Ether stakes could trigger securities laws – Gensler
Ethereum’s upgrade to proof-of-stake may have put the cryptocurrency back in the crosshairs of the Securities and Exchange Commission (SEC).
Speaking to reporters after the Senate Banking Committee on September 15, SEC Chairman Gary Gensler reportedly said that cryptocurrencies and intermediaries that allow holders to “stake” their crypto can define it as a security under the Howey test, according to The Wall Street Journal.
“From the perspective of the coin […] it’s another indication that under the Howey test, the investing public expects profits based on the efforts of others,” the WSJ told Gensler.
The comments came on the same day as Ethereum̵[ads1]7;s (ETH) transition to proof-of-stake (PoS), meaning the network will no longer rely on energy-intensive “proof-of-work” mining and instead allow validators to verify transactions and create new blocks in a process involving “staking”.
Gensler said that allowing holders to stake coins results in the “investing public expecting profits based on other people’s efforts.”
Gensler went on to say that intermediaries who offer betting services to their clients “look very similar – with some changes in the labeling – to lending.”
The SEC has previously said that it did not view ETH as a security, with both the Commodity Futures Trading Commission (CFTC) and the SEC agreeing that it functioned more like a commodity.
The SEC has been keeping a close eye on the crypto space, especially those it claims are securities. The regulator has been involved in a case against Ripple Labs regarding the launch of the XRP token.
The SEC has also pressured firms that offer crypto-lending products to register with them, including a $100 million penalty levied against BlockFi in February for failing to register high-interest accounts that the SEC considers securities.
Gabor Gurbacs, director of digital asset strategy at US investment firm VanEck, tweeted to his 49,300 followers that he had been saying for over six years “that transitions from POW to POS could draw regulatory attention”.
To be clear, I’m not saying that ETH is necessarily a security because of the proof model, but regulators are talking about stakes in the context of dividends that are a feature of what securities law calls a “joint enterprise.” There are also other factors in the Howey test.
— Gabor Gurbacs (@gaborgurbacs) 15 September 2022
Gurbacs went on to clarify that regulators refer to rewards from effort as dividends, which is a feature of the Howey test.
Related: Crypto developers should work with the SEC to find common ground
The Howey test refers to a Supreme Court case in 1946 where the court determined whether a transaction qualifies as an investment contract. If it does, it will be considered a security and covered by the Securities Act of 1933.
