As the date of the Ethereum merger is gradually approaching, whether the ETH converted to the PoS mechanism can be characterized as a security has once again become the center of the topic.
Recently, Adam Levitin, a law professor at the Georgetown University Law Center in Washington, D.C., said that all blockchain network systems that operate a PoS mechanism can be classified as securities for the following reasons:
- “Securities” includes “Investment Contracts”. An “investment contract” was defined as K by the US Supreme Court in the Howey case, for an investment in a joint investment enterprise, where the profit expectation is “completely derived from the efforts of a third party”.
- Howey is talking about the investment of “money”, but this has always been interpreted to mean only worthwhile investments. Staking easily meets this element.
- The elements of a joint venture are also easily satisfied with staking: the entire verification system requires the participation of multiple parties. This is crowdfunding (i.e. a harsher interpretation of joint ventures: horizontal commonality).
- The expectation of profit is also very clear, and stakers receive staking rewards.
- This brings us to the final element: the profit is expected to come “entirely” from the efforts of others. In Howey, the U.S. Supreme Court said “completely” several times. If this is the measure, stakers are not eligible for the test because stakers are also participants.
- But lower courts have largely deciphered the definition of “complete” from Howey, at least for something like a multi-level distribution pyramid, where participants do have to work hard to recruit more downlines.
- Basically, the Courts of Appeal (Second, Ninth, etc.) understood “completely” as more likely “primary” or “emphasis”. The U.S. Supreme Court has no objection. It discussed the issue in a 1975 submission, but did not take a position.
- Considering that the contribution made by any single staker relative to the sum of the efforts in the enterprise can be quite limited, I suspect that the “entirely [=mainly] from the efforts of others” element is consistent.
- However, none of this answers the tougher question: who is the “issuer” when you’re dealing with a decentralized system. But this is part of a broader question of how to incorporate a decentralized system into a human-centered legal system.
Venture partner Adam Cochran believes that the merged ETH is not a security for the following reasons:
- First, Howey tests three elements: An investment of money, In a common enterprise, and the expectation of making a profit from the efforts of others.
- For the point of “money investment”, ETH is not a problem. After all, almost all risk assets, commodity services, and even Bitcoin meet this point. The last two points are more controversial, and different courts have different standards, many of which have never been adopted by the U.S. Supreme Court.
- As for the definition of “joint investment enterprise”, there are many disputes, and schools of thought are more complicated, such as horizontal commonality, extensive vertical commonality, and strict vertical commonality. Among them is horizontal commonality, where courts look for features that prorate profits, or bundle investors’ assets together through pooling of funds. The specific application is in ETH 2.0. The ETH you pledge is independent, bound to the node, and has nothing to do with other pledged funds. It is also rewarded and punished according to the performance of your own node, and does not affect other nodes, so it does not have horizontal commonality. . The vertical commonality emphasizes the relationship between investors and issuers/promoters. For example, investors and issuers/promoters do not necessarily have the same profit and loss on ETH. But the first challenge is, as a decentralized open source project, who are the issuers and promoters of the Ethereum network? More importantly, the people who first wrote the code for Ethereum were not the people who currently run the network.
- Regarding the “expectation of profit from the efforts of others”, some cases show that the core is “reasonable expectation of profit from the entrepreneurial or managerial efforts of others”; some cases show that the profit cannot come from one’s own efforts or services; This is a subtle but important distinction, and for staking, it again relies heavily on proofs of joint ventures. The big question in this piece is: what are you being rewarded for? Why can I get rewards when staking? In fact, the ultimate argument is two-fold, one is to sell block space to users and get rewarded; this view can be regarded as a joint investment enterprise, but not from promoters or issuers, because block space is formed in cooperation with validators , and what the validator is actually selling is validating this behavior. So the question is, whether the verification behavior of the verifier is “self-reliant”. In fact, in previous cases, the SEC has indirectly given the answer, that is, the verifier’s participation in network verification is a substantial effort, and thus get rewarded .
- To sum up, for the three elements of the Howey test, the last two points are currently controversial in ETH. Although the model of “buy coins and pledge coins to earn coins” looks very similar to securities, if you have a deep understanding, the funds for pledge verification are not related to others. Hybrid, reward-independent, does not meet the second point; and validators are rewarded through their own online verification efforts, which does not meet the third point. However, even if the SEC were to recognize ETH as a security, it would have nothing to do with the transition from Ethereum to PoS.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/potential-crisis-will-ethereum-be-recognized-as-a-security-after-switching-to-pos-two-different-viewpoints/
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