SEC Chair Says Ethereum Could be Subjected to Securities Laws Post-Merge

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Gary Gensler, the chair of the SEC, said proof-of-stake cryptos might fall under the purview of securities rules, albeit he did not name any specific cryptocurrency.

As per The Wall Street Journal, SEC chairman Gary Gensler allegedly indicated in a press conference following the Senate Banking Committee on September 16 that facilitators that permit hodlers to stake their cryptocurrency may classify it in the category of securities under the Howey test.

The Supreme Court decided if a transaction meets the criteria for an investment contract in a case known as the Howey Test in 1946. The Securities Act of 1933 would apply and it would be regarded as a security if this were to take place. 

Gary Gensler emphasized that “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.” 

The remarks were made on the day of the Merge when Ethereum switched from proof-of-work (PoW) mining to proof-of-stake (PoS), allowing validators to validate transactions and build new blocks through staking. As a result, the blockchain will no longer be dependent on PoW mining which requires enormous amounts of energy.

“The investing public anticipating profits based on the efforts of others,” is how Gensler explained the outcome of staking, adding that third parties offering to stake for hodlers “looks very similar — with some changes of labeling — to lending.”

The Commodity Futures Trading Commission (CFTC) and the SEC originally decided that Ethereum (ETH) behaves primarily as a commodity and that they did not view it as a security.

The Securities and Exchange Commission has been closely monitoring the cryptocurrency market, especially those it claims belong in securities as opposed to other categories. In relation to the introduction of the XRP token, the agency has been involved in a legal dispute against Ripple Labs.

Additionally, the SEC has pressured businesses that provide cryptocurrency lending products to file with them. BlockFi was hit with a $100 million fine in February for not registering high-yield interest accounts, which are viewed as securities by the SEC.

POW to POS conversions can attract regulatory scrutiny, according to the VanEck director of digital assets strategy, Gabor Gurbacs, who tweeted to his 49,300 followers. He has been stating this for more than six years.

Gurbacs continued by elaborating on the fact that regulatory authorities allude to staking rewards as dividends, which is a Howey test component.

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