Decision To Switch Ethereum To Proof-Of-Stake May Have Been Based On Misleading Energy FUD

After countless delays, the Ethereum “Merge” finally took place last week, switching the blockchain protocol from proof-of-work (PoW) to proof-of-stake (PoS).

What this means, in brief, is that Ethereum’s native coin, Ether (ETH)—the world’s second largest digital asset following Bitcoin (BTC)—can no longer be mined using a graphics processing unit (GPU). Instead, participants can choose to “stake” their ETH on the network. The Ethereum network then selects which of these participants, known as “validators,” gets to validate transactions, and if such validations are found to be accurate and legitimate, participants are rewarded with new ETH blocks.

So what’s the catch? Well, there are a couple of big ones: 1) To become a validator, participants must stake at least 32 ETH, the equivalent of $43,000 at today’s prices, and 2) They must stake them for years.

You can see, then, how the Merge has transformed ETH from a decentralized asset, available to any young gamer with access to a decent GPU, to more of a centralized, oligarchic asset, controlled by a relatively few participants who already own tens of thousands of dollars’ worth of ETH.

In fact, as CoinDesk reported last week, two large validators were responsible for over 40% of the new ETH blocks that were added in the hours post-Merge. Those validators are crypto exchange platform Coinbase and crypto staking service Lido Finance.

PoS Puts Ether In Regulators’ Crosshairs

But wait, there’s more. By converting to PoS, Ether risks being seen by U.S. regulators as a proof-of-security asset. Last Friday, the White House published its first-ever crypto regulatory framework, just a day after the Merge was completed.

Gary Gensler, head of the Securities and Exchange Commission (SEC), has said on numerous occasions that PoW assets such as BTC are commodities, not securities, and should therefore not be regulated as securities.

That’s not the case with PoS, according to Gensler. Last week, the SEC chief commented that digital assets that allow investors to stake their holdings in exchange for new coins may qualify them as securities. The implication, of course, is that oversight of these coins may end up being just as rigorous as that of stocks, bonds, ETFs and other highly regulated assets. Besides ETH, other popular PoS cryptocurrencies include Cardano, Polkadot and Avalanche.

The May crash of Terra’s Luna coin, which triggered the collapse of overleveraged crypto lenders such as Celsius, Voyager and Three Arrows Capital, was a major driver of this year’s crypto winter. Lenders’ promises of high returns on investment have landed them in financial and legal hot water. It’s very important that the Ethereum Foundation not make the same mistakes and invite the same level of scrutiny.

As we like to say at U.S. Global Investors, government policy is a precursor to…