Speaking to reporters after the Senate Banking Committee on September 15, SEC Chairman Gary Gensler reportedly said that cryptocurrencies and intermediaries that allow holders to “stake” their crypto may qualify as a security under the Howey test , according to the Wall Street Journal. “From a currency perspective […] this is another indication that under the Howey test, the investing public expects profits based on the efforts of others,” the WSJ quoted Gensler as saying. The comments came on the same day as Ethereum (ETH) transitioned to proof-of-stake (PoS), meaning the network will no longer rely on energy-intensive “proof-of-work” mining and instead allow validators to verify transactions and create new blocks in a process that involves “staking”. Gensler said that allowing holders to stake coins results in “the investing public expecting profits based on the efforts of others.” Gensler went on to say that the intermediaries that offer betting services to its clients “are very similar – with some changes in labeling – to lending”. The SEC previously stated that it did not view ETH as a security, with both the Commodity Futures Trading Commission (CFTC) and the SEC agreeing that it functioned more like a commodity. The SEC is keeping a close eye on the crypto space, particularly those it claims are securities. The regulator has been embroiled in a case against Ripple Labs regarding the launch of the XRP token. The SEC has also pushed companies that offer crypto-lending products to register with them, including a $100 million fine imposed on BlockFi in February for failing to register high-yield interest accounts that the SEC considers securities. Gabor Gurbacs, director of digital asset strategy at US investment firm VanEck, tweeted to his 49,300 followers that he had been saying for more than six years “that the transition from POW to POS may attract regulatory attention”. To be clear, I’m not saying that ETH is necessarily a security because of its proof-of-concept model, but regulators are talking about staking in the context of dividends that are a feature of what securities laws call a “joint enterprise.” There are other factors in the Howey test. — Gabor Gurbacs (@gaborgurbacs) September 15, 2022 Gurbacs went on to clarify that regulators refer to staking rewards as dividends, which is characteristic of the Howey test. The Howey Test refers to a 1946 Supreme Court case where the court determined whether a transaction qualifies as an investment contract. If it does, then it will be considered a security and covered by the Securities Act of 1933.
