As the Ethereum merger fades and even the potential disruption caused by ETHPoW seems to fade away, several issues have come to the fore again; how should crypto be regulated? In addition to this, which regulatory agency should have the power to decide this, and how will this regulation be implemented?
In testimony delivered just hours after the successful merger on September 15, 2022, Securities and Exchange Commission (SEC) Chairman – Gary Gensler – delivered comments that immediately created waves in the crypto community. Chairman Gensler said that according to the Howey test – which determines whether an asset qualifies as an “investment contract” and is therefore subject to federal securities law, PoS cryptocurrencies could be considered securities .
The fact that the Howey test was adopted by the Supreme Court in 1946 – and that financial markets look nothing like when the law was written – continues to raise eyebrows when it is continually cited as a test. prominent in determining regulation. jurisdiction.
Here’s what investors need to know about whether ether, and other PoS cryptos, will (at this time) fall under regulation by SEC lawsuit and edict.
Does it pass the Howey test? The elements of the Howey test that have been cited as a reason to classify PoS crypto as securities are 1) PoS investors pledge funds (in the form of tokens) to fund a company with the intention of profiting from its efforts, and 2) that the investing public anticipates profits based on the efforts of others.
The fact that nearly two-thirds of staked ether, the unnamed (but assumed by many) center of these comments, is held by Lido, Coinbase, Binance and Kraken seems to reinforce this position. After all, retail investors and customers stake tokens on these centralized exchanges to generate returns, and these centralized exchanges accept these deposits for the benefit of company operations and profits.
At first glance, these positions look like reasonable enough assessments of PoS schemes, but this highlights an underlying fact that can be overlooked; moving from PoW to PoS does not always change the nature of how participants interact.
Economic realities are unchanged. The shift from PoW to PoS has generated a lot of debate, but the fundamentals underlying blockchain consensus methodologies have not changed. Under PoW and PoS 1) validators/miners are an open and potentially unlimited pool of participants, and that 2) the only prerequisite for participation is acceptance of costs. Cost under PoW is the financial investment required for mining, and under PoS the cost is primarily the opportunity cost associated with staking crypto versus spending or using it.
Both consensus protocols allow anyone, at any time, to allocate these resources to these activities, helping to create open and transparent competition among market players with virtually no other barriers to entry. Corrupt, unethical, or otherwise disinterested entrants will be replaced with those more interested in participating in a legitimate and ethical manner.
Based on these realities, the coordinated and collaborative effort needed to trigger the Howey test seems like a much weaker argument.
The ownership concentration of staked ether will inevitably decrease as 1) lock-up periods expire, 2) investors seek higher returns as interest rates and inflation remain high, and 3) new options appear as developers digest more of the PoS pivot.
The classification remains pending. Earlier comments from the SEC and the Commodity Futures Trading Commission (CFTC) agreeing that ether acted more like a commodity, and the fact that the SEC – under previous leadership and Chairman Gensler – did not publish a list control or definitive guide as to the criteria crypto would need to possess for securities classification, continues to create an environment of regulatory ambiguity and uncertainty. That said, the enforcement actions against Ripple and others, 80 totaland the fines imposed on BlockFi ($100 million) and others totaling more than $2 billion by the end of 2021 indicate how vigorously the SEC is willing to debate and regulate these matters.
As the debate around crypto classification continues to swirl, it is more important than ever for investors to do their due diligence, stay up to date with market developments, and take reasonable precautions when investing. .