Mon. Feb 26th, 2024

In a recent Wall Street Journal (WSJ) report, SEC chief Gary Gensler said that proof-of-stake digital assets can be considered securities. According to him WSJ report, the SEC chief claimed that proof-of-stake (PoS) blockchain governance tokens that allow holders to passively earn through staking could pass the Howey test. Gensler cited Cardano, Solana and Ethereum (who recently completed their PoS switch) as examples of such assets currently available in the market. Under the Howey test, an asset that qualifies as an investment contract is subject to federal security laws. Howey’s test considers an asset to be an investment contract if investors financially finance a company for profit no matter how small. Therefore, Gensler believes that PoS digital assets could pass the Howey test. “A main indicator under the Howey test is that the investor expects profit based on the efforts of others.” On September 15, Ethereum completed its switch from a proof-of-work (PoW) network to a PoS.

Under the PoS mechanism, participants in a blockchain network “stake” their cryptocurrencies (or lock them) to process transactions and secure the network. It differs from PoW cryptocurrencies as Bitcoin, which involves a mining process that consumes large amounts of energy. If Gensler is right, then Ethereum’s historic turnaround means the asset could now be labeled an investment contract. Therefore, it could be subject to security laws. Gensler has often said that bitcoin is not a security, but he has always been silent on whether Ethereum is a security. According to the WSJ, the SEC chief never mentioned any cryptocurrency (not even Ethereum) when he comments on staking and PoS coins.

There should be no change in ETH regulation

Even though it says that ETH has not been treated as security until today. On Thursday, crypto policy nonprofit Coin Center blogged that Ethereum’s move to a PoS does not mean there should be changes to its regulation. Although Gensler never commented that ethereum was a security, his predecessors often indicated that the SEC would not consider Ethereum a security. Part of the Coin Center blog post says “continued reliance on earnings, primarily other people’s efforts, is important in classifying an asset as a security.” However, the design of both consensus mechanisms (PoS and PoW) does not create this loophole. In each of these mechanisms, any unresponsive, censorious, or corrupt participant can be expelled by the community and replaced by someone who shares similar interests as the community. On Thursday, Gensler again told the Senate banking committee that most cryptocurrencies are securities. Gensler was speaking at a committee oversight hearing of the agency when he made this statement. It is worth noting that there are similarities in the economic realities of validating a chain through mining or staking. The SEC has often claimed that it considers the economic realities of transactions rather than the terms or technologies used to create such realities.

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By Farwa Raza

Farwa Raza is a writer who specializes in news articles. She has been writing on for over one years, and during that time she has written over 100+ articles on various topics ranging from politics to entertainment. Her goal as an author is to provide readers with the latest news stories while also providing her own opinion on them.