Ether Proof-of-Stake Could be Classified as a Security – SEC Chairman

September 16, 2022

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The wait for the Ethereum transition to proof of stake is finally over after the successful merge on Thursday, an event that led to Ether attracting the US Securities and Exchange Commission.

According to a recent report by the Wall Street Journal, SEC chairman, Gary Gensler has hinted about Ether, which according to him, the recent transition to proof-of-stake could be enough reason to push Ether out of its current legislation and make it security.

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Ethereum Proof-of-Stake Could Pass Howey Test

For a crypto to be classified as a security, it has to pass the Howey Test, a tool used to determine whether a crypto could be considered a security or not.

Howey Test was named after a landmark 1946 case that assisted in determining what’s security and what’s not, if a transaction should pass the test, it is assumed to be an investment contract and subsequently registered with the SEC. 

Prior to September 15, 2022, Ether has been operating on a proof-of-work consensus mechanism, therefore, it could not be registered as a security.

As Ether has completed its transition to PoS, staking, which has the staker make his own tokens unavailable to himself for a period of time in exchange for a return on investment, could be seen as a “reasonable expectation of profit.”

Meanwhile, SEC and Commodity Futures Trading Commission (CFTC) had previously said they didn’t recognize Ether as security with both commissions agreeing that Ether acted more like a commodity.

SEC Chairman States No Cryptocurrency Is an Exception

Gary Gensler, while addressing the Senate committee that oversees his institution on Thursday, noted that staking could be formally considered an investment, a move that may position the coin staked under the purview of the SEC and not CFTC.

“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. It looks very similar – with some changes of labelling – to lending,” says Gensler, according to a report by the Wall Street Journal.

The SEC has however said that crypto firms offering lending services must be registered with SEC for the firms to be able to operate legally, however, for digital commodities without these services, there is a bill being looked into in the senate which would grant the CFTC more powers in cryptocurrency regulation.

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