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CORRESP
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filename1.htm

BTCS
Inc.

9466
Georgia Avenue #124

Silver
Spring, MD 20910

October
16, 2023

VIA
EDGAR

Securities
and Exchange Commission

Division
of Corporation Finance

Office
of Crypto Assets

Re: BTCS
                                            Inc.

 Form
                                            10-K for the Fiscal Year Ended December 31, 2022

 Filed
                                            March 31, 2023

 Form
                                            10-K/A for the Fiscal year Ended December 31, 2022

 Filed
                                            April 27, 2023

 File
                                            No. 001-40792

Ladies
and Gentlemen:

This
letter is submitted by BTCS Inc. (the “Company” or “BTCS”) in response to the comment letter dated September
21, 2023 issued by the Staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission
(the “Commission”) with respect to the Company’s Form 10-K and Form 10-K/A for the Fiscal Year Ended December 31, 2022.

For
your convenience, each of the Staff’s comments have been restated below in their entirety, with the Company’s responses set
forth immediately beneath such comment.

Annual
Report on Form 10-K for the Fiscal Year Ended December 31, 2022

General

1. Please
                                            provide us with your legal analysis as to why you believe your activities supporting staking-as-a-service
                                            are executed in compliance with the federal securities laws, including why the agreements
                                            related to the staking-as-a-service program are not securities under Section 2(a)(1) of the
                                            Securities Act. In responding to this comment, please include a materially complete description
                                            of the program.

Response:

BTCS
Staking as a Service Program Overview

BTCS
uses its blockchain infrastructure to operate validator nodes on various proof of stake-based blockchain networks. In connection with
the validation of transactions occurring on those blockchain networks, BTCS stakes digital assets native to those blockchains in order
to earn staking rewards. BTCS also uses its blockchain infrastructure to validate and sign transactions on behalf of customers that delegate
their validation to BTCS-operated validator nodes (referred to as “Staking as a Service” or “StaaS”). Unlike
Coinbase and Kraken, BTCS does not take custody and pool customer crypto assets or customer crypto rewards; rewards are sent directly
to customers by the respective blockchain network and are never in BTCS’s possession. Similarly, BTCS, unlike Coinbase and Kraken,
only offers StaaS for delegated proof of stake blockchains, not proof of stake blockchains like Ethereum. While BTCS does stake Ethereum
which is a proof of stake blockchain it only does so with its own crypto assets. The key differentiating factor is that BTCS does not
take possession of users’ private “keys” or “crypto” as further detailed herein.

Securities and Exchange Commission

October 16, 2023

Page 2

StaaS
providers are operators of computer infrastructure and validation software that allow them and their delegators (collectively, the “Delegators”
and each, a “Delegator” or as may be referred to herein as “clients”, “customers” or “users”),
to stake certain blockchain-based digital assets native to blockchain networks (“native digital assets”) utilizing a delegated
Proof of Stake (“dPoS”) consensus protocol. dPoS protocols provide for the validation of transactions on the related network
as well as a “sybil resistance” mechanism to help secure the network.

The
nodes comprising a blockchain network use a protocol (or set of rules) to reach an agreement as to whether a given transaction proposed
by a user of the network is valid under the rules of the protocol and should be added to the ledger (such agreement being referred to
as “consensus”). Protocols typically group transactions into blocks that can only be added to the common ledger when validated
by a sufficient percentage of a dispersed network of unrelated computers or servers called “nodes” in the network. A complete
record (or “blockchain”) is maintained on the ledger by adding these groups (or “blocks”) of transactions to
the chain, and the nodes constantly automatically monitor the blocks to ensure record accuracy.

dPoS
networks rely on validators who own native digital assets and operate nodes for the network to confirm the validity of the transactions
comprising each block to be added to the network ledger. The dPoS protocol software run by the relevant network nodes generally determines
the validator node for each block at random, though each blockchain may have differing selection criteria. To be eligible to validate
transactions and to mint new blocks to the chain, validators are required to “stake” the relevant native digital assets whereby
validators commit value (in the form of the native digital asset) to the underlying network and lock their native digital assets, preventing
them from otherwise transacting with those native digital assets while they are staked. The dPoS mechanism is a sybil-resistance tool
(fights against attacks on nodes) that incentivizes validators to confirm transactions that conform to the rules of the protocol at the
risk of losing their staked assets (“slashing”). Validators utilizing their native digital assets to participate in dPoS
protocols secure the relevant network and receive staking rewards for doing so.

