The native assets of proof-of-stake blockchains, which allow holders to passively earn returns through staking, are seen by Gensler to pass the Howey test and be accepted as securities, as reported by The Wall Street Journal on Thursday. These assets have just entered the market and include Cardano, Solana, and the second biggest cryptocurrency by market size, Ethereum.
If an asset fits the Howey test’s parameters, it is classified as an “investment contract” and is therefore subject to federal security rules.
According to the criterion, an asset is considered an “investment contract” if investors make a commitment to provide financial backing for a business with the expectation of profiting from the company’s activities. According to Gensler, proof-of-stake cryptocurrencies have a good chance of passing that test and being considered securities.
The Wall Street Journal reported that he said there’s additional proof that, under the Howey test, the investing public is anticipating returns based on the work of others. Another sign is that investors expect returns from the work of others.
Verification of Ethereum transactions is now performed by proof-of-stake rather than proof-of-work.
Staking, or locking up one’s money, is a necessary part of the proof-of-stake blockchain protocol that allows it to operate and ensures the security of the transactions that are processed on the network.
It’s not the same as Bitcoin or any other proof-of-work cryptocurrency, which is now the most valuable cryptocurrency in terms of market value. The Bitcoin mining process is very power-hungry.
If Gensler’s claims hold water, Ethereum’s historic move would suggest that the asset now has the potential to be classified as an “investment contract,” subjecting it to the rules governing securities. Although Gensler has stated his belief that Bitcoin is not a security, he has previously refrained from commenting on Ethereum specifically. While discussing staking and proof-of-stake currencies, the chairman of the SEC did not specifically mention Ethereum or any other currency.
The Coin Center said on Thursday that Ethereum’s move to proof of stake shouldn’t change how the cryptocurrency is managed. However, Gensler’s predecessors at the SEC made it plain that they did not consider Ethereum to be a security, so it’s possible that this is just a policy decision.
According to a statement released on the Coin Center’s blog earlier today, central to classification as security is continuous reliance on revenue received mostly from the labor of others.
Proof-of-work and proof-of-stake are “both consensus procedures” that are specifically meant to eliminate any such dependency by fostering an open competition amongst strangers.
