Ethereum’s big software update on Thursday may have turned the second-largest cryptocurrency into a security in the eyes of a top U.S. regulator.
Securities and Exchange Commission Chairman Gary Gensler said Thursday that cryptocurrencies and intermediaries that allow holders to “stake” their coins might pass a key test used by courts to determine whether an asset is a security. Known as the Howey test, it examines whether an asset is bought by investors hoping to earn a return based on the efforts of others.
“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,” Mr. Gensler told reporters after a congressional hearing. He said he wasn’t referring to any specific cryptocurrency.
Some of the largest cryptocurrencies—including Solana, Cardano and, as of this week, ether—use staking to verify transactions. The staking system allows investors to lock their cryptocurrencies for a specified amount of time on a blockchain that logs transactions. In exchange, the investor receives a return.
If an intermediary such as a crypto exchange offers staking services to its customers, Mr. Gensler said, it “looks very similar—with some changes of labeling—to lending.” The SEC has repeatedly signaled over the past year that firms offering crypto-lending products need to register with the agency and in February BlockFi Lending agreed to pay a $100 million penalty for failing to do so.
Ether completed a software upgrade on Thursday to a “proof-of-stake” model for verifying transactions. The upgrade, dubbed The Merge, allows users to participate in securing the network by putting their own crypto holdings on the line—an incentive to ensure that only valid transactions are added to the blockchain.
Ether previously relied on a “proof-of-work” model that requires transaction validators to commit massive amounts of computing power to the network. Bitcoin, the largest cryptocurrency, still uses proof-of-work.
