SEC for Proof of Stake

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Proof-of-Stake Assets May Be Securities, According to Gensler

SEC for Proof of Stake
SEC for Proof of Stake / Image Credit: CRYPKYP
Source: Decrypt
1663322280 16 Sep / 09:58

According to a report from the Wall Street Journal, SEC Chairman Gary Gensler stated today that proof-of-stake cryptocurrencies might constitute securities.

The Wall Street Journal reported on Thursday that Gensler believes the native assets of proof-of-stake blockchains, which allow holders to earn returns through staking passively, might satisfy the Howey test. Cardano, Solana, and Ethereum, the second-largest cryptocurrency by market capitalization, are examples of such assets now available on the market.

The Howey test assesses whether a certain asset qualifies as an "investment contract" and is thus subject to federal security regulations.

Following the criterion, an asset is deemed an “investment contract” if investors contribute funds to a business to generate profits. Gensler asserted that proof-of-stake-based cryptocurrencies might pass this test.

The WSJ stated, “This is further indication that, under the Howey test, investors anticipate benefits based on the work of others.”

Today, Ethereum transitioned from proof-of-work money to a proof-of-stake currency.

Proof-of-stake blockchains function by having network participants “stake” their currencies or effectively lock up their crypto to protect the network and execute transactions.

It differs from proof-of-work cryptocurrencies, such as Bitcoin, the leading cryptocurrency by market capitalization, which employs an extremely energy-intensive mining method.

If Gensler’s assertions are accurate, Ethereum’s recent action might result in the asset being categorized as an “investment contract” and subject to securities regulations. Gensler has previously refused to comment explicitly on Ethereum, but he has stated that Bitcoin is not a security. According to the Wall Street Journal, the SEC chairman did not directly name Ethereum or any other token while discussing staking and proof-of-stake currencies.

In a blog post published on Thursday, Crypto policy charity Coin Center stated that Ethereum’s transition to proof of stake should not affect how it is governed. Despite Gensler’s refusal to comment on Ethereum, his predecessors in the last administration indicated that the SEC did not consider Ethereum a security.

“Continual dependence on earnings obtained mostly from the labor of others is key to classification as a security,” Coin Center wrote in a blog post today.

“Both consensus mechanisms [proof-of-work and proof-of-stake] are explicitly designed to avoid such dependence by creating an open competition among strangers in which any self-interested participant can and will fill the void left by any other unresponsive, corrupt, or censorious participant,” the policy group explained.

Earlier today, during a Senate Banking Committee oversight hearing of the agency, Gensler maintained his belief that most cryptocurrencies are securities.

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