Validators
in a dPoS network collect newly minted native digital assets and sometimes receive other transaction fees for the blocks they validate.
These “rewards” in the dPoS network encourage validators to participate in the network and thereby help to secure and decentralize
the network.

Securities and Exchange Commission

October 16, 2023

Page 3

A
StaaS provider maintains a ministerial role in validating transactions on a given dPoS network on behalf of its delegators by (1) arranging
transactions using open-source software to stake the relevant digital assets; (2) monitoring the nodes it is operating to ensure the
computers remain online to validate transactions; and (3) verifying transactions on the network when required.

Depending
on the dPoS network, a holder of native digital assets can generally participate in staking in three different ways: (1) act as principal,
staking their own digital assets as collateral ; (2) delegate their ability to participate in transaction validation to a third-party
StaaS provider, such as BTCS, allowing the provider to validate new transaction blocks on the underlying network; or (3) give custody
of their digital assets to a provider (e.g., Coinbase or Kraken), who then acts as principal to stake the assets and validate transactions
on the owner’s behalf.

BTCS
does not take custody of native digital assets on behalf of clients in connection with providing StaaS and all delegated assets
are subject to the rules of the respective blockchain.

Securities
Law Analysis

From
a securities law perspective, the key question is whether a StaaS scheme or arrangement constitutes a “security.” The federal
securities laws define the term security to include a variety of different assets.1 For purposes of an analysis of whether
the non-custodial staking business of BTCS involves the sale or purchase of a security, the key statutory phrase is “investment
contract.” Digital assets, or transactions involving digital assets, that are not plainly one of the other types of securities
enumerated in Section 2(a)(1) of the Securities Act or Section 3(a)(10) of the Exchange Act may still be deemed to constitute part of
an “investment contract” and, therefore, be considered securities by the SEC.2

The
test to determine whether a particular scheme would be considered an “investment contract” was established in SEC. v.
W.J. Howey Co., 328 U.S. 294 (1946), and has come to be known as the “Howey test”.3 The Howey
test looks at whether the scheme involves:

(1)
an investment of money;

(2)
in a common enterprise;

(3)
with the reasonable expectation of profits; and

(4)
solely from the efforts of others. This last prong of the Howey test has been modified by subsequent case law to require an expectation
of profits derived from the essential managerial efforts of others.4

1
Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77b(a)(1) (2023); Securities Exchange Act of 1934 (the
“Exchange Act”), 15 U.S.C. § 78c(10) (2023) (defining “security” and listing a variety of assets that are
considered securities including an “investment contract”).

2
See SEC v. Edwards, 540 U.S. 389, 393 (2004) (defining an investment contract as a definition that “embodies a flexible
rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek
the use of the money of others on the promise of profits” (quoting SEC v. W.J. Howey Co., 328 U.S. 293, 299 (1946)).

3
SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946); see also SEC. v. Edwards, 540 U.S. 389, 393 (2004).

4
SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476, 482 (9th Cir. 1973).

Securities and Exchange Commission

October 16, 2023

Page 4

All
four elements of the Howey test must be present for a scheme to be considered an “investment contract” under this
test. As detailed below the economic reality of BTCS’s non-custodial StaaS program does not meet any of the four elements of the
Howey test and does not create an investment contract.

 I. Investment
                                            of Money

BTCS’s
StaaS service is non-custodial meaning BTCS never takes possession or has control of either a delegator’s staked crypto assets
(private keys) or the reward earned for staking their crypto assets so therefore does not involve an investment of money. In November
2022 BTCS submitted an inquiry to the SEC’s Strategic Hub for Innovation and Financial Technology (“FinHub”) which
outlines three methods in which staking can be performed. See Schedule 1. The SEC was unable to provide guidance that having staking
rewards “flow through” BTCS to delegators would not inadvertently create a security under the Howey test. As such
BTCS elected to implement non-custodial staking (aka Native staking) which clearly does not create a security under the Howey
test.

