Ethereum Attracts SEC Scrutiny After Successful Merger

Ethereum’s move to Proof-of-Stake, while highly celebrated, has also attracted closer scrutiny from the Securities and Exchange Commission (SEC), with SEC Chairman Gary Gensler hinting at a closer look at Ethereum from regulatory authorities.

Gensler stated that exchanges that offer betting services to users look “very similar” to lending services.

An increase in regulatory control

Ethereum’s merger was the talk of the town, as the protocol transitioned from Proof-of-Work to Proof-of-Stake. However, this shift could lead to further regulatory scrutiny, as Securities and Exchange Commission Chairman Gary Gensler suggested on Thursday. Gensler told reporters after a Senate hearing that the SEC could take a closer look at Ethereum and regulate it as a security.

Speaking to reporters, the SEC also mentioned the Howey test, used by regulators to determine whether a particular asset is a security. Gensler stated,

“From the coin’s perspective … it’s another indication that under the Howey test, the investing public expects profits based on the efforts of others.”

However, Gensler mentioned that he was not referring to any particular cryptocurrency. He argued that Proof-of-Stake blockchains that generate new coins for users take on investment contract-like characteristics, a move that could bring them under the purview of the SEC.

Strict rules for securities

Securities are assets that include stocks and bonds. Every securities issuer must file extensive disclosures with the SEC, required by laws in place since the 1930s. Brokers and exchanges that facilitate the trading of securities are required to adhere to strict rules to protect investors from any conflict of interest. Issuers of cryptocurrency face severe penalties if they sell assets deemed to be a security by the SEC.

Staking is used by cryptocurrencies to verify transactions on their networks and is used by some of the most prominent players in the market, such as Solana, Cardano and now Ethereum. Investors can lock in their assets for a fixed period and earn returns. According to the SEC head, if an intermediary such as a crypto exchange offers betting services to its users, these services are quite similar to lending.

Over the past year, the SEC has repeatedly signaled that firms offering crypto-lending products must register with the agency. Back in February, the SEC forced BlockFi to pay a $100 million fine for failing to register with the agency.

Jostling For Jurisdiction

Meanwhile, federal agencies and the congressional committees they face compete with each other for jurisdiction over the crypto space. The Senate Agriculture Committee, the body that oversees the Commodity Futures Trading Commission (CFTC), held a hearing on Thursday to discuss and consider a crypto bill. Meanwhile, the Senate Banking Committee, which oversees the SEC, also held a hearing so members could question the SEC chairman.

CFTC’s Crypto Bill

The crypto bill proposed by the leaders of the agriculture group proposes to designate Bitcoin and Ethereum as digital goods rather than securities. Digital goods do not fall under the purview of federal regulators under current law. Essentially, this bill would give the CFTC the authority to regulate digital goods. Crypto exchanges will be required to register with the CFTC, monitor trading activities, protect investors and only offer assets that are resistant to manipulation. In addition, the exchanges will also be required to disclose some information about the assets they list.

However, consumer protection advocates have expressed their discomfort with the CFTC, stating that the body lacks the resources and experience to protect small investors in a market described by the SEC chairman as the Wild West. The CFTC has a fraction of the staff compared to the SEC, with the markets it oversees dominated mainly by banks, hedge funds and other large corporations.

The crypto industry prefers the CFTC over the SEC

For its part, the crypto industry has stated that it prefers to be regulated by the CFTC and not the SEC. According to crypto lobbyists, the SEC has a strict disclosure regime that they believe is impractical and expensive. Crypto firms and lobbyists have already spent millions lobbying Congress to align with their interests.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial or other advice.

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