Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
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Post-Merge Will Ether Be Closer to a Security?
Coindesk | Frederick Munawa | Aug 10, 2022
A Georgetown Law professor sounds an alarm on how proof-of-stake makes it easier for ether to meet the Howey Test.
Ethereum’s upcoming Merge (Expected to be complete by October) could make the second-largest blockchain greener, faster and cheaper. But a law professor says it could also create regulatory headaches by transforming ether (ETH), the network’s native asset, into a security under U.S. law.
https://twitter.com/AdamLevitin/status/1550990967670554624?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1550990967670554624%7Ctwgr%5Ecb110666d1480c93d4f9d0786e8ce158aecb91cb%7Ctwcon%5Es1_c10&ref_url=https%3A%2F%2Fwww.coindesk.com%2Ftech%2F2022%2F08%2F10%2Fwhats-at-stake-will-the-merge-turn-ether-into-a-security%2F
See: Vitalik: Ethereum creator dumps cold water on Zuckerberg and Michael Saylor
Levitin’s argument is anchored in the Howey Test – detailed in a 1946 U.S. Supreme Court ruling often used to determine whether an asset is a security. To fully appreciate Levitin’s perspective, it’s important to understand Howey and the concept of staking in a proof-of-stake system.
A world where ETH is a security
If Levitin is right, and, more importantly, if the U.S. Securities and Exchange Commission (SEC) shares his view, exchanges that list ether (and that would be nearly all of them) would be subject to more onerous regulatory requirements. Like the bitcoin (BTC) cryptocurrency, ether has until now been treated as a commodity, outside the SEC’s jurisdiction.
Essentially, smaller decentralized finance (DeFi) projects, especially those outside the United States, may continue to operate. Even if these projects run afoul of U.S. securities laws, Levitin said the SEC would be less likely to deploy its limited enforcement resources to convict them when big centralized organizations make easier targets.
See: Coinbase Responds to New SEC Securities Listing Probe
The biggest change may be in the regulation of centralized exchanges. Currently, exchanges need only to register as money services businesses at the federal level and obtain money transmitter licenses in the states where they operate to facilitate spot ETH trading. A securities designation would bring them under the additional authority of the SEC.
At a minimum, that would mean new business models for exchanges and more complex transactions for customers. Many other downstream effects would likely manifest.
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