Ethereum 2.0 tokens could be securities, warns CFTC chairman
Heath Tarbert, chairman of the U.S. Commodity Futures Trading Commission, sounded out a warning yesterday over the potential for staked tokens (i.e. the coins that support proof-of-stake blockchain networks) to be classified as securities.
And while the CFTC head has previously said that Ethereum, in its current state, is likely not a security and should be classified as a commodity, things are less clear for the next iteration of Ethereum.
“We are thinking carefully about it,” he said during a conversation at Coindesk’s Invest conference in New York City in response to a question about Ethereum 2.0, the
blockchain’s next evolution which intends to use proof of stake (PoS) as a consensus mechanism.
During his wide-ranging talk, Tarbert laid out a generally hopeful and, at times, bright future for
crypto. “I think America needs to lead [in crypto regulation],” he said. “As a regulator, I want to, at least, create an environment where innovation can flourish.” Tarbert also emphasized the importance of a principles-based approach to spur innovation.
“Rather than detailed, granular rules, we have broad-based principles that everyone can agree upon,” he explained. “But we will leave it up to people in the industry to how best to meet those principles.” This approach contrasts with that of the Securities and
Exchange Commission (SEC), which has used the Howey Test’s criteria to prosecute crypto projects in which securities (allegedly) masquerade as utility tokens.
The CFTC has jurisdiction over commodities and derivatives or financial contracts derived from those underlying commodities. The Commission has stated publicly that Bitcoin and, more recently, Ethereum should be classified as commodities.
But Ethereum 2.0 could be in danger of being classified as a security due to its use of proof-of-stake (PoS) as a consensus mechanism.
PoS requires nodes to stake coins for block creation. Nodes with the highest number of coins win the right to create the next block and earn rewards. Staking services that promise returns on crypto invested in their nodes have become popular in recent times. Profits for such services are self-perpetuating. More cryptocurrencies staked in a node win more coins, increasing their crypto stash.