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Proof of Stake Makes Cryptos More Security-Like, Says SEC Chairman

Securities and Exchange Commission (SEC) Chairman Gary Gensler had some chilling comments for proof of stake cryptocurrency issuers on Thursday.

The chairman suggested that a proof of stake (POS) consensus mechanism can bring a given cryptocurrency closer to security status. Thus, it would compel the project to operate under the commission’s laws and jurisdiction. 

Bad News for Ethereum?

The chairman reportedly shared his thoughts on POS cryptocurrencies with reporters after a congressional hearing. They would also coincide with the day that Ethereum – the second largest cryptocurrency – has adopted the mechanism to secure its network. 

Gensler specifically claimed that using a POS model could tick a critical box of the Howie Test. The Howie Test is a long-established model for determining whether an asset constitutes an investment contract. 

“From the coin’s perspective, that’s another indice that under the Howie Test, the investing public is anticipating profits based on the efforts of others,” he said.

Gary Gensler confirmed by Senate to lead the SEC, Wall Street's top regulator
Gary Gensler. Source: CNBC

POS blockchains achieve consensus by letting users stake their cryptocurrency holdings for the right to produce a block. If chosen by the network, those users earn more crypto as a reward – arguably building a profit motive directly into the token. 

This creates added uncertainty around Ethereum’s legal status, which Gensler suggested met the criteria of security while delivering a course in 2018.

As an official SEC Chairman, however, his verdict on all tokens besides Bitcoin hangs in the air. While making Thursday’s comments, he clarified that he was not referring to any particular POS assets. 

Other politicians have chosen to be a bit more specific, however. Commodities and Futures Trading Commission (CFTC) Chairman Rostin Benham has claimed that Ether should fall under his jurisdiction as a commodity. 

Cynthia Lummis – a Bitcoin-bullish Republican Senator from Wyoming – falls between both chairmen. While viewing Ethereum as a commodity, she has also said that Ethereum’s proof of stake could impact how it is regulated.

Furthermore, Lummis agrees with Gensler that the vast majority of cryptocurrencies are securities – a view the chairman reiterated today. 

Gensler: The Rules Are Clear

During the hearing, Gensler defended his approach to regulating the cryptocurrency space against multiple critics. When pro-crypto Senator Pat Toomey accused Gensler of being unclear about what defines security, the chairman argued that he has been very transparent. 

As he explained, classifying a token as security does not come down to its “centralization” versus “decentralization” at a computer level. Rather, it’s whether the group of developers constitutes a “common enterprise” responsible for boosting the token’s value. 

“Not liking the answer from the SEC doesn’t mean there isn’t guidance,” Gensler added. “We’re talking with a wide swath of these organizations right now to get them registered.” We’ve been pretty clear about this matter, and we’re going to continue to protect the public as best we can.”

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MicroStrategy’s Executive Chairman Michael Saylor agrees with Gensler on the matter of crypto securities. For this view, Ethereum co-founder Vitalik Buterin has called him a “total clown.”

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