Ethereum Attracts SEC Scrutiny After Successful Merge

Ethereum’s shift to Proof-of-Stake, while highly celebrated, has also attracted closer scrutiny from the Securities and Exchange Commission (SEC), with SEC Chair Gary Gensler hinting at a closer look at Ethereum from regulatory authorities. 

Gensler stated that exchanges offering staking services to users look “very similar” to lending services. 

An Increase In Regulatory Scrutiny 

Ethereum’s Merge was the talk of the town, as the protocol successfully transitioned from Proof-of-Work to Proof-of-Stake. However, this shift could bring about additional regulatory scrutiny, as the Securities and Exchange Commission Chair, Gary Gensler, hinted on Thursday. Gensler told reporters after a Senate hearing that the SEC could take a closer look at Ethereum and regulate it as a security. 

Speaking to reporters, the SEC also mentioned the Howey test, used by regulators to determine if a particular asset is a security. Gensler stated, 

“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.”

Gensler did, however, mention that he was not referring to any particular cryptocurrency. He maintained that Proof-of-Stake blockchains that generate new coins for users take on investment contract-like attributes, a move that could bring them under the SEC’s purview. 

Strict Rules For Securities 

Securities are assets that include stocks and bonds. Any securities issuer must file extensive disclosures with the SEC, mandated by laws in place since the 1930s. Brokers and exchanges facilitating the trading of securities are required to comply with stringent rules to protect investors from any conflict of interest. Cryptocurrency issuers stand to face stringent penalties if they are selling any asset deemed to be a security by the SEC. 

Staking is utilized by cryptocurrencies to verify transactions on their networks and is used by some of the most prominent players in the market, such as Solana, Cardano, and now, Ethereum. Investors can lock up their assets for a fixed period of time and earn returns. According to the SEC chair, if an intermediary such as a crypto exchange offers staking services to its users, these services are quite similar to lending. 

Over the past year, the SEC has repeatedly signaled that firms offering crypto-lending products are required to register with the agency. Back in February, the SEC forced BlockFi to pay a fine of $100 million for failing to register with the agency. 

Jostling For Jurisdiction 

Meanwhile, federal agencies, and the congressional committees they answer to, are competing with one another for jurisdiction over the crypto space. The Senate Agriculture Committee, the body overseeing the Commodity Futures Trading Commission (CFTC), held a hearing on Thursday to discuss and vet a crypto bill. Meanwhile, the Senate Banking Committee, overseeing the SEC, also held a hearing so members could question the SEC Chair. 

CFTC’s Crypto Bill 

The crypto bill proposed by the leaders of the agriculture group proposes designating Bitcoin and Ethereum as digital commodities instead of securities. Digital commodities do not fall under the purview of federal regulators under current law. Essentially, this bill would grant the CFTC the authority to regulate digital commodities. Crypto exchanges would be required to register with the CFTC, monitor trading activities, protect investors, and only offer assets resistant to manipulation. Additionally, the exchanges would also be required to disclose some information about the assets they list. 

However, consumer protection advocates have expressed their discomfort with the CFTC, stating that the body lacks the resources and experience to protect small investors in a market described by the SEC Chair as the Wild West. CFTC has a fraction of the staff when compared to the SEC, with the markets it watches over dominated primarily by banks, hedge funds, and other large companies. 

Crypto Industry Prefers CFTC Over SEC

On its part, the crypto industry has stated that it would prefer to be regulated by the CFTC and not the SEC. According to crypto lobbyists, the SEC has a rigorous disclosure regime which they believe is impractical and expensive. Crypto firms and lobbyists have already spent millions lobbying Congress to align with their interests. 

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.