Gary Gensler: Crypto staking falls under the SEC

Could Gensler put ether to sleep?

Gary Gensler just gave Ethereum an early Halloween scare. The SEC chair spooked crypto’s second-largest ecosystem by suggesting that the Merge may have turned its ether token into a security.

Gensler didn’t mention Ethereum or ether by name. But his recent remarks on how staking has features consistent with the definition of a security come on the heels of Ethereum’s big shift from proof of work to proof of stake. And they quickly sparked speculation that the regulator — who has long argued that most cryptocurrencies should be regulated as securities — was lumping ether in with the rest.

Staking holders expect a return. Staking, a mainstay of DeFi, sure looks like a system in which “the investing public is anticipating profits based on the efforts of others,” making the product offered a security, Gensler told reporters after testifying before the Senate Banking Committee last week.

• Gensler reaffirmed during the hearing his view that bitcoin is not a security, unlike “a vast majority” of other cryptocurrencies. The biggest cryptocurrency, he argued, had “no group of individuals in the middle. So the investing public’s not betting on somebody in the middle.”
• Gensler’s views on ether, the most widely traded crypto token after bitcoin, have not been as clear. In his 2018 MIT lectures, he had said that, compared to bitcoin, “Ethereum is a bit more centralized and has more leadership,” with co-founder Vitalik Buterin playing a key role with a “sort of founder following.”
• His predecessor at the SEC, Jay Clayton, made it clear he didn’t consider ether a security as far back as 2019. And many speculated that Gensler would follow that stance. So his comments on staking last week caught the Ethereum community by surprise. Ether’s price dropped about 11% after Gensler’s comments spread.

What is Gensler really saying? Ether’s price bounced back as investors and the Ethereum community realized the SEC chair’s remarks weren’t that clear. But that in itself may be a problem.

• Cathy Yoon, chief legal officer at MPCH, argued that “calling ether a security after all this time, even after a change in the consensus mechanism, is a reach.”
• Crypto entrepreneur Alex Dunmow suggested the SEC chair was “not talking about [ether] being a security” but was instead addressing “staking derivatives,” with a focus on crypto marketplaces like Coinbase, in a tweet. “Let’s not panic just yet,” Dunmow said.
• The confusion speaks to a bigger issue, Yoon pointed out. The SEC under Gensler “has consistently said that no guidance or clarity from the commission is required because the law is settled,” but crypto companies and investors are grappling with a lot of uncertainty, she told Protocol.

Figuring out the SEC’s thinking on crypto has long been challenging. The regulator makes “large, grand statements,” Yoon said. But beyond pursuing “enforcement actions based on very specific facts and circumstances,” Team Gensler “has done nothing to drill down into their thought process and how they are applying existing laws and rules,” she said. There’s little clarity, and a lot at stake.

— Benjamin Pimentel (email | twitter)

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