We are in a post-merger world. And the SEC is looking at Ethereum again after the significant changes it recently underwent. Word on the street is that Chairman Gary Gensler, speaking after the merger for the first time, hinted that Ethereum could now be a security. What did Gensler actually say? What is a security? Is the SEC on to something by targeting post-merger Ethereum?
On one hand, Ethereum’s mining could have been the element that kept the organization out of the unregistered security category. After the merger, there is no mining, and there is still the question of the huge premium at Ethereum’s inception. On the other hand, we can say that the miner’s replacements, the validators, do not receive dividends. The reward is compensation for their work. Under that lens, staking would not be an investment of any kind.
Years ago the SEC said that Ethereum is a commodity and not a security. However, the changes were significant. ETH is a completely different animal post-merger. Does Securities and Exchange Commission Chairman Gary Gensler see that as a goal? Or are people reading too much into his words?
What did Chairman Gensler say about a post-merger Ethereum
Nothing, actually. His statements were about cryptocurrencies in general. However, after a congressional hearing, Gensler told reporters:
“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.”
But what is the Howey test? According to Investopedia, the Howey test refers to “four criteria for determining whether an investment contract exists.” The Supreme Court established them by ruling in “SEC v. WJ Howey Co.” in 1946. The criteria are:
- An investment of money
- In a joint enterprise
- With the expectation of profit
- Being derived from the efforts of others
So, that’s what chairman Gensler refers to in his soundbite after the congress. Was he specifically talking about Ethereum? Is Ethereum after the merger a security? According to Gabor Gurbacs, strategy advisor at VanEck among others, it is not about that. Although not a security, Ethereum was bound to attract regulatory attention after the merger.
To be clear, I’m not saying that ETH is necessarily a security because of the proof model, but regulators are talking about stakes in the context of dividends that are a feature of what securities law calls a “joint enterprise.” There are also other factors in the Howey test.
— Gabor Gurbacs (@gaborgurbacs) 15 September 2022
And Ethereum may well be a security, according to Gurbacs:
“I’m not saying that ETH is necessarily a security because of its proof model, but regulators are talking about stakes in the context of dividends that are part of what securities law calls a ‘joint enterprise’. There are other factors in the Howey test as well.”
ETH price chart for 09/16/2022 on Gemini | Source: ETH/USD on TradingView.com
Is betting equal to…lending?
The WSJ contextualized a small but very telling sentence by chairman Gensler:
“If an intermediary such as a crypto exchange offers betting services to its clients, Gensler said, “it looks very similar – with some changes in labeling – to lending.”
But does it? It seems like a stretch at first hearing, but… stakers lend their ETH to the exchange and get dividends in return? Maybe there is a case to go against Ethereum after the merger. However, that’s not what professor, investor and marketing/strategy manager Adam Cochran thinks. “At first the idea of ’buy token, bet token, earn token’ may look like a security – I get it,” he concludes after a convincing and elaborate thread.
“But with a nuanced understanding of the operation of a proof-of-stake chain, I think it fails to be a security even on a generous reading of the Howey test.
If the SEC were to argue that Ethereum is a security, I personally don’t see that view being made *more* likely by the move to proof of stake, and I certainly don’t think anyone has any grounds to definitively say so.”
If the SEC were to claim that Ethereum is a security, I personally don’t see that view being made *more* likely by the move to proof of stake, and I certainly don’t think anyone has any grounds to definitively say that .
— Adam Cochran (adamscochran.eth) (@adamscochran) 24 July 2022
Adding to the pile, Gurbacs, arguing the Ethereum-is-a-security case, had this to say as a conclusion:
“I believe that computer programs that are not used to collect money or promise dividends should not be categorized as a security. Tokens and small businesses need a lighter and cheaper regulatory regime so they can register. The current system is complex and prohibitive.”
Is that the way forward?
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