While
delegators use the assets they own, and give up alternative uses of those assets during the time they are staked, the opportunity cost
of staking is not an investment. Unlike stakers in custodial platforms, those who use BTCS’s non-custodial StaaS retain full ownership
and control over their crypto assets at all times, which means, by definition, there cannot be an investment. By contrast, in Howey,
the investors had no custody of the orange grove they invested in. Instead the passive investors entered into a services contract with
W. J. Howey Co., and the primary risk they faced was not a breach of contract, but the financial risk of a failed enterprise. If the
company failed in its management of the enterprise, or if other risks such as poor weather or a depressed orange market intervened, there
would be insufficient oranges to sell to make up the investors’ losses. The investors were betting on the ability of the company
to successfully grow and sell oranges at a profit meaning the company could perform every promised action and yet the investors could
still face a loss. This analog does not exist with BTCS’s non-custodial StaaS model. Delegators are not betting on the success
of BTCS or its StaaS platform as an enterprise. Delegators are using existing staking protocols to reap a benefit, which they could do
directly or through a service provider as a convenience. While there is a risk that the service could fail to achieve the promised capabilities,
that failure would be a breach of contract, not a failed investment.

Any
rewards the users receive are not investment gains. Reward payouts are paid by the blockchain network directly to a delegator’s
wallet and are simply the result of the successful performance of compliant validation in which the delegator participates, which is
dictated by the blockchain protocol, not BTCS. There is neither the risk that the service provider will fail to make good choices about
staking, nor that the provider failed to accurately predict and adjust for market events. There is only the risk that the provider did
or did not comply with a prescribed set of rules. That is simple contractual risk—no different than the risk a company faces when
hosting its website on Amazon Web Services, or what a car owner faces when trusting a vehicle to a mechanic, or what a homeowner faces
in trusting the completion of renovations to a contractor. Such a simple contractual risk is not the type of risk the securities laws
were intended to address.

Securities and Exchange Commission

October 16, 2023

Page 5

Whether
an investment of cash or other assets, the courts have agreed that there must be risk of financial loss. The “investment of money”
prong narrows the types of financial risk that securities laws and regulations concern itself with. The risk of financial loss must be
the type of loss that accompanies an investment and not the risk that every party to a contract faces when depending on the other party
to perform its obligations under the contract. The risk of financial loss is simply absent from the use of BTCS StaaS validator nodes,
and therefore only a contract for services exists. BTCS delegators can delegate and withdraw their supported native digital assets as
they see fit, subject to the rules of the particular blockchain protocol. Because delegators always retain custody and control over their
supported native digital assets (both staked and rewards) and can withdraw them from the BTCS StaaS arrangement at will there is no “investment
of money.” Finally, in the event a BTCS creditor were to attempt to seize delegated assets, the creditor would only be successful
in seizing BTCS’s own assets) because BTCS does not have custody of delegated assets. Moreover, creditors would not have a valid
legal claim to delegated assets.

 II. Common
                                            Enterprise

There
is no common enterprise among Delegators or between Delegators and BTCS with its StaaS service regardless of whether the definition of
vertical or horizontal commonality is used.5

Investors
in a common enterprise need the protections of the federal securities laws because the fate of their investment is tied to the fate of
the enterprise—either through the seller, promoter, or third party. In many ways this analysis of vertical commonality is similar
to the fourth prong of Howey described infra in Section IV below. This vulnerability is categorically different from the kind
of routine counterparty risk that can be mitigated by ordinary commercial due diligence, and that is entirely independent of the counterparty
risk faced by other customers of a provider. In the context of BTCS StaaS, BTCS does not take custody of delegator assets, meaning they
are not joined together in the context of the Howey test, there is no horizontal commonalty, and therefore no “common enterprise.”

Users
of native staking or non-custodial staking retain full authority over their assets, with the ability to unstake them, sell, hypothecate,
vote, pledge, or otherwise dispose of them independently from the service provider and its other delegators. Since the assets belong
to the user throughout, the failure of the entire staking service provider such as BTCS StaaS has no effect on the user’s property
rights. The user would only need to find a new provider, or create the necessary set-up to engage in staking as an individual.

5
See Brodt v. Bache & Co., Inc., 595 F.2d 459, 4