Key Takeaways:
- Proof-of-stake cryptocurrencies may be considered investment contracts, making them subject to securities laws, according to SEC Chair Gary Gensler.
- Its native ether currency was one of only two cryptos, along with bitcoin, that was explicitly classified as commodities by federal regulators as a proof-of-work chain.
The cryptocurrency industry is embroiled in debates over whether Ethereum (ETH), which recently completed its switch to proof-of-stake, can now be deemed a security or not.
Gary Gensler, the chairman of the Securities and Exchange Commission, stated on Thursday that digital currencies and intermediaries that permit users to “stake” their coins may be able to pass a crucial test used by courts to assess whether an asset is a security.
The Howey test looks at whether or not investors anticipate receiving a return from the effort of third parties.
After testifying before Congress, Gensler restated his conviction that the majority of crypto assets are securities in this remark. He stated:
From the viewpoint of the coin, this is another indication that, in accordance with the Howey test, the investing public expects to make money from the labor of others.
The remarks were made the same day that Ethereum switched from proof-of-work (PoW) mining to proof-of-stake (PoS), allowing validators to validate transactions and build new blocks through staking. As a result, the network will no longer be dependent on energy-intensive PoW mining.
According to Gensler, allowing holders to stake coins causes “the investing public to anticipate returns based on others’ efforts.”
Under rules passed in the 1930s, issuers of securities—a class of assets that includes stocks and bonds—are required to file thorough disclosures with the SEC.
Strict regulations that are intended to safeguard investors from conflicts of interest must be followed by exchanges and brokers that enable the trading of securities. If they sell any assets that the SEC or courts judge to be securities, cryptocurrency issuers, and trading platforms will be held strictly liable.
The Commodity Futures Trading Commission (CFTC) and the SEC consented that Ether (ETH) behaved more like a commodity and that they did not view it as a security.
Some members of the cryptocurrency industry claimed that Gensler’s assertion implied Ethereum may now be categorized as a security.
With Ethereum’s transition to PoS, the asset will join a number of other blockchains that support smart contracts and use staking to protect their network.
The SEC has been closely monitoring the cryptocurrency market, especially those it claims are securities. In relation to the introduction of the XRP token, the regulator has been involved in a case against Ripple Labs.
Members of the community, including @adamscochran and @gaborgurbacs, believe it is a completely baseless FUD spread by organizations that are indifferent to the technology.
It is also important to note that regulators mention staking in the context of dividends, which is one characteristic of what securities laws refer to as a “common enterprise.”
There is a heated debate over which government agencies and the congressional committees they report to have jurisdiction over cryptocurrency.
The Senate Banking Committee, which controls the SEC, conducted a meeting Thursday in parallel with the Senate Agriculture Committee, which oversees the Commodity Futures Trading Commission, to allow senators to interview Mr. Gensler.
The SEC has a strict disclosure framework that crypto advocates claim is expensive and impracticable, and the industry has made it clear a lot of times that it prefers to be overseen by the CFTC.
Millions of dollars have been spent by cryptocurrency companies petitioning legislators on their behalf.
As far as the issue of tokens and financial instruments involving tokens is concerned, there hasn’t been enough clarity. This has both helped and hurt the community.
