SEC Chair Gensler States Once Again That Proof-of-Stake Tokens Are Securities

By: Mark Jessy

SEC Chair Gensler States Once Again That Proof-of-Stake Tokens Are Securities

March 16, 2023 9:00 AM

Since Ethereum's switch to proof-of-stake last year, Gensler has suggested that ether might be considered a security.


SEC Chairman Gary Gensler is digging in on his belief that proof-of-stake tokens could fulfill the definition of securities under the Howey Test, bringing them under his agency's regulatory authority.


Gensler told reporters after a commission decision on Wednesday that securities rules could be invoked because investors expect a return when they buy tokens backed by a proof-of-stake consensus mechanism. The Block broke the news first.


Gensler advised that token operators "attempt to come into compliance," adding that intermediaries should do the same. Token operators "are promoting and putting into a protocol, and locking up their tokens in a system, a protocol that's typically being constructed by a small group of entrepreneurs and developers," he added.


According to The Block, Gensler made his remarks in response to inquiries from reporters regarding remarks made last week by Rostin Behnam, chairman of the Commodities Futures Trading Commission (CFTC), in which he claimed that ether is a commodity and should be under his agency's control.


The two agencies have been fighting for a long time about who should be in charge of regulating cryptocurrency markets. Gensler has said that bitcoin is a commodity, but he has been reluctant to give up power or the possibility of future control over any other cryptocurrency, including ether. He has also said that the "vast majority" of the thousands of existing cryptocurrencies are securities.


In September 2022, following the Merge, the Ethereum blockchain upgraded to proof-of-stake, and Gensler proposed that proof-of-stake tokens may be investment contracts subject to securities regulations.


The New York Attorney General's Office filed a lawsuit against crypto exchange KuCoin (NYAG) this week, giving Gensler's claim that proof-of-stake tokens are securities an unexpected boost. In the lawsuit, the AG said that the Seychelles-based exchange is breaking US securities laws by selling tokens, like ether, that meet the definition of a security without first registering with the right regulatory agencies, in this case, the state AG's office.


Notwithstanding the public spat between Gensler and Behnam, the NYAG litigation is the first time a regulator has asserted in court that ether is a security, albeit in a state rather than federal court.