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September 16, 2022

The SEC Could Get Stricter With Ethereum Now After Merge

After a congressional hearing on Thursday, Gary Gensler, head of the United States Securities and Exchange Commission (SEC), said that cryptocurrencies and exchanges that provide a staking option to users may pass the Howey test before the U.S. Supreme Court.

Regarding cryptocurrencies, the Howey test is a Supreme Court ruling that determines whether a coin or token fits under the category of a security or an investment contract. If an asset satisfies the Howey test, it is deemed to be a security, which means it will be subject to SEC scrutiny.

According to the Wall Street Journal, Gensler thinks that cryptocurrencies and crypto exchanges implementing the proof-of-stake (PoS) consensus mechanism might satisfy the Howey test, since users who stake their cryptocurrency for a certain time are rewarded “depending on the efforts of others.”

“From the standpoint of the currency, […] this is more evidence that, according to the Howey test, the investing public anticipates returns based on the labor of others,” he said.

Gensler said further that “an intermediary such as a crypto exchange” that provides these staking services to consumers is comparable to crypto lending platforms, with “some labeling adjustments” being the only difference. Remember that crypto lender BlockFi was fined $100 million by the SEC for violating a stipulated rule.

Coins such as Solana, Avalanche, and Cardano, among others, will be classified as securities and eventually be subject to the agency’s supervision if Gensler’s argument about crypto assets adopting the Proof-of-Stake mechanism is successful.

Ethereum will also fall into this category, since it has just adopted a Proof-of-Stake consensus process, dubbed “The Merge.” Before the Merge, Ethereum was not considered a security, as disclosed by Jay Clayton, the former head of the U.S. Securities and Exchange Commission.

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With the latest switch, however, the second-largest cryptocurrency, which formerly used a proof-of-work (PoW) consensus process, has entered the group of assets being discussed by the current SEC chair.

Gensler stressed that he did not have a particular cryptocurrency in mind while making his comments.