From the moment it was created, the debate about the nature of ETH cannot be summed up simply. The controversy will only get worse when the recent transition from the agreement completes to a “proof-of-stake” (PoS) transaction verification mechanism.
The core is whether ETH is a commodity or a security. U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler was the first to talk about this after the merger.
Therefore, his main position comes down to the fact that most crypto tokens can be used as securities according to the Howey test. According to this test, the existence of an investment contract is confirmed if “a monetary investment is made in an ordinary enterprise and profits from the activities of other participants are reasonably expected”.
According to Gary Gensler, after switching to POS, Ethereum began to reflect more of the nature of a security because “token collateral is very similar to lending,” while investing in Ethereum is actually associated with profit expectations, as the activities of all stakeholders (“other participants”) allow the entire verification mechanism to exist, even if the profits of a particular stakeholder depend on his particular interests.
At the same time, the Responsible Financial Innovation Act (RFIA) refers to most digital currencies as commodities, which should include ETH. RFIA provides clear criteria for determining when to treat digital assets as commodities and when to treat them as securities. If the asset does not confer rights on the owner company, the token issued under the investment contract will be eligible as a “subsidiary asset”. RFIA clearly distinguishes ancillary assets from the underlying investment contract that records the ancillary asset transfer agreement. It turns out that as long as ETH gives a company rights, including receiving dividends, it is a commodity.
Note: On June 7, 2022, U.S. Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) introduced the Responsible Financial Innovation Act. 4356 – The Responsible Financial Innovation Act, or RFIA for short, aims to establish a U.S. regulatory system for digital assets. The highly anticipated bill aims to address long-standing uncertainty over the jurisdiction of financial regulators over digital assets, clarify tax issues for digital assets and decentralized autonomous organizations (DAOs), and establish information disclosure and consumer protection obligations for issuers and service providers of digital assets.
The same logic is found in the recently enacted Digital Goods Consumer Protection Act (the “Act”), issued by the Senate Committee on Agriculture in early August.
The bill defines “digital goods,” which include Bitcoin and Ethereum, and certain financial instruments, including securities. As a result, the Commodity Futures Trading Commission (“CFTC”) designates its jurisdiction over ETH, but leaves room for the regulation of other assets related to securities and will be regulated by the SEC. The bill will systematize the process by which digital assets are identified as commodities.
The Act also grants the CFTC exclusive jurisdiction over digital goods transactions, except for transactions in which sellers or consumers only use digital goods to buy or sell goods or services.
As we’ve seen, there are different ways to regulate ETH. In my opinion, the difference in the way is due to the peculiarities of the ETH nature:
1. In the case of stakes, we are talking about the income obtained by placing tokens as a mechanism to verify blockchain transactions. Yes, it is very similar to debt securities.
2. ETH may be the subject of an asset buying or selling transaction. In this case, it is a commodity.
Therefore, according to the proven Ether functionality, there will be applicable regulations in specific cases.
Despite the introduction of legislative provisions regarding the legal nature of ETH, the SEC will not relax its regulation of digital assets, especially ETH.
In the near future, when the SEC and CFTC will actually establish their jurisdiction over the representation of the nature of ETH, we may witness several public cases. These cases will be the basis for future laws that will only address fait accompli.
About the author: Web3 lawyer with over 10 years of experience in the corporate and intellectual property sectors. The main areas of expertise are general corporate law, mergers and acquisitions, NFT, venture capital, intellectual property, contracts, WEB3, legal due diligence.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/lawyers-opinion-is-the-merged-ethereum-a-security/
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