Gary Gensler, the SEC’s Chairman, commented on Thursday, September 15th that he considers that tokens working on a PoS model are likely all securities. His comments were particularly conspicuous as they came just hours after Ethereum completed its highly-anticipated Merge.
Gensler Says That Staking Makes Securities Out of Cryptocurrencies
This Thursday, Chairman Gensler opined that he believes that most digital assets that use staking fit the definition of securities as identified by the Howey test. While Gensler specifically mentioned that he isn’t referring to any particular cryptocurrency, the timing of his statement is very noteworthy.
Several hours before the statements were made, Ethereum completed its much-anticipated upgrade to a proof-of-stake (PoS) model. If Gensler is right and if the SEC starts acting on this view of staking, ETH might soon find itself in the SEC’s crosshairs.
Gensler has been adamant for some time that most cryptocurrencies are indeed securities and has argued his point by citing the Howey test. The Howey test is a 4-element method the commission has been using for decades to determine if something is a security.
The test hinges on a court case from 1946 which was itself based on the 1933 Securities Act. The four criteria needed for something to be declared a security are:
- Whether it is an investment of money;
- Whether the investment is in a common enterprise;
- Whether it is made with expectations of profit;
- And whether that profit hinges on the efforts of others.
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Backlash Against Viewing Cryptos as Securities
The SEC’s recent aggressive actions in the crypto sector—perhaps best exemplified by its case against Coinbase—have been facing a lot of backlash. Expectedly, just as Gensler is adamant about his assessment of cryptos as securities, Coinbase made its unyielding statement on the matter—that it doesn’t list securities.
The debate went far beyond the confines of the crypto sector and found its way into Washington. Last month, Tom Emmer, a representative from Minnesota, likened the commission to a “shakedown authority” when it comes to Crypto.
Today, Senator Pat Toomey of Pennsylvania attacked Gensler’s stance in an interview. The Senator pointed out that the SEC has so far failed to provide the framework it is using when assessing digital assets. He also dismissed the stance that most cryptos are securities.
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Do you think that staking makes cryptos fulfill all the criteria of the Howey test? Let us know in the comments below.
About the author
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.