Gensler Rattles DeFi With Suggestion PoS Coins are Securities – The Defiant

The Merge may be complete, but the battle for legally defining Ethereum 2.0 is just beginning.

Hours after Ethereum completed its historic transition to Proof of Stake technology, a top U.S. regulator said cryptocurrencies that use this approach should probably be defined as securities. 

Onerous at Best

This is no small matter. If authorities deem Ethereum and its ilk securities or investment contracts like stocks and bonds the decision would activate a slew of obligations, including registering cryptocurrencies with the U.S. Securities and Exchange Commission. 

Fearful this move would be onerous at best and fatal at worst, the crypto industry has steadfastly fought the idea that most digital assets are securities. 

“Only the bluest of blue-chip revenue-generating corporations can afford this,” Gabriel Shapiro, general counsel at Delphi Digital, tweeted last week. “This won’t be compliance, it will be extinction.”

Speaking to reporters on Thursday, Gary Gensler, the SEC’s chair, said PoS cryptocurrencies like Solana, Cardano and now, Ethereum, may be considered securities under a precedent known as the Howey test. Since the inception of U.S. securities laws in the 1930s, the Howey test has been used to determine whether an investment is also a security and subject to reporting requirements.

“The investing public is anticipating profits based on the efforts of others,” Gensler said, according to The Wall Street Journal.

Cried Foul

Ethereum’s move from energy-hungry Proof of Work technology to the greener PoS system was oft-delayed and years in the making. It was Ethereum’s biggest upgrade in its seven year history and the most anticipated event of the year among crypto die-hards. 

The Merge is already reducing the blockchain’s power consumption by 99.98%, according to the Ethereum Foundation. The hope is that the shift will accelerate mass market adoption by attracting climate-conscious investors, users, and entrepreneurs eager to build new projects on the network.

The industry is worried regulatory interference may derail this trajectory. Crypto lawyers cried foul in the wake of the Journal’s report.

Jake Chervinsky, head of policy at industry lobbying group the Blockchain Association, said it was unclear how staking — as opposed to the mining used to maintain Proof of Work blockchains such as Bitcoin — made a cryptocurrency more of a security. Users who stake their crypto lock it into the network, helping to secure it while earning rewards in the process.

“The general idea seems to be ‘if you squint hard enough, staking sort of looks like a dividend or interest, & some actual securities have those, so maybe staked assets are securities too,’” he wrote on Twitter. 

No Difference

But the notion that…