The potential designation of ether (ETH) as a security is creating doubt in the cryptocurrency markets and could have far-reaching consequences if it is determined to be an investment security.
The question of whether the second-largest cryptocurrency by market cap is a security has been widely speculated since Ethereum switched to a “proof-of-stake” blockchain network last year. This has allowed investors to “stake” their coins in exchange for rewards – similar to the interest paid on bonds.
The allegation from a New York state regulator has brought the debate back to the fore. Ether has so far been treated as a commodity by state and federal regulators, including the Commodity Futures Trading Commission (CFTC). If it is designated as a security, it could drastically alter how (and if) the currency and others like it are traded in the U.S.
The SEC defines a security as “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”
The SEC’s Howey Test would likely classify proof-of-stake as a security because its interest payouts require little work and align with the idea of “expecting profit.”
If ether is found to be a security, exchanges listing it will need to register as securities broker-dealers with the SEC. Decentralized trading platforms could also face legal trouble. The U.S. government has already taken action against one blockchain-based computer program, the Tornado Cash mixer, for its links to money laundering.
The implications of an ether-as-a-security world would be felt across the crypto industry. It could potentially impact other tokens that use similar proof-of-stake mechanisms. It could also open the door for other regulators to follow the NYAG’s lead.
The suit from the New York Attorney General’s office has raised questions about how the SEC under Chairman Gary Gensler will approach the matter. Gensler has previously hinted that the switch to proof-of-stake brings Ethereum closer to the agency’s definition of a security.
The price of ether dropped by around 7% in wake of the NYAG’s announcement of its lawsuit against KuCoin. It will be interesting to see how the crypto market responds when the SEC and other regulators make their decision on the matter.
