Gary Gensler: Crypto staking falls under the SEC

Could Gensler put ether to sleep?

Gary Gensler gave Ethereum an early Halloween scare. The SEC chief alarmed crypto’s second largest ecosystem by suggesting that the merger may have transformed the ether token into a value.

Gensler did not mention Ethereum or ether by name. But his recent comments about how staking has features that match the definition of a security come on the heels of Ethereum’s major shift from proof-of-work to proof-of-stake. And they quickly sparked speculation that the regulator — which has long argued that most cryptocurrencies should be regulated as securities — lumped ether in with the rest.

Stakeholders expect returns. Staking, a mainstay of DeFi, certainly looks like a system where “the investing public expects 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 confirmed during the hearing his view that bitcoin is not a security, unlike “a large majority” of other cryptocurrencies. The largest cryptocurrency, he argued, had “no group of individuals at the center. So the investing public is not betting on someone in the middle.”
• Gensler’s views on ether, the most 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 little more centralized and has more leadership,” with co-founder Vitalik Buterin playing a key role with a “kind of founding following.”
• His predecessor at the SEC, Jay Clayton, made it clear that he did not consider ether a security as far back as 2019. And many speculated that Gensler would follow that stance. So his comments about stakes last week surprised the Ethereum community. Ether’s price fell around 11% after Gensler’s comments spread.

What exactly is Gensler saying? Ether’s price retreated as investors and the Ethereum community realized that the SEC chairman’s comments were not so clear. But that in itself can be a problem.

• Cathy Yoon, legal director 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 that the SEC chairman “didn’t talk about [ether] be a security”, but instead addressed “stake derivatives”, focusing on crypto marketplaces such as Coinbase, in a tweet. “Let’s not panic yet,” said Dunmow.
• The confusion speaks to a larger problem, Yoon pointed out. The SEC under Gensler “has consistently said that no guidance or clarity from the commission is needed because the law is settled,” but crypto companies and investors are struggling with a lot of uncertainty, she told Protocol.

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

—Benjamin Pimentel (e-mail | twitter)

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