Yesterday was a historic day for Ethereum (ETH), the largest altcoin. The network has completed the transition from proof-of-work (PoS) consensus algorithm to proof-of-stake (PoS). This was met with enthusiasm in the cryptocurrency market. However, this transition, which is described as a “merge”, was also in the focus of regulators. Comment on the subject came from the head of the US Securities and Exchange Commission (SEC). SEC Chairman Gary Gensler spoke about this shift in ETH.
Leading altcoin ETH targets Gensler
Shortly after the Merge event on September 15, SEC chairman Gary Gensler made a statement. Speaking to reporters after the Senate Banking Committee on Sept. 15, Gensler said that cryptocurrencies and brokers that allow their holders to “stack” their crypto could identify ETH as a security under the Howey test, according to The Wall Street Journal.
The Howey test, as we report at Kriptokoin.com, determines whether investors expect returns from the work of third parties. Gensler also used the following statements:
From Coin’s point of view […] this is another indication that, under the Howey test, the investing public expects profits based on the efforts of others.
SEC and CFTC considered ETH a “commodity”
Gensler said that allowing holders to stake the coins results in “investors predicting profits based on the efforts of others.” The SEC Chairman said that brokers that offer staking services to their clients are “similar to lending platforms with some modifications.” Previously, both the Commodity Futures Trading Commission (CFTC) and the SEC have stated that they do not view ETH as a security. They acknowledged that ETH “acts more like a commodity.”
The SEC has been keeping a close eye on the cryptocurrency space, with some projects specifically claiming to be securities. For example, the regulator was involved in a lawsuit against Ripple regarding the launch of the XRP token. It also reacted in February to BlockFi’s failure to record the institution’s high-yielding interest accounts, which it sees as securities. That’s why it forced companies offering crypto loan products to register with the agency, including a $100 million penalty.
VanEck director warns of merge
Gabor Gurbacs, VanEck’s director of cryptocurrency strategy, said the merger could attract regulators’ attention. He tweeted that he’s been telling his 49,300 followers for more than six years that “switching from POW to POS could draw regulatory attention.” Gurbacs clarified that regulators refer to rewards from staking as dividends, a feature of the Howey test.
To be clear, I am not saying that ETH is necessarily a security because of its proof model, but regulators do talk about staking in the context of dividends which if one feature of what securities laws call a "common enterprise". There are other factors in the Howey test too.
— Gabor Gurbacs (@gaborgurbacs) September 15, 2022
The Howey Test refers to a Supreme Court case in 1946 in which the court determined whether a transaction qualifies as an investment contract. If the transaction is an “investment contract” then it is considered a security. Thus, it is covered by the Securities Act of 1933.
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