Has Ethereum become a "security"?

The transformation of Ethereum into Proof of Stake changed its nature. So much so that the creation of Vitalik Buterin finds itself in the crosshairs of the SEC.

Garry Gensler wants to oversee Ethereum

The Chairman of the SEC has declared that Ethereum could well pass the famous Howey test. “Allowing ETH holders to stack them in a node is tantamount to anticipating profits based on the efforts of others”, he launched to journalists from the Wall Street Journal.

Indeed, it would be difficult to assert that the stakers of ETH are working. These people are going to make money doing nothing for the rest of their lives…

While the miners Proof of Work perform demonstrable work, stakeholders are content to place their ETH in escrow, with their toes fanned out. It looks a lot like passive investing, so making ETH a security.

Garry Gensler spoke out on September 15, the same day as the “merge” from Ethereum…

As a reminder, the US Supreme Court has established four criteria for determining whether an asset is an investment contract (security):

  • A pecuniary investment
  • In a common project
  • In anticipation of profits
  • Through the efforts of others

In sum, the SEC could soon force Coinbase to de-list Ethereum if its founders do not register it with the SEC.

These remarks came a few days after a speech carefully crafted at the Practicing Law Institute conference. Gary Gensler gave his most direct comments to date.

The former MIT professor (where he taught courses on bitcoin) notably reaffirmed his position that most cryptocurrencies, stablecoins and other digital assets were securities.

According to him, since most cryptocurrencies are created and sold by centralized entities to people expecting potential profits, they therefore fall under the scope of the SEC.

Furthermore, although G. Gensler did not say so directly, the comment that cryptocurrencies are not securities “are probably only a small number, although they may represent a significant portion of the overall market value”was a nod to the idea that bitcoin is not a security.

He further stated that Congress should give more authority to the CFTC regarding the regulation of commodities (commodities), category in which bitcoin falls. The CFTC indeed regulates the markets where foodstuffs, minerals, oil, gold, and therefore, BTC are bought.

To sum up, Ethereum is an investment (security) contract. Bitcoin is a commodity.

Why does ETH pass the Howey test?

According to the SEC, the “investment of money” test is easily met in the case of the sale of digital assets. As well as the “joint enterprise” test.

However, the question of whether a digital asset qualifies as an investment contract is trickier when it comes to the “expectation of profit” “from the efforts of others” criteria.

For example, buyers of a cryptocurrency may rely on the efforts of others if they depend on their creators to develop and manage the network.

This is the case of Ethereum since Vitalik Buterin and his cronies are constantly changing its money supply.

In addition, the Ethereum foundation created by Vitalik and Gavin Wood carried out a presale in 2014. Sixty million ETH were sold to a few thousand insiders at a price of $0.30 cents each.

10% of ETH was also donated to the Ethereum Foundation

Incidentally, an additional 10% to the handful of developers who participated in the creation of Ethereum. Including Vitalik, of course, who continues to influence the protocol today. Nothing to do with Bitcoin which was offered to the world by an anonymous genius.

The criterion is also met if the creators of the project take action to support the price of the digital asset. For example by burning part of the assets. Which is now the case with PoS since part of the transaction fees are burned (burning).

[Soit dit en passant, le « burning » d’ETH est similaire à la perte de BTC à tout jamais. Cela profite davantage à ceux qui ont beaucoup de BTC ou d’ETH étant donné que cette perte a un effet multiplicatif sur la valeur de l’ensemble des BTC restants. Ceux qui en possèdent le plus en profite donc le plus. Le burning est foncièrement injuste.]

The same applies to the “efforts of others” criterion if the creators of the asset continue to play a managerial role. This is the case of Ethereum because of its ICO (Initial Coin Offering) and the still very strong involvement of Vitalik.

Conversely, Satoshi Nakamoto disappeared after two years, when the BTC was not even worth $0.30.

In short, big black clouds are piling up above “ultra sound money”. But probably it will be Congress that will decide the question. Don’t miss our article: Ethereum throws in the towel in the hashrate race

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