Amanda Fischer, the former Chief of Staff at the Securities and Exchange Commission (SEC), has issued a blunt warning following the regulatory agency's Division of Corporation Finance revealing its latest stance on liquid staking activities.

On Aug. 5, the Division released a statement as per which certain liquid staking activities associated with protocol staking don't constitute the sale of securities, and therefore, parties associated with these activities need not register with the SEC under the securities laws.

Let's first break down the concept of liquid staking.

Crypto staking refers to the process of staking or locking up your digital assets like Ethereum to help secure a proof-of-stake (PoS) blockchain and earn rewards in exchange.

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Liquid staking goes one step further and lets you not only stake your crypto assets in exchange for rewards but also doesn't lock up those assets and instead makes them liquid so that they can continue to be traded.

This is how the process takes place.

When you stake your crypto assets, you receive a tokenized version of these assets, such as sETH, which can be traded in the market.

While the SEC Chairman Paul Atkins hailed the statement for offering clear guidance on crypto, Fischer slammed it as giving validation to "rehypothecation" that led to the collapse of the Lehman Brothers.

Rehypothecation is the practice of a lender using collateral received from a borrower for their own benefit, often to secure their own loans or participate in other transactions. Note that the practise played a crucial role in the Lehman Brothers collapse and subsequent 2008 financial crisis.

Since the new guideline allows rehypothecation in crypto without the SEC or Fed's oversight, it's worse, Fischer argued.

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Staking crypto assets and receiving duplicate tokens for trading is no different from Lehman Brothers borrowing customers' assets and using them as collateral to make other bets in the market, she warned.