By
Bhushan Akolkar
April 25th, 2024
Grant Gulovsen wrote in a blog post that the new long awaited Ethereum patch may cause regulatory changes of unexpected sizes.
CFTC Chairman Heath Tarbert has said that his entity is investigating Ethereum. Tarbert and other scientists carefully studied the inner processes of the Ethereum blockchain. Appears that the network will soon start changing itself to become a PoS-based system. Not only the miners but also the stakers will secure the transactions and blocks. On October 10, 2019, Tarbert concluded that Ethereum 2.0 tokens are likely to become virtual securities. Per Heath:
“It is my view as chairman of the CFTC that ether is a commodity.”
The SEC‘s Division of Corporate Finance head William Hinman said that Ether is not a commodity:
“Based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions”
Some articles claim that Ethereum Foundation hides from U.S. laws and taxes. Indeed, the Foundation is working in Switzerland as a nonprofit. But the Attorney Grant Gulovsen thinks that the U.S. lawmakers can list Ethereum as Commodity and start investigating into what has happened in the field in recent years.
He thinks that the SEC may decide that a new PoS validation system of Ethereum turns the coins into an investment asset. The Bitcoin industry may experience a shocking blast, as well as the Ethereum ecosystem.
Ethereum 2.0 PoS Model Can Change the Securities Law?
If you want to find out whether something is classified as the security, look into the statutory definition. It is there, in the Securities Act from 1933 and the Securities Exchange Act from 1934. To regulate investments, Congress created laws with blurry definitions of security: it is something that you can sell as an investment.
The term ‘investment contract’ is present in every security definition. The SEC and one of the District Courts have stated: the definition of the virtual deal depends on whether the asset fits ‘investment contract’ term. Considering the fact of the high popularity of smart contracts and digital assets, Ethereum PoS tokens will perfectly fit the definitions. Per the Supreme Court:
“An investment contract for purposes of the Securities Act means 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 Howey test shows us that investment contract ”…embodies a flexible rather than a static principle. One that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”
The Attorney cited that a validating node must contain 32 ETH on a special address. Otherwise, the validator will lose his status.
So ETH is similar to securities in terms of the investment scheme. Secondly, staking is a common enterprise, which is one of the conditions of the securities. Also, the stakers are expecting to receive profits. It is similar to the goal of classic investors. Per director Hinman:
“When the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As the network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.”
The Attorney noted that the Ethereum Foundation is giving large sums of money to coding teams. This works without any accounting. No stats on how much money do they spend yearly on thousands of people! The situation asks for regulatory oversight.