The SEC chairman warns that the merge update could turn ETH into a security; indeed Gary Gensler declared that cryptos that use the “proof of stake” or PoS principle could be considered as “securities” after passing the “Howey” test.
Cryptos who pass the Howey test?
The Howey test, named after a landmark 1946 case that helped determine what is considered a security and what is not, states that a transaction becomes an investment contract if the money is “invested in a common enterprise with a reasonable expectation of profit from the efforts of others.”
If a transaction passes the Howey test, it is considered an investment contract and must be registered with the SEC.
This Thursday, the Ethereum blockchain successfully completed The Merge without a hitch. This transition from a “proof of work” to “proof of stake” mode of operation.
Like many who have been waiting for the ethereum merge, the SEC is also questioning this system which according to its president allows for rewards to be earned.
Speaking to the Senate Banking Committee, which oversees his institution, SEC Chairman Gary Gensler said the staking can be officially considered an investment. This would place the coin as a stake under the jurisdiction of the SEC, not the Commodity Futures Trading Commission (CFTC), which often regulates cryptos in the United States as digital products.
“This is another indication that, under the Howey test, the investing public anticipates profits based on the efforts of others,” said Gary Gensler.
However, Gensler clarified that he was not referring to any crypto at this point. But the announcement that will be made shortly after the merge upgrade could make a splash, as the WSJ reports.
The SEC has been very clear about including digital assets in the securities laws, especially cryptos sold with a promise of future profits.