SEC Chairman Gary Gensler commented on the recently long-awaited update to the Ethereum network, which saw the network switch from proof-of-work to proof-of-stake. Gensler hinted that the update would be sufficient to transfer Ethereum from its present legal classification into that of securities.
Gary Gensler, the chair of the U.S. Securities and Exchange Commission (SEC), reiterated his support for monitoring on Thursday by stating that staked cryptocurrencies may be governed by federal securities laws. This comes after Ethereum switched to a similar system.
Gensler stated that proof-of-stake (PoS) blockchains, which create new coins for creators who pool their holdings, take on characteristics similar to investment contracts and may fall within his agency’s jurisdiction.
The remarks, which came hours after Ethereum successfully completed its PoS shift via the Merge, suggest that the significant technological improvement may have more effects on the second-most popular blockchain than only reducing its energy consumption. Its native ether currency was one of only two cryptos, along with Bitcoin, that were explicitly classified as commodities by federal regulators as a proof-of-work chain.
Ethereum May Pass The Howey Test
The Howey Test states that a transaction becomes an investment contract if money is “invested in a common enterprise with a reasonable expectation of profit to be derived from the efforts of others.” The Howey Test is named after a seminal 1946 case that helped define what is considered a security and what is not.
A transaction is deemed to be an investment contract and must be registered with the SEC if it meets the Howey Test. Ethereum was not a security, despite the fact that its value was dependent on proof-of-work.
However, now that the value of ETH is derived from proof-of-stake (PoS), staking, which has the staker make his own tokens unavailable to himself for a period of time in exchange for a return on investment, could be seen as a “reasonable expectation of profit.”