Has The Merge Turned Ether into a Security? Yes, SEC's Gary Gensler Suggests
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Has The Merge Turned Ether into a Security? Yes, SEC's Gary Gensler Suggests

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According to The Wall Street Journal, Gary Gensler believes cryptocurrencies that operate on PoS chains may be classified as securities.

Has The Merge Turned Ether into a Security? Yes, SEC's Gary Gensler Suggests

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Ethereum's switch to Proof-of-Stake could attract unwelcome attention from the U.S. Securities and Exchange Commission.

According to The Wall Street Journal, Gary Gensler believes cryptocurrencies that operate on PoS chains may be classified as securities.

While the SEC chairman stressed that he wasn't talking about any digital asset in particular, his remarks are particularly ominous given how The Merge had taken place just hours earlier.

Referring to the Howey test — which courts use to assess whether assets should be classed as securities — Gensler was quoted as saying:

"From the coin's perspective… that's another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others."

This matters because organizations that issue securities — with stocks and bonds just some of the most common types — need to make a range of disclosures to the SEC.

Crypto projects have faced action from the SEC before after launching initial coin offerings that the regulator regarded as an illegal securities offering.

All of this comes amid ongoing regulatory uncertainty for the industry, with a number of agencies battling for jurisdiction in the nascent digital asset market.

Awkwardly, it may be the case that Ether wouldn't have been counted as a security had it continued to exist on a Proof-of-Work network.

Is Gensler Right?

Coin Center — a non-profit focused on crypto policy — does not believe "the technological differences between PoW and PoS warrant any different treatment." A blog post explained:

"The economic realities of validating a chain through mining and validating a chain through staking are similar. In both cases validators are an open set of participants and the only precondition to participation is provably suffering some cost. In Proof-of-Work that cost is energy and computing resources, in Proof-of-Stake it is the time value of money."

The organization added that PoW and PoS are "explicitly designed" to avoid a reliance for profits derived primarily from the efforts of others — something that's central to the classification of a security. Instead, these consensus mechanisms focus on "creating an open competition amongst strangers wherein any self-interested participant can and will fill the gap left by any other unresponsive, corrupt, or censorious participant."

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