Ethereum Could go Through ‘Howey Test’ Following The Merge

The much-anticipated Merge took place in the early hours of Thursday and now there is a possibility that  Ethereum (ETH) may be probed by the United States Securities and Exchange Commission (SEC).

From indication, Gary Gensler who is the current Chairman of the SEC is likely mulling the idea of categorizing ETH as securities following its transition from proof-of-work (PoW) to proof-of-stake (PoS). 

Although not explicitly declared, this ETH transition now places it on a pedestal where staking is the order. Gensler talked about the Howey test which the court utilizes to determine whether a cryptocurrency is securities or non-securities. 

The Howey Test For Securities

According to the SEC, the Howey test is used for digital assets to “determine whether it has the characteristics of any product that meets the definition of “security” under the federal securities law.” 

Consequently, “the term “security” includes an “investment contract,” as well as other instruments such as stocks, bonds, and transferable shares.”

Also, the Howey test checks to know if a “reasonable expectation of profits to be derived from the efforts of others.” During a congregational meeting, the SEC Chairman reiterated this point, “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.”

Without specifically speaking of Ethereum, Gensler attested to the fact that cryptocurrencies and intermediaries which permit its holders to get involved in staking might be obliged to pass the Howey test.

If ETH passes the test and is finally regarded as security, trading platforms, exchanges, and issuers who sell it are likely to be accosted by the regulator and face strict liabilities. This is owing to the current undeterminable status of cryptocurrencies.

What is This Staking (PoS) About?

Ethereum’s transition to PoS involved doing away with miners because the new consensus mechanism no longer needed miners to add blocks to the blockchain.

Instead, it makes use of validators who only stake their coins in the network and then receive transaction fees as rewards when a node is finally selected. Meanwhile, the bigger the stake, the higher the chances of being selected as the next node.

TheCoinrise explained it as “the Proof Of Stake algorithm uses a pseudo-random election process to select a node to be the validator of the next block, based on a combination of factors that could include the staking age, randomization, and the node’s wealth.”