Proof-of-Stake Tokens Could Be Securities – Ethereum in Trouble?

Securities and Exchange Commission Chair Gary Gensler has once again indicated that tokens using staking mechanisms could be considered securities under US law. 

During an open meeting of the SEC on Wednesday, Gensler reportedly said that Proof-of-Stake (PoS) tokens can be considered securities because investors anticipate a return when they purchase them. 

“The investing public is investing anticipating a return, anticipating something on these tokens, whether they’re proof-of-stake tokens, where they’re also looking to get returns on those proof-of-stake tokens and getting 2%, 4%, 18% returns,” the SEC Chair said. 

Proof-of-stake is a cryptocurrency consensus mechanism for processing transactions and creating new blocks in a blockchain. 

The system works by selecting validators, who stake a certain amount of crypto, in proportion to their quantity of holdings in the associated cryptocurrency. 

A number of major cryptocurrencies, including Ethereum, the second-largest crypto in terms of market cap, use the PoS consensus mechanism. Gensler added:

“Whatever they’re promoting and putting into a protocol, and locking up their tokens in a protocol, a protocol that’s often a small group of entrepreneurs and developers are developing, I would just suggest that each of these token operators … seek to come into compliance, and the same with the intermediaries.”

Gensler’s remarks came after reporters asked him for his thoughts on statements made by Rostin Behnam, chairman of the Commodity Futures Trading Commission (CFTC), last week, arguing that ether is a commodity and should be regulated by his agency.

In early February, the SEC reached an agreement with crypto exchange Kraken to stop offering staking services or programs to clients in the country.

According to the SEC, Kraken failed “to register the offer and sale of their crypto-asset staking-as-a-service program,” which the commission now qualified as securities. 

Aside from the service’s halt, Kraken agreed to pay $30 million in disgorgement, prejudgment interest, and civil penalties.

If PoS tokens are categorized as securities for regulatory purposes, a stronger regulatory crackdown on both ETH as well as nearly all other altcoins can be expected from US regulators. 

Such a scenario has long been feared in Ethereum circles, although it remains unclear exactly how it would affect the Ethereum project and the price of ETH.

Regulators Agree that Bitcoin is a Commodity

While the regulatory fate of PoS tokens is yet to be determined, regulators agree that Bitcoin can be viewed as a commodity. 

As reported, CFTC Chair has claimed Bitcoin is the only crypto asset that can be categorized as a commodity. 

“[Bitcoin is] unlike any commodity we have dealt with,” Behnam said, admitting that the asset is difficult to regulate within the current framework.

Notably, U.S. Senator John Boozman (R-AR) has also revealed that federal courts and the Securities and Exchange Commission (SEC) chairman view Bitcoin as a commodity.

“Bitcoin, although a cryptocurrency, is a commodity. It is a commodity in the eyes of the federal courts and in the opinion of the Securities and Exchange Commission (SEC) chairman. 

There is no dispute about this,” he said at the time.