Ethereum’s New Staking Model Could Trigger Securities Laws Warns SEC Chairman

The day when the Ethereum developers successfully completed the Merge upgrade triggering one of the biggest software upgrades in the history of blockchain, the commentary from SEC chair Gary Gensler has drawn concerns that Ethereum’s staking model could trigger securities laws.

Speaking after the Senate Banking Committee on Thursday, September 15, SEC Chair said that the digital assets and the intermediaries which allow users to “stake” their crypto assets could be defined as a security as per the Howey test.

As reported by the Wall Street Journal, Gensler said: From the coin’s perspective […] that’s another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others”.

Gensler further added that allowing crypto holders to stake coins results in the investing public anticipating profits based on the efforts of others”. Additionally, he said that these intermediaries offering staking services to customers looks very similar to the activities of lending.

Over the last year, the SEC has been repeatedly signaling that firms offering crypto-lending products need to be registered with the agency. Crypto lending platform BlockFi that failed to do so had suffered $100 million in fine.

Some of the other industry experts also weighed on the SEC chair’s comments. Gabor Gurbacs, director of digital assets strategy at American investment firm VanEck, wrote: “SEC chair says system used by Ethereum following software update could trigger securities laws. Literally published on day 1 of the fork/merge. I have been saying this for over 6 years that POW to POS transitions can draw regulatory attention. To be clear, I am not saying that ETH is necessarily a security because of its proof model, but regulators do talk about staking in the context of dividends which if one feature of what securities laws call a "common enterprise". There are other factors in the Howey test too”.

Previously, the SEC had said that they don’t see Bitcoin and Ethereum as securities but rather as commodities. However, it was said when Ethereum was following the Proof-of-Work algorithm. Now that Ethereum has completely changed its consensus model, the SEC could be seeing it with a different eye.

Last month, Gensler said that they shall be treating crypto like the rest of the capital market. He added: “We can dispense with the idea that crypto lending isn’t subject to regulation. On the contrary, the rules have been around for decades. The platforms aren’t following them. Noncompliance isn’t the inevitable result of the crypto business model or underlying crypto technology”.