Why Is Crypto Staking Not Allowed in California?

Cryptocurrency staking has emerged as a popular way for investors to earn passive income by locking up their digital assets to support blockchain network operations. However, in California, one of the United States’ most progressive states in terms of technology and innovation, crypto staking faces significant restrictions. This article delves into the reasons behind California’s prohibition on certain crypto staking activities, exploring the regulatory landscape, key legal actions, and their implications for investors and the broader crypto industry.

California’s Regulatory Stance on Crypto Staking

California’s Department of Financial Protection and Innovation (DFPI) has taken a firm stance against crypto staking programs offered by centralized exchanges, primarily due to concerns over securities laws. The DFPI argues that staking programs, such as those offered by platforms like Coinbase, constitute unregistered securities offerings. According to the DFPI, when investors deposit their crypto assets with an exchange that pools these assets and advertises expected returns (often up to 6%), the arrangement resembles an investment contract under securities law.

This classification requires such programs to be registered with the state, a step many exchanges have not taken, leading to enforcement actions. For instance, in June 2023, the DFPI issued a desist and refrain order against Coinbase, alleging that its staking rewards program violated state securities laws by offering unregistered securities to over 600,000 California investors.

1. Regulatory Classification: Staking Programs as Securities

California regulators, led by the Department of Financial Protection and Innovation (DFPI), argue that many crypto staking offerings—especially those provided by centralized exchanges like Coinbase—essentially function as unregistered securities. In June 2023, the DFPI issued a “desist and refrain” order against Coinbase, stating that its staking rewards program, which pooled customer assets and advertised potential returns, constituted a securities offering offered without proper qualification or registration.

This action was part of a coordinated effort by a multi-state task force involving regulators from nine other states. The DFPI emphasized that California law requires any offering of securities to be duly qualified, ensuring investors receive full disclosure of associated risks—a requirement Coinbase’s staking service, in their view, failed to meet.

2. Operational Impact: Coinbase Suspends Staking in California

In response to these orders, Coinbase halted new staking activity for residents in California (along with New Jersey, South Carolina, and Wisconsin) around mid-July 2023. While assets already staked remained unaffected and continued to earn rewards, new contributions were blocked.

Coinbase characterized these state moves as part of a broader “war on staking” and maintained that staking is a fundamental blockchain operation—not an investment contract. However, regulators took the stance that pooling and sharing rewards transforms staking into a securities-like activity.

3. California’s Digital Financial Assets Law (DFAL)

Looking ahead, California is instituting the Digital Financial Assets Law (DFAL), designed to regulate entities that engage in digital financial asset business activity with California residents. Enacted in early 2025 and slated to take effect July 1, 2026, DFAL mandates licensing for businesses that exchange, transfer, or store digital assets on behalf of residents.

Since many centralized staking services fall squarely under those functions—handling assets on behalf of customers—the DFPI will have heightened authority to regulate or restrict services like staking, especially when they resemble investment products.

4. Federal Developments: SEC Clarification on Staking (2025)

At the federal level, the U.S. Securities and Exchange Commission (SEC) issued guidance in May 2025 distinguishing **“protocol staking”—**where users contribute assets directly into the network validation process—from yield-bearing or managed staking schemes. The SEC clarified that solo staking, delegated or custodial staking tied to consensus do not constitute securities under the Howey test. However, products promising pooled returns—like staking services that resemble passive investment—remain under scrutiny.

In other words, personal and network-centric staking is increasingly recognized as lawful, while exchange-managed staking with pooled rewards still triggers securities regulation.

5. Taxation and Compliance Considerations

From a taxation perspective, California aligns with federal tax treatment: staking rewards are taxable as ordinary income when received, and any subsequent sale or exchange triggers capital gain or loss reporting. Unlike some other states, California does not offer preferential capital gains rates—all crypto gains are treated as ordinary income, with rates ranging from 1% to 13.3% depending on income level.

This dual pressure—regulatory prohibition plus tax liability—creates a complex compliance landscape for staking participants in California.

