The United States Securities and Exchange Commission (SEC) is considering classifying Ethereum as securities following its upgrade to proof-of-stake (PoS).
PoS Cryptos May Be Securities
In a report by the Wall Street Journal, the SEC chair was quoted as having said crypto assets that allow staking may be defined as securities under the Howey test. Because staking is done with the anticipation of profit based on others’ efforts, the Howey test sees this as a security product.
Gary Gensler’s statement came after Ethereum completed its move to the PoS consensus algorithm.
This signals the end of using the energy-intensive Proof-of-Work (PoW) protocol. Validators would be able to verify transactions and build new blocks. The process of designing new blocks is known as “staking.”
According to Gensler, when holders stake coins, investors anticipate profits based on the efforts of the coin owners. Moreover, Gensler added that entities offering staking services could be likened to some aspects of lending.
However, before the Merge, the SEC revealed that Ethereum is not a security. The Commodity Futures Trading Commission (CFTC) agreed with the SEC statement. They both see Ethereum as a commodity. As a result, the latest development may appear confusing to members of the Ethereum community.
However, Gabor Gurbacs of VanEck, a U.S.-based crypto investment firm, sees this differently. Gurbacs noted that he talked about how the PoW to PoS transition will draw regulatory scrutiny.
According to him, the regulators see the rewards from staking as dividends. And this is part of the Howey Test.
The SEC’s Alleged “Regulations by Enforcement”
The SEC’s frequent but often conflicting information about crypto tokens has put it in a face-off with several crypto exchanges.
The crypto space has been under scrutiny by the SEC for quite some time. The regulator has been hot on the heels of those crypto exchanges that the SEC alleges offer security tokens without approval.
Moreover, Ripple vs. the SEC is the perfect example of what the commission has been up to recently. Ripple Labs Inc. is involved in a long-dragging lawsuit against the regulator. The SEC has slammed heavy penalties on Ripple over the launch of its XRP token.
However, the commission has been accused of using regulations by enforcement to pressure crypto exchanges into registering with it. The case of BlockFi’s $100 million penalty shows how far the SEC under Gensler can go.
Meanwhile, the absence of regulatory clarity in the American crypto space is one of the issues service providers face. Both the SEC and CFTC are claiming jurisdiction over the crypto industry. This has made the clamor for comprehensive regulations more pronounced than ever before.
It is worth noting that the Howey Test was a U.S. Supreme Court case in 1946. The court declared that transactions that qualify as an investment contract are considered securities. This is under the Securities Act of 1933.
Meanwhile, Gensler’s remarks may mean another round of debates about Ether staking is in the offing.
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