In a recent interview with the Commodity and Futures Commission (CFTC), chairman Heath Tarbert cast doubt on Ethereum 2.0’s future legal status in regards to U.S. law. The warning is directly related to the block validation planned for the platform’s upcoming upgrade.
Tarbert told the audience during the interview that the previously held view that Ethereum is a commodity is now in jeopardy. While the CFTC has no jurisdiction over Ethereum’s status, the Securities and Exchange Commission (SEC) is carefully analyzing the platform’s newest iteration.
Our job at the @CFTC is to ensure that our rules protect market integrity while fostering innovation. Thanks to @mikejcasey for a great discussion today at @coindesk’s #InvestNYC on the future of digital assets. pic.twitter.com/HGRBNhT95Y
— Heath Tarbert (@ChairmanHeath) November 12, 2019
Ethereum’s Basis for Change
While the Proof of Work (PoW) block validation method has been helpful in eliminating SEC scrutiny, the basis for the evaluation of a security, called the Howey Test, has maintained that decentralized mining (e.g. Bitcoin and Ethereum 1.0) prevents them from being considered a security.
However, Proof of Stake (PoS) authentication creates a profit-based system that effectively links owners with returns. Such a system certainly meets the SEC’s normal classifications of a security.
Just as stock owners receive dividends from profits, the PoS system links the returns from the platform with the line of most staked validators. In this way, it functions far more like a simple security than a decentralized work-for-return model.
Tarbert’s analysis lines up strongly with the previous analyses done by SEC officials during other probes. The recent cease and desist order filed against the Telegram token sale is just one example where the SEC will not allow token sales when they have the marks of securities.
Nevertheless, it appears that Ethereum is stuck between a rock and a hard place. The complexity of…