6. Community Sentiment

Reddit discussions reflect frustration among crypto users:

“Staking in California is still totally legal if you can do it all by yourself, but you won’t be able to do it via centralized exchange.”
—Reddit

Another user lamented:

“California is requiring us to limit your access to ongoing Coinbase staking services.”
—Reddit

These insights highlight how regulations specifically target centralized platforms—not self-custodied or decentralized protocols.

Comparison Chart: Staking Regulations

Here’s a quick look at how California’s approach stacks up against other states and federal guidance:

Region/Authority	Centralized Exchange Staking	Liquid Staking (Lido, Rocket Pool)	Solo/Delegated Staking
California (DFPI)	Restricted – treated as unregistered securities	Allowed but under observation	Allowed
New Jersey	Restricted – Coinbase/Kraken banned	Allowed	Allowed
Texas	More lenient – exchanges operate but under scrutiny	Allowed	Allowed
Florida	No direct restrictions yet	Allowed	Allowed
SEC (Federal)	Restricted if pooled/yield-based	Gray area	Allowed

The Impact on California Investors

The restrictions on crypto staking have significant implications for California investors. Staking offers a way to earn passive income, with platforms like Coinbase reporting yields of up to 12% annually, far surpassing traditional savings accounts. By limiting access to these services, California residents are excluded from a growing segment of the digital asset economy, with staked assets valued at $42 billion globally in Q4 2022.

Moreover, the lack of clear regulatory guidelines creates uncertainty, discouraging innovation and investment in the state’s crypto sector. Investors are also at risk due to the absence of protections like FDIC or SIPC insurance, which the DFPI cites as a reason for its stringent oversight. For those interested in staking, alternatives like non-custodial staking or running personal validator nodes exist, but these require technical expertise and may not be feasible for all investors.

The Future of Crypto Staking in California

Looking ahead, the future of crypto staking in California remains uncertain. The state’s Digital Financial Assets Law (DFAL), effective July 1, 2025, imposes licensing requirements on digital asset businesses, further complicating the operation of staking services. While Coinbase and other platforms are actively challenging these regulations in court, advocating for staking as a non-security activity, the outcome of these legal battles will shape the industry.

California’s approach could set a precedent for other states, as it has historically been a leader in crypto policy. Stakeholders, including exchanges and advocacy groups like the Crypto Council for Innovation, are pushing for regulatory clarity to balance consumer protection with innovation. Until then, California investors must navigate a restrictive landscape, potentially seeking decentralized or non-custodial staking options to participate in this lucrative aspect of the crypto economy.

Frequently Asked Questions

Is staking crypto illegal in the US?

Staking crypto is not illegal in the U.S., but it is regulated. Investors can stake through exchanges or directly on blockchain networks. However, the SEC has scrutinized some staking programs, arguing they may qualify as securities offerings. Major platforms like Coinbase and Kraken offer staking but face regulatory oversight. Users should check platform compliance and understand potential tax implications before participating in staking within the U.S.

Is crypto banned in California?

Crypto is not banned in California. In fact, the state is one of the most active hubs for blockchain and crypto innovation. While cryptocurrencies are legal to buy, sell, and use, businesses dealing with digital assets must follow state and federal regulations. California has also introduced the Digital Financial Assets Law, set to increase oversight of crypto firms. Residents can freely trade, invest, and use crypto within legal guidelines.

Why is staking not allowed?

Staking isn’t universally disallowed, but in some regions or platforms it’s restricted due to regulatory concerns. Authorities like the SEC argue that certain staking services resemble unregistered securities, requiring stricter compliance. Additionally, some exchanges suspend staking to avoid legal risks or protect users from potential losses. The restrictions mainly aim to ensure investor protection, prevent fraud, and align staking services with existing financial laws.

Will California allow crypto staking?

California has not banned crypto staking, and residents can currently stake through compliant platforms. However, future rules may tighten under the state’s upcoming Digital Financial Assets Law, which seeks to regulate crypto businesses more closely. While staking itself is not prohibited, providers must ensure they meet federal and state requirements. As regulations evolve, California is expected to allow staking but under stricter compliance and consumer protection standards.