SEC: Ethereum’s New PoS Model Could Put It Under Securities Laws

Gary Gensler, the chairman of the U.S. Securities and Exchange Commission, stated on September 15, 2022, that digital currencies and intermediaries that allow users to “stake” their coins might all be regulated as securities. With Ethereum now a Proof-of-Stake (PoS) based token, regulators may soon categorize it as a security rather than a commodity like Bitcoin (BTC).

Ether May Finally Become a Security

SEC chairman Gary Gensler engaged reporters after the Senate Banking Committee hearing on September 15, reportedly stating that cryptocurrencies and intermediaries that allow holders to “stake” their crypto may be defined as securities under the Howey test, according to The Wall Street Journal.

“From the coin’s perspective […] that’s another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others,” Mr. Gensler told reporters after a congressional hearing. He said he wasn’t referring to any specific cryptocurrency.

Gensler made those remarks the same day Ethereum finally switched to the proof-of-stake consensus mechanism. This implies that the Ethereum network will no longer rely on the proof-of-work consensus, which consumes a lot of energy.

The Ethereum team claims the switch to proof-of-stake reduces energy consumption by 99 percent by allowing validators to confirm transactions and create new blocks through a process called staking.

Gensler has made it clear that allowing holders to stake coins results in “the investing public anticipating profits based on the efforts of others.” He also claimed that intermediaries providing staking services to their clients “look quite similar to lending.”

The Commodity Futures Trading Commission (CFTC) and the SEC have previously stated that they did not view ETH as a security because it behaved more like a commodity. However, that narrative may change shortly.

PoS Blockchains and the Howey Test

The Howey Test refers to the U.S. Supreme Court litmus for determining whether a transaction qualifies as an “investment contract,” and therefore would be considered a security.

Per the Howey test, an asset can be called security if the contracts involve an investment of money with the expectation of profit, and is based on other people’s efforts in a common enterprise.

While crypto staking activities may not completely tick all the boxes in the Howey Test, regulators may still bundle all PoS-based digital assets under the securities umbrella. How the SEC and CFTC will classify Ether going forward remains to be seen.

While the Proof-of-Work (PoW) consensus algorithm is often criticized for its energy usage, proponents still see it as the only true consensus mechanism for the issuance of digital commodities.

MicroStrategy’s Michael Saylor recently released a blog post in support of the PoW mechanism, arguing that contrary to what critics of proof-of-work algorithms say, Bitcoin (BTC) mining is the most efficient, cleanest, industrial use of electricity. 

Saylor says hos who criticize PoW-based tokens such as Bitcoin, do so in a bid to distract regulators “from the inconvenient truth that PoS cryptocurrencies are generally unregistered securities trading on unregulated exchanges to the detriment of retail investors.” At press time, the price of ETH is hovering around the $1,467 price region.