As the Ethereum consolidation fades into the background, and even the potential disruption caused by ETHPoW appears to be fading, many questions have returned to the fore; How should cryptocurrency be regulated? Additionally, which regulatory agency should have the power to decide this, and how would said regulations appear?
In testimony given just hours after the successful completion of the merger on September 15, 2022, the Chairman of the Securities and Exchange Commission (SEC) – Gary Gensler – made comments that immediately made waves in the crypto community. President Gensler stated that under the Howey test — which determines whether an asset qualifies as an “investment contract” and is therefore subject to federal securities law, PoS cryptocurrencies can qualify as securities.
The fact that the Howey test was passed into law by the Supreme Court in 1946 – and that financial markets are in no way similar to those at the time the law was written – continues to raise eyebrows when it is consistently cited as a leading test for determining regulation. Jurisdiction.
Here’s what investors need to know about whether Ether and other PoS cryptocurrencies will fall under regulation (so far) by the Securities and Exchange Commission.
Does he pass the Howey test? The parts of the Howey test cited as a reason for classifying PoS crypto as securities are 1) that PoS investors pledge money (in the form of tokens) to fund an institution with the intention of making profits from its efforts, and 2) that the investing public expects profits based on the efforts of others.
The fact that nearly two-thirds of interconnected ether, the unnamed focus (which many assume) of this comment, is held by Lido, Coinbase, Binance, and Kraken seems to reinforce this position. After all, retail investors and clients make bets on these centralized exchanges to generate returns, and these centralized exchanges accept these deposits for the benefit of corporate operations and profits.
On the surface, these situations seem like reasonable enough assessments of POS systems, but this highlights a key fact that can be overlooked; Changing from PoW to PoS does not always change the nature of how participants interact.
Economic facts have not changed. The switch from PoW to PoS has sparked a lot of controversy, but the basic foundation of blockchain consensus methodologies remains unchanged. Under both PoW and PoS 1) validators/miners are an open and potentially unlimited group of participants, and 2) the only prerequisite for participation is cost acceptance. The cost under a Proof of Work is the financial investment required for mining, and in a POS framework, the cost is primarily the opportunity cost associated with fixing the cryptocurrency in exchange for spending or using it.
Both consensus protocols allow anyone, at any time, to allocate these resources to these activities, helping to create open and transparent competition among market actors without any other barriers to entry. Corrupt, unethical or disinterested participants will be replaced by participants who are more interested in participating in a legitimate and ethical manner.
Based on these facts, coordination and collaboration among the efforts needed to start Howey’s test seems a much weaker argument.
The concentration of cryptocurrency ownership will inevitably decline as 1) lock-down periods end, 2) investors look for higher returns as interest rates and inflation continue to rise, and 3) new options emerge as developers internalize the POS hub.
Classification is still unresolved. Previous comments by both the Securities and Exchange Commission and the Commodity Futures Trading Commission (CFTC) concur that ether is behaving as a commodity, and the fact that the SEC — under the previous leadership of President Gensler — has not issued a checklist or definitive guide on the standards cryptocurrencies need to Possessing a stock rating, it continues to create an environment of regulatory ambiguity and uncertainty. However, enforcement actions against Ripple and others, 80 in totaland fines against BlockFi ($100 million) and others totaling more than $2 billion as of the end of 2021 indicate how willing the SEC is to discuss and regulate these points.
As the debate over the rating of cryptocurrencies continues, it is more important than ever for investors to continue to perform their due diligence, keep abreast of market developments, and take sensible precautions when investing.