involving custody or control of client virtual assets. However, the ADGM further extends the regulatory perimeter by not only regulating staking from custody, but also bringing within scope discretionary staking conducted by authorised asset managers using clients’ virtual assets.

What does this mean for VASPs?
——> A VASP registered with VARA would have greater flexibility under VARA’s regulatory perimeter to design staking offerings given that there is no limit on asset control or discretion.
——> A VASP registered with the ADGM would have more onerous governance obligations associated with custody and asset management.
——> A VASP registered with VARA would be able to structure staking arrangements in such a way so they are not caught within the regulatory perimeter.

Firms will no doubt gravitate towards the jurisdiction offering a more flexible regulatory perimeter, however, flexibility may prove to be short-lived if it fails to keep pace with the underlying risks associated with intermediated staking.