Ethereum’s upgrade to proof-of-stake may have put the cryptocurrency back in the sights of the Securities and Exchange Commission (SEC).
Speaking to reporters after the Senate Banking Committee on Sept. 15, SEC Chairman Gary Gensler reportedly said that cryptocurrencies and intermediaries that allow holders to “stake” their crypto can define it as security. according to the Howey test, according to the Wall Street Journal.
“From the point of view of the room […] this is another clue that according to the Howey test, the investing public anticipates profits based on the efforts of others,” Gensler said according to the WSJ.
The comments came on the same day as Ethereum (ETH) transitions to proof-of-stake (PoS), meaning the network will no longer rely on energy-intensive “proof-of-work” mining and instead allow validators to verify transactions. and create new blocks in a process that involves “staking”.
Gensler said that allowing holders to stake coins results in “the investing public anticipating profits based on the efforts of others.”
Gensler went on to say that the intermediaries offering staking services to its clients “look very similar – with some labeling changes – to loans.”
The SEC has previously stated that it does not consider ETH a security, with the Commodity Futures Trading Commission (CFTC) and SEC agreeing that it acts more like a commodity.
The SEC closely monitors the crypto space, especially those it deems are securities. The regulator was involved in a case against Ripple Labs regarding the launch of the XRP token.
The SEC has also pushed companies offering crypto lending products to register with them, including a $100 million fine imposed on BlockFi in February for its failure 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’s been saying for more than six years “POW to POS transitions can attract regulatory attention”.
To be clear, I’m not saying ETH is necessarily a security because of its proof pattern, but regulators are talking about staking in the context of dividends which if one of the characteristics of what securities laws securities call a “joint venture”. There are also other factors in the Howey test.
— Gabor Gurbacs (@gaborgurbacs) September 15, 2022
Gurbacs went on to clarify that regulators refer to staking 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 1946 Supreme Court case in which the court determined whether a transaction qualified as an investment contract. If so, then it would be considered a security and is covered by the Securities Act of 1933.