Is Proof-Of-Stake A Security?

Most of you know about Proof-of Stake, which is a crypto consensus mechanism made to process transactions and create new blocks in a blockchain. It utilizes accidentally picked validators to confirm transactions and make new blocks. Nowadays PoS is considered to be more secure and modern than Proof-of-Work, which utilizes a competitive validation process. We have compared PoS to PoW and figured out the benefits and drawbacks of both algorithms. Take a look at this article if you’re interested. 

Today we will discuss the news concerning the possibility of PoS to become a security. This was claimed by Gary Gensler from the U.S. Securities and Exchange Commission (SEC).  

According to Mr. Gensler, all blockchain projects built on the Proof-of-Stake consensus algorithm could be qualified as the equivalent to securities. This status can be granted under the Howey test. This test is made to determine the criteria of conformity with the characteristics of the investment contract and to figure out if the securities law could actually extend to it. 

The SEC also believes that a user who invests in cryptocurrency on a PoS algorithm to block in staking for profit, disposes of his/her assets as a security rather than a cryptocurrency. This follows from the fact that they confirm the share of ownership of assets, created as a means of payment.

From the crypto projects technology’s novelty point of view, based on the POS, the Howey test is likely to be outdated, as its criteria have been there for over 80 years. Most cryptocurrency projects operate in a decentralized manner and do not have a general control center that can be considered the issuer of a particular asset.

From the SEC’s point of view — the regulator is looking for investors who are buying crypto projects’ coins and intend to obtain profit in the form of interest due to retention in staking. The SEC had not previously considered such a case related to the BTC and Ethereum, since the transition of Ethereum to POS, the rhetoric has changed but not in relation to the BTC.

If a lawsuit is filed by the regulator, for example, by SEC against the Ethereum team, the proceedings will drag on for a long time and will not end up with anything positive for the regulator. For example, considering the precedent of the Ripple project, the XRP cryptocurrency hearing has been ongoing since 2020, because of the ICO.

Regulators use outdated economic notions developed for securities, although assets vary in many ways. It is likely that the SEC will understand the need to develop new, separate, clear asset requirements in the crypto industry, to make life much easier for investors and developers. As for now, it is impossible to say if the aforementioned will happen soon, but SimpleSwap will follow the situation to keep you updated. Stay tuned.