SEC Chairman, Gary Gensler, warned that Ethereum after its move to the proof of stake mechanism may be considered a security and therefore reclassified.
Can it pass the Howey test?
The Howey Test – named after a landmark 1946 case that helped determine what is and is not considered a security – states that “a transaction becomes an investment contract if money is “invested in a common enterprise with a reasonable expectation of profit arising from the efforts of others”.
If a transaction passes the Howey Test, it is considered an investment contract and must be registered with the SEC.
While ETH’s value was based on the proof of work mechanism, Ethereum was not considered a marketable security (a point of contention that Ripple often brings up in its own legal battle against the SEC).
However, now that ETH’s value is driven by the proof of participation (PoS) mechanism – the well-known staking that holds a user’s coins for a period of time and cannot use them in exchange for interest on the deposit amount – it could be considered a “reasonable expectation of profit” according to the SEC.
No cryptocurrency stands out
Addressing the Senate Banking Committee that oversees the SEC, SEC Chairman Gary Gensler said that staking can be officially considered an investment.
This would automatically put the currency under the jurisdiction of the SEC, not the Commodity Futures Trading Commission (CFTC), which often regulates cryptocurrencies in the US as digital commodities.
“FROM A CURRENCY PERSPECTIVE … THIS IS ANOTHER INDICATION THAT UNDER THE HOWEY TEST, THE INVESTING PUBLIC EXPECTS PROFITS BASED ON THE EFFORTS OF OTHERS. IT’S VERY SIMILAR – WITH SOME NAME CHANGES – TO LENDING,” GENSLER SAID.
– Gary Gensler, SEC Chairman
The SEC has made it clear that cryptocurrency platforms offering lending services must register under it to continue operating legally.
The new bill
Meanwhile in the case of digital commodities, without these services, a bill is currently being considered for approval by the US Senate that would grant the CFTC extensive powers regarding the regulation of cryptocurrencies.
However, critics argue that, unlike the SEC, the CFTC is unable to properly regulate such a large market, at least with its current resources.