While SEC Chairman Gary Gensler has not specified a specific cryptocurrency, proof-of-stake cryptocurrencies may be subject to securities laws.
Ethereum’s upgrade to Proof-of-Stake (PoS) may have brought the cryptocurrency back to the target board of the Securities and Exchange Commission (SEC).
Speaking to reporters after the Senate Banking Committee on Thursday, SEC Chairman Gary Gensler said brokers and brokers that allow cryptocurrency holders to “share” their cryptocurrency can identify it as a security under the Howey test, according to The Wall Street Journal.
“From the perspective of the coin, this is another indication that under the Howey test, investors expect returns based on the efforts of others,” the WSJ said of Gensler.
The comments came the same day that Ethereum switched to PoS; This means that the network will no longer rely on power-hungry proof-of-work (PoW) mining and will instead allow validators to validate transactions and create new blocks in a process that includes:
Gensler said that allowing holders to stake on the coins results in “the investing public predicting returns based on the efforts of others.”
Gensler went on to say that brokers who offer betting services to their clients are “very similar to lending – with some labeling changes.”
The Securities and Exchange Commission previously said it did not see the broadcast.
Both the Commodity Futures Trading Commission (CFTC) and the SEC recognize that it acts more like a commodity, like a security.
The SEC keeps a close eye on the crypto space, especially what it calls securities. The regulator has been embroiled in a lawsuit against Ripple Labs over the launch of the XRP token.
The Securities and Exchange Commission also ordered firms offering crypto-lending products to sign up for them, including a $100 million fine against BlockFi in February for failing to register high-yielding interest-bearing accounts that the SEC considers securities.
Gabor Gurbach, director of digital asset strategy at American investment firm VanEck, tweeted that for more than six years he has been telling his 49,300 followers that “the switch from POW to POS could get regulatory attention.”
Gurbach went on to explain that regulators refer to staking rewards as dividends, which is a feature of the Howey test.
Related: Crypto developers should work with SEC to find common ground
The Howey test refers to a 1946 Supreme Court case where the court determined whether a transaction qualifies as an investment contract. If so, it is considered a security and falls under the Securities Act of 1933.