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Ethereum 2.0’s Proof of Stake Could Be Classified as a Security, Says CFTC Chairman

2 mins
Updated by Max Moeller
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In a recent interview with the Commodity and Futures Commission (CFTC), chairman Heath Tarbert cast doubt on Ethereum 2.0’s future legal status in regards to U.S. law. The warning is directly related to the block validation planned for the platform’s upcoming upgrade.
Tarbert told the audience during the interview that the previously held view that Ethereum is a commodity is now in jeopardy. While the CFTC has no jurisdiction over Ethereum’s status, the Securities and Exchange Commission (SEC) is carefully analyzing the platform’s newest iteration.

Ethereum’s Basis for Change

While the Proof of Work (PoW) block validation method has been helpful in eliminating SEC scrutiny, the basis for the evaluation of a security, called the Howey Test, has maintained that decentralized mining (e.g. Bitcoin and Ethereum 1.0)  prevents them from being considered a security. However, Proof of Stake (PoS) authentication creates a profit-based system that effectively links owners with returns. Such a system certainly meets the SEC’s normal classifications of a security. Just as stock owners receive dividends from profits, the PoS system links the returns from the platform with the line of most staked validators. In this way, it functions far more like a simple security than a decentralized work-for-return model. Ethereum Eth Tarbert’s analysis lines up strongly with the previous analyses done by SEC officials during other probes. The recent cease and desist order filed against the Telegram token sale is just one example where the SEC will not allow token sales when they have the marks of securities. Nevertheless, it appears that Ethereum is stuck between a rock and a hard place. The complexity of creating a scalable platform for its users has been met with cries for PoS validation. However, a move to PoS away from PoW would likely result in increased scrutiny from governing bodies. The project appears to be left with the painful choice of loss of users or loss of functionality in the U.S. — neither of which is a viable business model.

Competition Abound

The damaging scenario could, however, leave room for other blockchain projects to steal market shares from Ethereum. For example, TRON has already been hailed by Udi Wertheimer as the competitor to watch, while EOS and others are waiting in the wings as well. https://twitter.com/UDIWERTHEIMER/status/1194343164716310529 Regardless of risers or fallers, the current landscape for Ethereum 2.0 is not bright. While cryptocurrencies appear to be here to stay, Vitalik’s dream may soon become a nightmare.
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With a background in science and writing, Jon's cryptophile days started in 2011 when he first heard about Bitcoin. Since then he's been learning, investing, and writing about cryptocurrencies and blockchain technology for some of the biggest publications and ICOs in the industry. After a brief stint in India, he and his family live in southern CA.
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