Proof-of-Stake Is Just an Excuse for the SEC; It Doesn’t Make Ethereum a Security

Consensys has refuted the Securities and Exchange Commission’s (SEC) assertion that Ethereum could be considered a security following its transition to a Proof-of-Stake consensus mechanism. 

The software company, established by Ethereum co-founder Joe Lubin, filed a lawsuit in a Texas federal court against the SEC, arguing that the regulatory body is misapplying federal securities laws.

Proof-of-Stake Doesn’t Make Ethereum a Security

The controversy began when the SEC issued a Wells notice to Consensys, indicating plans to sue the firm. The notice was a part of the SEC’s wider investigation dubbed “Ethereum 2.0,” initiated on March 28, 2023. This formal order of investigation was approved by Gurbir Grewal, head of the SEC’s Division of Enforcement, allowing for the subpoena of parties involved in Ethereum transactions.

Despite Ethereum’s significant market presence and widespread adoption, the SEC’s investigation focuses on Ethereum’s Proof-of-Stake model. According to the regulator, the transition to this consensus mechanism might meet the criteria of the Howey Test, which determines if an asset functions as an investment contract and thus qualifies as a security.

Consensys argues that the SEC’s approach is inconsistent with previous guidance. In 2018, Bill Hinman, then-Director of Corporation Finance at the SEC, stated that Ethereum was not a security.

“Putting aside the fundraising that accompanied the creation of [Ethereum], based on my understanding of the present state of [Ethereum], the Ethereum network and its decentralized structure, current offers and sales of [Ethereum] are not securities transactions,” Hinman said.

However, the current SEC Chairman Gary Gensler hinted that Proof-of-Stake tokens could trigger securities classifications. This position reflects a pivot from the agency’s earlier stance and has injected uncertainty into the $2 trillion cryptocurrency industry.

In its lawsuit, Consensys claims the SEC’s current actions represent an unlawful overreach. The company emphasizes that Proof-of-Stake increases decentralization by enabling wider network validation and maintenance participation. 

This contradicts the notion that it could centralize control, which is often a characteristic of securities.

“The Proof-of-Stake, or the Merge upgrade, really is kind of the SEC’s hook for trying to say Ethereum is a security. But I think that’s just a surface level point. Nothing about Proof-of-Stake itself versus Proof-of-Work would make Ethereum a security. I think really that’s just grabbing at some explanation for the SEC,” a Consensys spokesperson told BeInCrypto. 

Read more: Proof of Work and Proof of Stake Explained

The SEC has not publicly commented on the ongoing case, maintaining a tight-lipped stance amidst the industry’s scrutiny. Meanwhile, Consensys hopes the court will provide a definitive resolution to Ethereum’s regulatory status debate. This a matter with far-reaching implications for the future of cryptocurrency regulations.