Ethereum’s proof-of-stake update 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 said that cryptocurrencies and intermediaries that allow holders to “distribute” their cryptocurrency can define it as a security under the Howey test, according to The Wall Street Journal.
“From the currency perspective […] this is another indication that under Howey’s test, the investing public is anticipating profits based on the efforts of others,” WSJ Gensler said.
The comments came on the same day that Ethereum (ETH) transitioned to proof-of-stake (PoS), meaning the network will no longer rely on energy-intensive “proof-of-work” mining and, instead, it allows validators to verify transactions. and create new blocks in a process involving “staking”.
Gensler said that allowing holders to stake coins allows “the investing public to anticipate profits based on the efforts of others.”
Gensler went on to say that the brokers who offer staking services to their clients “look very similar – with some labeling changes – to loans.”
The SEC has previously said it did not view ETH as a security, with the Commodity Futures Trading Commission (CFTC) and SEC agreeing that it acted more like a commodity.
The SEC has been keeping a close eye on the crypto space, especially those it alleges are securities. The regulator has been embroiled in a case against Ripple Labs regarding the launch of the XRP token.
The SEC has also pushed companies that offer crypto-lending products to register, including a $100 million fine aimed at BlockFi in February for failing to register high-yield 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 more than six years “that POW to POS transitions can get attention regulatory”.
To be clear, I’m not saying that ETH is necessarily a security because of its proof model, but regulators are talking about betting in the context of dividends, which is a feature of what securities laws call a “common enterprise” . There are other factors in the Howey test as well.
— Gabor Gurbacs (@gaborgurbacs) September 15, 2022
Gurbacs clarified that regulators refer to wagering rewards 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 established whether a transaction qualifies as an investment contract. If it does, it would be considered a security and is covered by the Securities Act of 1933.