Could Ethereum Be Classified as a Security After The Merge?

The highly anticipated Ethereum Merge has been driving momentum for the asset and broader crypto market over the past week, but there could be negative regulatory implications.

There are several bullish factors for Ethereum’s transition to proof-of-stake in September. A massive reduction in network energy consumption and deflationary issuance are two of the major ones.

However, there could be a negative outcome especially if anti-crypto financial regulators in the United States decide that Ethereum has now qualified as a security.

On July 24, Professor of law at Georgetown University Law Center, Washington D.C., Adam Levitin, proposed a scenario in which ETH could be classified as a security.

Is Ethereum an ‘investment contract’?

Securities and Exchange Commission chief Gary Gensler is on an enforcement-driven mission to secure his agency’s control over crypto. If the SEC succeeds, the majority of tokens could be treated as securities and regulated the same way stocks are.

According to Levitin, any token in a proof-of-stake network is likely to be considered a security. A security, as defined by the Howey Test used in a Supreme Court ruling way back in 1946, refers to an “investment contract” in which profits are expected.

The test attempts to determine if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

It requires an investment, which in the case of Ethereum would be staking with the expectation of profit being the staking reward – currently around 4.2% APY. This satisfies the common enterprise requirement but the “solely from efforts of a third party” is a gray area because stakers are also network participants giving some form of “work” in return by validating blocks.

Levitin said that individual staker’s contributions are likely to be small relative to the total sum which could satisfy the “solely from the effort of others” criteria.

“Now none of this answers the trickier question (IMHO) of who the “issuer” is when you’re dealing with a decentralized system,” he added as the debate rages on.

In June, Gary Gensler told CNBC that the only crypto asset he considers not to be a security is Bitcoin.

ETH prices cooling

Following a 30% rally over the past fortnight, Ethereum prices have hit resistance over the weekend and are in retreat on Monday morning.

At the time of press, ETH was trading down 2.9% on the day at $1,515 according to CoinGecko. Furthermore, the asset remains down 69% from its all-time high despite last week’s momentum.

There could be some turbulent macroeconomic news in the U.S. this week which could cause more volatility for Ethereum and crypto markets.