Ethereum is Wrong About Proof-of-Stake! PoS is Considered Securities

Chairman of the Securities and Exchange Commission explained that PoS might be seen as securities

Popular cryptocurrency blockchain Ethereum has completed its long-awaited switch to proof-of-stake. That upgrade process, better known as "The Merge", has been years in the making. Previously, the Ethereum blockchain relied on proof-of-work, a consensus mechanism that requires a lot of computational effort from all the decentralized nodes participating in the blockchain. The proof-of-stake (PoS) mechanism radically changes how the Ethereum blockchain works. It eliminates the need for mining new blocks as the network is now secured using staked ETH and validators.

What is Proof of Stake

Proof-of-stake (POS) was first proposed by BitcoinTalk user QuantumMechanic on 11 July 2011. You show your commitment by holding coins. Your chance to validate the next block and get the coins is proportional to your current holding. POS is a bit too obviously "thems what has, gets" so you have to convince the users to go along with it. There was zero chance that bitcoin would adopt POS. But many minor altcoins seized upon POS just on the basis that they needed something to let them pretend to be decentralized that wasn't POW, and this was something. Most remained functionally centralized in practice.

Before the Ethereum merge event, some experts and investors predicted a fall in the price of Ethereum and hence traded cautiously. Popular analysts referred to the merge hype as a buy the rumor, sell the news scenario. The Feds reserves tightening and other market factors added to the volatility recorded in the valuations of ETH, BTC, and other Altcoins.

After the merge event, analysts' predictions proved right as the ETH price crashed below the support level. As a result, several ETH investments got withdrawn, and a few additions were recorded after the merge.

Proof-of-work mining is a crime against humanity. Using a country's worth of electricity, and thus pumping huge amounts of carbon dioxide into the air, is unconscionable. But last week, the Chairman of the Securities and Exchange Commission, Gary Gensler, commented on staked cryptocurrencies. The regulator said in a Wall Street Journal edition that staked cryptocurrencies might be subject to regulations. He further explained that Staked crypto might be seen as securities.

Following Gensler's comment, there may be regulatory uncertainties surrounding the new Ethereum proof-of-stake Token. As a result, corporate investors may not want to dive into ETH investment because of regulatory uncertainty.

According to the Journal, Ethereum's proof-of-stake caught SEC's attention. He further noted that proof-of-stake coins have contract attributes and will require SEC regulations. Gensler's comments came out hours after the completion of the Ethereum merge.

Is Ethereum Staking a Security?

The staking model for Ethereum is probably an investment contract under the Howey test of whether something is a security under US law — and many people realized this years ago. Coinbase is offering staking as a service. The SEC won't be a big problem here because they're offering it only to institutional clients so far. But staking as a service pretty clearly is security. The question is whether the SEC will be able to argue in a legally robust way that Ethereum validation in general is an investment contract — and that the ETH tokens involved are securities.