We are in a post-merger world. And the SEC is again looking at Ethereum after the substantial changes it has undergone recently. Word on the street is that Chairman Gary Gensler, speaking after the merger for the first time, hinted that Ethereum could now be a security. What exactly did Gensler say? What is a security? Is the SEC targeting post-merger Ethereum?
For one thing, Ethereum mining could have been the element that kept the organization out of the unregistered security category. After the merger, there is no mining and there is still the big premise problem at the beginning of Ethereum. On the other hand, we could say that the miner’s substitutes, the validators, do not receive dividends. The reward is compensation for your work. Under this lens, betting would not be an investment of any kind.
Years ago, the SEC said that Ethereum is a commodity and not a security. The changes were substantial, however. ETH is a completely different animal after the merger. Does Securities and Exchange Commission Chairman Gary Gensler see that as a goal? Or are people reading too much into his words?
What Chairman Gensler Said About A Post-Merger Ethereum
Nothing, actually. His statements were about cryptocurrencies in general. However, after a congressional hearing, Gensler he told reporters:
“From a currency perspective … this is another indication that, under the Howey test, the investing public anticipates profits based on the efforts of others.”
But what is the Howey test? Seconds on Investopedia, the Howey test refers to “four criteria for determining whether an investment contract exists.” The Supreme Court established them by ruling in “SEC v. WJ Howey Co.” in 1946. The criteria are:
- An investment of money
- In a common company
- With the expectation of profit
- Derive from the efforts of others
So this is what President Gensler was referring to in his subsequent hearing with Congress. Was he talking about Ethereum specifically? Is post-merger Ethereum a security? According to Gabor Gurbacs, VanEck’s strategy advisor, among other things, it’s not about that. Even if it’s not a security, Ethereum was bound to attract regulatory attention after the merger.
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
And Ethereum could be a security, according to Gurbacs:
“I’m not saying that ETH is necessarily a security because of its proof-of-concept model, but regulators are talking about betting in the context of dividends, which is a characteristic of what securities laws call a ‘common enterprise.’ there are other factors in the Howey test.”
ETH price chart for 09/16/2022 on Gemini | Source: ETH/USD on TradingView.com
Is betting similar to… loans?
The WSJ contextualized a tiny but very telling sentence from President Gensler:
“If an intermediary, such as a cryptocurrency exchange, offers participation services to its customers,” Mr. Gensler said, “it looks very similar, with some labeling changes, to lending.”
Does it, though? It seems like a stretch at first hearing, but… does the bettor lend their ETH to the exchange and get dividends in return? There may be a case against post-merger Ethereum. That’s not what professor, investor, and marketing/strategy executive Adam Cochran thinks, though. “At first brush, the idea of ’buy chips, bet chips, win chips’ may seem like a security – I get it,” he concludes after an attractive and compelling. elaborate thread.
“But with a nuanced understanding of how a proof-of-stake chain works, I think it’s not a security even on a generous reading of Howey’s proof.
If the SEC were to argue that Ethereum is a security, I personally don’t see that view being made *more likely’ by the change to the proof of stake, and I certainly don’t think anyone has reason to definitively claim it as such. .”
If the SEC were to argue that Ethereum is a security, I personally don’t see that view being made *more likely’ by the change to the proof of stake, and I certainly don’t think anyone has reason to definitively claim it as such. .
— Adam Cochran (adamscochran.eth) (@adamscochran) July 24, 2022
To add to the pile, Gurbacs, who argued for the Ethereum-is-a-security case, had this to say to conclude:
“I believe that computer programs that are not used to collect money or promise dividends should not be classified as security. Listings and small businesses need a lighter and cheaper regulatory regime to register. The current system is complex and cost prohibitive.”
Is this the way to go?
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