BREAKING: Ethereum (ETH) could be a security using PoS Gary Gensler says

• The SEC chief claims that the Howey test proves that proof-of-stake cryptocurrencies are securities.
• Ethereum has never been treated as security up till now. but the agency has refrained from making public comments about it.

In a recent report by the Wall Street Journal (WSJ), SEC chief, Gary Gensler, said that proof-of-stake digital assets can be considered securities. According to the WSJ report, the SEC chief claimed that the governance tokens of proof-of-stake (PoS) blockchains which enable holders to earn returns passively via staking could pass the Howey test.

Gensler cited Cardano, Solana, and Ethereum (which recently completed its PoS switch) as examples of such assets currently available in the market. Under the Howey test, an asset that qualifies as an investment contract is subject to federal security laws. The Howey test considers an asset to be an investment contract if investors fund an enterprise financially to earn profits no matter how little.

Hence, Gensler believes that PoS digital assets could pass the Howey test. “One main indicator under the Howey test is that the investor expects profits based on others’ efforts.” On September 15, Ethereum completed its switch from a proof-of-work (pow) network to a PoS one.

BREAKING: Gary Gensler says using of Proof-of-Stake could trigger securities laws.

— Dennis Porter (@Dennis_Porter_) September 15, 2022

Under the PoS mechanism, participants in a blockchain network “stake” their cryptocurrencies (or lock them up) to process transactions and secure the network. It differs from the PoW cryptocurrencies such as Bitcoin which involves a mining process that consumes huge amounts of energy. If Gensler is correct, then Ethereum’s historical change means that the asset could now be tagged as an investment contract.

Therefore, it could be subject to security laws. Gensler has often said that bitcoin is not security but has always kept mute about whether Ethereum is a security. According to the WSJ, the SEC chief has never mentioned any cryptocurrency (not even Ethereum) when he makes comments on staking and PoS coins.

There shouldn’t be changes to ETH regulation

Even though he is saying that ETH hasn’t been treated like security till today. On Thursday, crypto policy non-profit, Coin Center, wrote on its blog that Ethereum’s switch to a PoS doesn’t mean there should be changes to its regulation.

Even though Gensler never commented about Ethereum being security, his predecessors have often indicated that the SEC wouldn’t consider Ethereum to be a security. Part of the Coin Center blog post reads “ongoing reliance for profits mainly from other people’s efforts is important to classifying an asset as a security.”

Related: Gensler hearing: Not only XRP but is Ethereum also a target of the SEC?

However, the design of both consensus mechanisms (PoS and PoW) doesn’t create this loophole. In each of these mechanisms, any unresponsive, censorious, or corrupt participant can be pushed out by the community and replaced with one who shares similar interests with that of the community. On Thursday, Gensler again told the senate banking committee that most cryptos are securities.

Gensler was speaking at an oversight hearing of the agency by the committee when he made this statement. It is worth noting that there are similarities in the economic realities of validating a chain through mining or staking. The SEC has often claimed that it considers the economic realities of transactions instead of the terms or technologies used for creating such realities.