Can Ethereum be classified as a security after the merger?

The long-awaited Ethereum merger has led to bullish momentum in the ETH price and the crypto market over the past week. However, the merger may result in some negative regulations for the crypto space and affect the prices of several cryptocurrencies.

The so-called Ethereum merger is expected to take place in September 2022. The consensus mechanism in the blockchain is changing from proof-of-work to proof-of-stake. The associated innovations can certainly be considered bullish: energy consumption in the blockchain will decrease by 99% after the upgrade, and ETH will become a deflationary asset.

However, financial regulators may decide to classify Ethereum as a post-merger security. This in turn will potentially have a negative impact not only on ETH but also on the crypto market as a whole. As with XRP, regulators could put pressure on cryptocurrencies and gain more control over the crypto space.

On July 24, 2022, Adam Levitin, professor of law at Georgetown University Law Center in Washington DC, tweeted about possible reclassifications of ETH. He wrote:

“Something no one is talking about: After the merger, there will be strong arguments that Ether will be considered a security. The token on any proof-of-stake system is then likely to be a security.”

Is Ethereum an investment contract?

Gary Gensler, the head of the Securities and Exchange Commission (SEC), still wants the US agency to take control of the crypto market. In June 2022, Gensler explained to CNBC Bitcoin is the only crypto assetwhich is not considered a security. If the SEC does indeed classify Ethereum as a security, the agency could treat cryptocurrencies the same as stocks.

As Levitin explained, any proof-of-stake network token could be classified as a security. The Howey test, introduced by an American court in 1946, is used for the evaluation. What is decisive is whether the asset is a so-called “Investment Contract” trades, and investors can count on a profit.

The test checks if there is one “Investment in a collaborative project with a reasonable expectation of return from the efforts of others”is.

That could be the case with Ethereum. After all, investors who own ETH expect an annual profit (currently around 4.2%). They also invest in a kind of “joint venture”. However, the premise that investors obtain profits “exclusively from the efforts of a third party” is a gray area. After all, stakers are also network participants and therefore “work” for the validation of the ETH blocks.

Levitin claimed that the contribution of most ETH players is relatively small compared to the total amount of ETH staked. Therefore, he believes that the SEC can conclude that earnings “only from the efforts of a third party” come. However, how exactly the SEC will justify this decision is questionable. Levitin explained:

“However, all this does not answer the more difficult question (IMHO) of who the ‘issuer’ is when dealing with a decentralized system.”

ETH course update

After a 30% rally over the past two weeks, the price was rejected at a key resistance level last weekend. The price drop continued this Monday morning.

At the time of writing, ETH is priced at $1,500 according to Coinmarketcap. The ETH price is currently still about 69% away from the last all-time high.

Ethereum Price in Euro Chart Source: Coinmarketcap

Negative news on US macroeconomic data and inflation could lead to further turmoil in equity markets this week. Therefore, there may be greater volatility in the Ethereum price and the crypto market.

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