ETH Staking Might Trigger Securities Laws, Says Gensler

The Securities and Exchange Commission (SEC) may have once again targeted Ethereum due to its switch to proof-of-stake. According to The Wall Street Journal, SEC chairman Gary Gensler allegedly warned, in a press conference after the Senate Banking Committee on September 15, that intermediaries that permit users to “stake” their cryptocurrency may classify it as a security under the Howey test.

“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,” Gensler said. 

The remarks were made on the same day Ethereum (ETH) switched to proof-of-stake (PoS). It means the network will no longer depend on energy-intensive “proof-of-work” mining and will permit validators to verify transactions and create new blocks through a process known as “staking.” 

Gensler said that enabling holders to stake coins causes the investing public to anticipate returns based on others’ efforts. He further stated that intermediaries supplying staking services to their customers look very similar to lending, with a few labeling adjustments. The Commodity Futures Trading Commission (CFTC) and the SEC have previously said that they did not view ETH as security since it behaved more like a commodity.

The SEC has been closely monitoring the cryptocurrency market, especially those it claims are securities. In relation to the introduction of the XRP coin, the regulator has been involved in a case against Ripple Labs. Moreover, the SEC has pressured businesses that provide cryptocurrency loan products to register with them. BlockFi was hit with a $100 million fine in February for failing to register high-yield interest accounts, which the SEC views as securities.

According to a tweet from Gabor Gurbacs, director of digital assets strategy at the American investment firm VanEck, he has been stating for more than six years that POW to POS conversions can bring regulatory attention. He continued by explaining that the Howey test characteristic that regulators refer to as dividends is how they refer to incentives from staking.

In 1946, the Supreme Court decided whether a transaction meets the criteria for an investment contract in a decision known as the Howey Test. If it did, the Securities Act of 1933 would apply, and it would be regarded as a security.

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