SEC Chief Gary Gensler Hints Ethereum’s Move To Proof-of-Stake Might Transform ETH Into A Security

SEC Chief Gary Gensler Hints Ethereum’s Move To Proof-of-Stake Might Transform ETH Into A Security

Ethereum’s milestone switch from the proof-of-work to proof-of-stake might have just put the cryptocurrency right back in the crosshairs of the U.S. Securities and Exchange Commission (SEC).

On Thursday, SEC Chairman Gary Gensler stated that proof-of-stake cryptocurrencies could qualify as securities under the Howey Test.

PoS Assets Could Be Subject To Securities Laws: Gensler

Gary Gensler has hinted at additional scrutiny for proof-of-stake cryptocurrencies. 

According to a report in the Wall Street Journal, Gensler posited that proof-of-stake cryptos, which allow holders to generate passive income through staking might be defined as securities under the Howey Test. Such assets are many in the market today, including Cardano, Solana, and most recently, Ethereum — the world’s second-biggest cryptocurrency by market value. However, it should be noted that the SEC chair did not directly mention ether or any other crypto asset while commenting on proof-of-stake and staking.

The infamous Howey Test establishes whether an asset has investment contract-like characteristics and is thus subject to federal securities regulations.

“That’s another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others,” the WSJ reported him remarking. 

Gensler’s comments came hot on the heels of Ethereum finally executing its long-awaited Merge, meaning the blockchain no longer uses the energy-sapping proof-of-work security model and instead relies on validators staking their coins to achieve consensus and secure the network.

While Ethereum is now faster and has shed the vast majority of its environmental impact, the switch to PoS could have severe implications for the crypto. Gensler suggests it could be subject to securities laws.

Is Ether A Security?

Since taking the helm at the SEC last April, Gensler has frequently drawn the ire of the cryptosphere. Much of the frustrations have emanated from the SEC’s adamancy to greenlight a spot Bitcoin exchange-traded fund (ETF) and Gensler’s reiterated remarks on how crypto assets should be regulated. While he has made it clear that it’s the SEC’s position that nearly all cryptocurrencies are securities, the agency has not yet crafted a clear regulatory framework.

Gabor Gubacs, the digital asset director at leading global fund management company VanEck, observed in a tweet that he has been stating for more than six years that “POW to POS transitions can draw regulatory attention.”

Gubacs clarified that he doesn’t mean Ethereum is a security because of its consensus mechanism, but regulators simply describe staking rewards as dividends, which is a key factor in the Howey test.

Gensler’s predecessors had publicly declared that both bitcoin and ether should be classified as commodities. He, however, reaffirmed that bitcoin is a commodity but refrained from extending the same label to Ethereum. Nonetheless, the question of Ethereum’s security status continues to be raised.

The matter has emerged as a sticking point in the SEC’s protracted suit against Ripple and its top executives over the company’s sale of unregistered securities in the form of XRP tokens.

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