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(Kitco News) - The Ethereum (ETH) Merge has been the talk of the crypto sphere for the better part of 2022, and its successful completion on Thursday marked the culmination of years of hard work and development. Unfortunately, the switch to proof-of-stake (PoS) may have come with some unintended consequences for holders of Ether tokens.
In a talk given on Thursday, Securities and Exchange Commission (SEC) Chair Gary Gensler suggested that tokens and intermediaries that allow users to “stake” their coins may pass one of the qualifications of the Howey test, which is used to determine whether an asset is a security.
“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,” Chair Gensler said following a congressional hearing, clarifying that he wasn’t referring to any cryptocurrency in particular.
The issue of whether digital assets should be considered securities is one of the most hotly contested topics in crypto and has even led to inter-agency strife as the SEC and Commodity Futures Trading Commission (CFTC) duke it out for who gets to regulate the nascent asset class.
Gensler had previously made it known that he views Bitcoin (BTC) as a commodity, but has been less forthright on his view of Ether, which suggests that it has always been considered a security in his perspective.
Ether is far from being the only network affected by this new line of discussion as other top PoS platforms like Cardano and Solana could also fall under the definition of an “investment contract” now, meaning that they would be subject to the same category of securities laws that apply to stocks and bonds.
This would require the issuers of these tokens to file extensive disclosure documents and comply with strict consumer protection rules. Gensler also said that platforms offering staking services to customers, such as crypto exchanges, “looks very similar – with some changes of labeling – to lending.”
Gensler’s comments sparked an intense discussion between Ethereum supporters and Bitcoin maximalists which included Michael Saylor, the co-founder of MicroStrategy and a staunch BTC supporter.
While supporters from each camp waded into the conversation to defend their perspective, the best explanation of the situation was summed up in the following tweet from Jake Chervinsky, Head of Policy at Blockchain Association, who highlighted the need for the government to develop clear specifications when it comes to digital assets and things like staking.
The general idea seems to be "if you squint hard enough, staking sort of looks like a dividend or interest, & some actual securities have those, so maybe staked assets are securities too." That's not how the law works. That just means holders of staked assets expect profit...
Taken by itself, the expectation of profit by itself “doesn't make the assets into securities,” according to Chervinsky, who noted that “People hold all kinds of assets with an expectation of profit. Gold, cars, watches, etc.”
“Expectation of profit is only one of four Howey test prongs & likely the least important for volatile assets (i.e., non-stablecoins),” Chervinsky stressed. It is “a feature of all investable commodities, not just securities. Whether that profit comes in the form of an increase in market price, a staking reward, or any other mechanism should make no difference to the securities analysis.”
As for now, the debate as to the status of PoS assets like Ether continues, and will likely remain contentious until regulators provide clear guidance on the matter and write it into law.
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