As a security, Ether might qualify as an investment contract due to its expected rewards or profits. The SEC seeks to control all cryptocurrencies the same way as securities, except for BTC.
Over the last week, the long-awaited Ethereum Merger has driven the asset and the overall crypto market. However, there might still be some negative implications about the regulatory framework.
Several bullish factors have led to the Ethereum transition to Proof of Stake (PoS) in September. Two of the main are a massive reduction in grid power consumption and deflationary issuance.
However, there might be a negative outcome if anti-crypto US financial regulators decide that Ethereum qualifies as a security.
Professor Adam Levitin, from Georgetown University Law Center, Washington DC, recently suggested a scenario where ETH might qualify as a security.
The Expected Profits on ETH Make It an Investment Contract
Gary Gensler, the Securities and Exchange Commission (SEC) Chairman, seeks to secure the control of his agency over cryptocurrencies. If they succeed, they could treat most tokens as securities and regulate them like stocks.
Levitin thinks it is possible to consider any token on a PoS network a security. According to the Howey Test used in a Supreme Court in 1946, a security is an investment contract due to its expected profits.
The test aims to determine whether people have invested money in a business with an expectation of profit derived from the efforts of others.
Concerning Ethereum, the investment would consist of staking with the expectation of a reward or gain of about 4.2% annual percentage yield (APY).
That meets the common business requirement, but only because of the efforts of a third party. It is a gray area as stakers are network participants who provide work in return by validating blocks.
According to Levitin, the contributions from individual stakers might be small compared to the sum that could satisfy the criteria of the efforts of others.
The law professor added that this does not answer the question regarding the issuer when dealing with a decentralized system.
Gary Gensler told financial news television channel CNBC that the only cryptocurrency he does not consider a security is Bitcoin.
The Prices of Ether Cool Down despite the Recent Momentum
After a two-week 30% rally, the prices of Ether reached resistance over the weekend and pulled back on Monday.
ETH is trading at around USD 1,546 and has accumulated a 2.4% loss over the last 24 hours. Its daily trading volume is above USD 18.12 billion, while its market capitalization is about USD 185.30 billion, according to CoinGecko.
The price of the crypto asset remains 69% below its all-time high despite recent momentum.
Turbulent macroeconomic news in the US might cause further volatility for Ether and the crypto market in the coming days.
The relevance of cryptocurrencies is increasingly evident, which regulators like the SEC do not overlook. By considering it a security, they exert further control on how people use it, going against its decentralization principles.
By Alexander Salazar
