Officials and financial regulators, one after another, come up with the idea of ​​recognizing this or that cryptocurrency as a security. The high-profile case of the American SEC regulator against Ripple has been going on for the third year on this very issue. But what about Ethereum?

Regulatory pressure

On Thursday, March 10, the New York Attorney General’s Office filed a lawsuit against the KuCoin exchange from the Seychelles. The essence of the claims is that the platform conducted trades in unregistered securities. Among them, among other things, the plaintiff attributed the world’s second-largest cryptocurrency in terms of capitalization.

The statement caused a wide resonance. Until now, most regulators, including the Commodity Futures Trading Commission (CFTC), have recognized ETH as a commodity. If Ethereum is now recognized as a security, this will have a significant impact on the cryptocurrency markets, the rules for trading digital assets and other crypto projects other than Ethereum.

And why, in fact, can ETH be recognized as a security?

Reasons for recognizing ETH as a security

The main reason is the transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS). If the first system involves a consensus algorithm and a protection system through solving problems and searching for a hash using special computing devices, now everything is determined by how many tokens you have on hand. The more ETH you have, the more significant your position in the system, the more power your word has.

And how does this differ from the same shares, shares in the company? Whoever has the largest package of securities makes the decision, is a member of the board of directors, etc. Small private investors who buy shares for their salary can only count on dividends and on the growth of the market rate.

Questions about governance arise not only because of the transition to Proof-of-Stake. The decentralization of Ethereum is questionable. The transition to PoS only exacerbated them. In fact, all real power and initiative lies in the hands of Vitalik Buterin and the development team. If you want to switch to PoS, you can. They wanted to start burning ETH – they launched it. In the same Bitcoin payment system, everything is arranged much more transparently: there are no changes in the consensus protocol, decentralization is carried out at the expense of miners who are scattered all over the world, and initiatives to radically update the system through a hard fork are not welcomed by the community.

But do any authorities recognize ether as a security?

Definition of a security under the SEC

What the New York Attorney General’s Office says in a statement causes a buzz around ETH, but does not make it a stock or a bond all at once. Much more important is how securities are treated by various regulators, including the US Securities and Exchange Commission (SEC).

The SEC treats securities in accordance with
deed Howey case, 1946. In accordance with this precedent under the security
understood “a contract, transaction, or scheme whereby a person invests his money in an ordinary enterprise and expects to receive income only from the actions of others.” Does ether fit this definition? In general, yes. When you buy it, you basically do nothing, and the income is made up of the actions of third parties. In contrast, by the way, from bitcoin, where you are directly involved in mining, due to special equipment. On the other hand, the crypto community has certain questions about the process of validation and interpretation of this procedure, therefore, as they say, not everything is so simple.

The fact that the term matches the definition does not mean that the SEC will eventually recognize the ether as a security. The economic situation is already difficult. No matter how the regulator raises rates, inflation is still far from the target value of 2%. And then three banks at once (Silvergate Bank, Silicon Valley Bank and Signature Bank) crashed. Will Chairman Gary Gensler put more pressure on already anxious investors in this situation? Most likely not in the near future.

What are the consequences of recognizing ether as a security?

Implications for the crypto market

In the world of cryptocurrencies, most altcoins are currently on PoS. Or its variations like Proof-of-History. The point is not what the consensus protocol is called, but the method of mining coins.

And they almost all and everywhere go through staking. They want to recognize Ether as a security primarily because of PoS. Obviously, logically, this can also affect all other projects using staking: Solana, Cardano, Avalanche, and so on.

In favor of this fact plays the case law in the United States. That is, if you create a case, then it will be based on it in the future. Here is just one possible option:

  1. Ether is recognized as a security due to the fact that it is on PoS.
  2. Everyone else is also recognized because they have PoS.

Thusuntil ether is recognized as a security, and this is only mentioned in the New York Attorney General’s lawsuit, the situation remains in balance. In order for any changes to be adopted, recognition from the regulators is necessary, which is now unlikely due to the heap of economic problems. If this does happen, then most likely the rest of the PoS cryptocurrencies will also be recognized as securities.

This material and the information in it does not constitute individual or other investment advice. The opinion of the editors may not coincide with the opinions of the author, analytical portals and experts.