Post-Merge Ethereum Could Be Securities Now, SEC Says
On Thursday, September 15th, SEC Chairman Gary Gensler hinted that post-merge Ethereum could now possibly classify as Securities due to the nature of staking yields.
With Ethereum’s Merge to Proof-of-Stake consensus, this yields the blockchain a number of benefits, including lower energy consumption and possibility for further upgrades in the future. However, another change it could bring may also include the regulations that may be enforced onto the cryptocurrency now.
For many years now, Gensler has stated his belief that most cryptocurrencies aside from Bitcoin are securities. Though many in the crypto community have argued that Ethereum should also count as a commodity along with Bitcoin.
Despite this however, Gary Gensler recently argued that native assets of blockchains that use the Proof-of-Stake consensus, like Ethereum now, could actually technically pass the Howey test, causing them to be identified as securities.
The Howey Test itself is a test that is able to determine whether an asset qualifies as an “investment contract”. If they do, this would render them to be subject to federal security laws.
The four criteria of the Howey test include whether the asset is an investment of money, whether there is an expectation of profits from the investment, whether the investment of money in a common enterprise, and finally, whether any profit comes from the efforts of a promoter or third party.
Gensler argues that with Proof-of-Stake based blockchains, all four criteria are met as investors are technically also expecting profit from the efforts of validators that stake ETH tokens.
“From the coin’s perspective…that’s another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others.” He reportedly said.
Arguments Against This
Not everyone agrees with Gensler’s statements however. The non-profit organization focused on crypto policy Coin Center, for example, argued that regulations shouldn’t be changed due to the fact that Ethereum had moved to a PoS consensus.
They argued that classification of securities are based on “ongoing reliance for profits derived primarily from the efforts of others.” This does not line up with either Proof-of-Work or Proof-of-Stake consensus cryptocurrencies however, as both consensus mechanisms are designed to avoid these reliance.
They do this by “creating an open competition amongst strangers wherein any self interested participant can and will fill the gap left by any other unresponsive, corrupt, or censorious participant,” Coin Center explains in their blog post.