Gary Gensler, the SEC Chairman, has recently hinted that the SEC might classify proof-of-stake cryptocurrencies as securities. Up until now, they ware generally accepted with the commodities classification.
Gensler did not specifically mention Ethereum, but given that it has recently completed the Merge, the transition to Proof of Stake, it could potentially also be classified as a security. However, he also mentioned that Bitcoin, the biggest cryptocurrency, is not a security as there are no middlemen, unlike “a vast majority” of other cryptocurrencies.
Ethereum’s price dipped by about 11% after his comments.
Source: https://forkast.news/secs-gensler-proof-stake-cryptocurrencies-securities/ and many others
The point being…
The reason for ETH’s shock plunge to 11% is not because of his comments - it was a gradual plunge firstly, and second, it is now much easier to “mine” blocks at a faster rate with the new Proof of Stake algorithm. This has a knock-on effect on transaction fees, so it becomes less expensive to move transactions around, and thus ETH itself became less expensive to buy. Interesting how things work here, isn’t it?
But this topic is not about Ethereum’s price dropping - all cryptocurrencies do that. It’s about how the SEC could potentially re-classify Ethereum as a security in the future.
The Ethereum staking protocol itself does not constitute a security. But the staking pools ran by 3rd parties alarmingly pass the Howey Test - Users lock up their ETH in expectation of incremental future gains, all users are staking at the same pool (the common enterprise), and most crucially, the staking pool is ran by a 3rd party and not the decentralized network.
This could lead to the SEC regulating the staking pools themselves in the future, rather than the decentralized codebase that enables staking. It’s far more easier for them to regulate centralized 3rd parties in the first place. If this happens, we could see a stunt in Ethereum and other Proof of Stake coins’ economic growth as the SEC constantly interferes with the activity of staking pools.
The implications will reach exchanges, who are not only responsible for listing cryptocurrencies in the first place, but in some cases are running the staking pools themselves. Some, like Coinbase, do not list securities at all. If Ethereum is one day regulated as a security, it would be placed under similar regulatory pressure as anonymity coins such as Monero.
Not Bitcoin’s problem
Bitcoin does not have to worry about being reclassified as a security, because it does not use staking in the first place - it fails criteria #3 of the Howey Test (“The profit comes from efforts of a 3rd party”). Instead, miners can opt to use greener forms of energy, striking deals with utilities to buy up surplus electricity and get paid to use less, and moving out of places where there is a shortage of electricity on the grid.
Always remember that Proof of Work is the most secure, decentralized cryptocurrency algorithm and is the only one that has the potential to push other industries to using renewable energy.