We are in a post-merger world. And the SEC is looking at Ethereum once again after the substantial changes it recently passed. The news is that chairman Gary Gensler, speaking after the merger for the first time, hinted that Ethereum could now be a security. What exactly did Gensler say? What is security? Is the SEC on to something by targeting post-merger Ethereum?
On one hand, Ethereum mining could have been the element that kept the organization out of the non-registered security category. After the merger, there is no mining, and there is still the issue of the huge supremacy at the beginning of Ethereum. On the other hand, we could say that the miner’s substitutes, the validators, do not get dividends. The reward is the compensation for their work. Under this lens, the bet would not be an investment of any kind.
Years ago, the SEC said that Ethereum is a commodity and not a security. But the changes were substantial. 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 Chairman Gensler Said About Ethereum After The Merger
Nothing, actually. His statements were generally about cryptocurrencies. However, after a congressional hearing, Gensler he told reporters:
“From a currency perspective … this is 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 on Investopedia, the Howey test refers to “four criteria for determining whether an investment contract exists.” The Supreme Court defined them in SEC v. WJ Howey Co. in 1946. The criteria are:
- An investment of money
- In a joint venture
- With the expectation of profit
- To come from the efforts of others
Well, that’s what Chairman Gensler is referring to in his post-Congress soundbite. Was he specifically talking about Ethereum? Is post-merger Ethereum safe? According to Gabor Gurbacs, Strategy Consultant at VanEck among others, it’s not about that. Even if it’s not about 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 its proof-of-concept model, but regulators are talking about staking in the context of dividends that are a feature of what securities laws call a “joint enterprise.” There are other factors in the Howey test.
— Gabor Gurbacs (@gaborgurbacs) September 15, 2022
And Ethereum may well be a security, according to Gurbacs:
“I’m not saying that ETH is necessarily a security because of the proof model, but regulators are talking about staking in the context of dividends that are a feature of what securities laws call a ‘common enterprise.’ There are other factors in the Howey test.”
ETH price chart for 09/16/2022 on Gemini | Source: ETH/USD on TradingView.com
Is betting similar to… borrowing?
The WSJ coined a tiny but very telling phrase from President Gensler:
If an intermediary such as a crypto exchange offers betting services to its customers, Mr. Gensler said, “it’s very similar — with some changes in labeling — to lending.”
But does it? It seems like a stretch at first listen, but… does the player lend their ETH to the exchange and receive dividends in return? Perhaps there is a case to be made against Ethereum post-merger. However, professor, investor and marketing/strategy executive Adam Cochran doesn’t think so. “At first brush, the idea of ’buy chip, bet, win token’ may seem like insurance – I get it,” he concludes after a fascinating and ornate yarn.
“But with a nuanced understanding of how a proof-of-stake chain works, 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 becoming *more likely’ than the move to proof-of-stake, and I certainly don’t think anyone has reason to declare it as such definitively.”
If the SEC were to argue that Ethereum is a security, I personally don’t see that view becoming *more likely’ than the move to proof-of-stake, and I certainly don’t think anyone has reason to declare it as such definitively.
— Adam Cochran (adamscochran.eth) (@adamscochran) July 24, 2022
To add to the pile, Gurbacks, who argued the Ethereum-is-a-security case, had this to say As a conclusion:
“I believe that computer programs that are not used to raise money or promise dividends should not be categorized as securities. Brands and small businesses need a lighter and cheaper regulatory regime to register. The current system is complex and cost prohibitive.”
Is this the way forward?
Featured Image by Лечение Наркомании from Pixabay | Charts by TradingView