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HomeRegulationIs Ether A Security? How The Merge Reignited Questions Around Crypto Regulation

Is Ether A Security? How The Merge Reignited Questions Around Crypto Regulation

With the Ethereum merger fading into the background and even the potential disruption caused by ETHPoW seemingly gone, some questions have returned to the forefront. How should crypto be regulated? Besides, which regulatory body should have the power to decide this and how would that regulation be done?

In a testimony given just hours after the merger was successfully completed on September 15, 2022, Securities and Exchange Commission (SEC) Chairman Gary Gensler said the cryptocurrency community was immediately making waves. announced the comment that caused the Chairman Gensler says PoS cryptocurrencies qualify as securities under Howie’s test to determine whether an asset qualifies as an “investment contract” and is therefore subject to federal securities law. I said it is possible.

The fact that the Howey test was passed into law by the Supreme Court in 1946, and that it bears no resemblance to the financial markets at the time the law was written, continues to be the primary test for determining regulation. It continues to be frowned upon because it is quoted. jurisdiction.

Here’s what investors should know about whether Ether and other PoS cryptos are subject to regulation by the SEC’s (to date) lawsuits and proclamations.

Pass the Howey test? The elements of the Howey test cited as reasons for classifying PoS cryptos as securities are: 1) PoS investors provide funds (in the form of tokens) to companies with the intention of making a profit from their efforts; 2) the investor expects a profit based on the efforts of others.

Nearly two-thirds of staked Ether is the unnamed focus of these comments (still assumed by many), held by Lido, Coinbase, Binance, and Kraken The fact that the After all, retail investors and customers are staking tokens on these centralized exchanges to generate profits, and these centralized exchanges accept these deposits to help companies operate and profit. is making a profit.

On the surface, these positions seem like a fair enough assessment of the PoS regime, but they highlight a fundamental fact that is often overlooked. Changing from PoW to PoS does not always change the nature of participant interactions.

economic reality remains the sameAlthough the switch from PoW to PoS has caused a lot of debate, the underlying fundamentals of blockchain consensus methodology have not changed. Under both PoW and PoS, 1) validators/miners are an open and potentially unlimited pool of participants, and 2) the only prerequisite for participation is cost acceptance. The cost in PoW is the financial investment required to mine, while the cost in PoS is primarily the opportunity cost associated with staking and spending or using cryptocurrencies.

Both consensus protocols allow anyone to allocate these resources to these activities at any time, thus helping to create open and transparent competition between market participants, with virtually no other barriers to entry. Corrupt, unethical, or otherwise disinterested participants will be replaced by participants interested in participating in a lawful and ethical manner.

Based on these realities, the coordination and collaboration of efforts required to trigger the Howey test looks like a much weaker argument.

Concentration of ownership of staked Ether 1) ends lockup period, 2) investors seek higher returns as interest rates and inflation continue to rise, and 3) developers further digest the PoS pivot Over time, it will inevitably decline as new options arise.

Classification remains unresolvedEarlier comments by both the SEC and the Commodity Futures Trading Commission (CFTC) agreed that Ether would behave more like a commodity and that the SEC, under its previous leadership and Chairman Gensler, had made no definitive decision on which standard. The fact that they have not issued a checklist or guide to cryptocurrencies that must be owned for security classification continues to create an environment of regulatory ambiguity and uncertainty. That said, a total of 80 enforcement actions against Ripple and others as of the end of 2021, along with fines imposed against BlockFi ($100 million) and others ($100 million), totaling more than $2 billion, are expected by the SEC. It shows how willing we are to discuss and regulate these points.

As the debate over the classification of cryptocurrencies rages on, it is more important than ever for investors to maintain due diligence, keep abreast of market trends, and take reasonable precautions when investing.

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