Key Takeaways
- A recent SEC investigation into insider trading has revived debates over whether Ethereum could qualify as a security.
- Some have argued that ETH passes the Howey test due to the way it was launched and Ethereum’s upcoming move to Proof-of-Stake.
- As ETH stakers earn revenue from validating blocks on the Ethereum network, there is an argument that ETH investors buy the asset with the expectation of a profit. However, a security classification from the SEC seems unlikely.
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Could the SEC have the grounds to classify Ethereum as a security once it completes its “Merge” to Proof-of-Stake? Crypto Briefing explores one of crypto’s most hotly contested issues.
Ethereum and the SEC
Almost seven years after the Ethereum network began producing blocks, the debate over whether its token should be classified as a security still rages.
Ahead of Ethereum’s launch in July 2015, the network sold its native token, ETH, through an initial coin offering (ICO) in exchange for Bitcoin. Approximately 50 million ETH were sold during the ICO, netting the Ethereum Foundation, a non-profit set up to steward the network’s development, over $18 million.
In Ethereum’s infancy, many argued that ETH would have passed the SEC’s Howey test. Used to assess whether or not an asset constitutes a security, the Howey test seeks to determine if a given transaction is an investment contract under three criteria: whether it is an investment of money, whether it is in a common enterprise, and whether there is an expectation of profit, derived explicitly from the efforts of others.
The Ethereum Foundation sold ETH directly to the public, meaning it met the requirement of an investment of money. Additionally, the Ethereum network, for which ETH is the currency, required the direct input of over 100 developers to launch, likely qualifying as a common enterprise. Finally, the Ethereum ICO happened in August 2014, 11 months ahead of the network’s…
