Gensler Reiterates Proof-of-Stake Tokens Could be Securities

• SEC Chairman Gary Gensler has warned that tokens using a proof-of-stake consensus mechanism may be classified as securities.
• Gensler urges token operators to comply with securities laws, stating that investors anticipate a return when purchasing such tokens.
• The NYAG lawsuit against KuCoin, arguing that ether is a security, also lends weight to Gensler’s argument.

United States Securities and Exchange Commission (SEC) Chairman Gary Gensler has reiterated his opinion that proof-of-stake tokens could be considered securities under the Howey Test, thereby falling under the regulatory purview of the SEC. Speaking to reporters after a committee vote on Wednesday, Gensler explained that securities laws could be triggered since investors anticipate a return when purchasing tokens underpinned by proof-of-stake consensus mechanisms.

“Whatever they’re promoting and putting into a protocol, and locking up their tokens in a protocol, a protocol that’s often a small group of entrepreneurs and developers are developing, I would just suggest that each of these token operators […] seek to come into compliance, and the same with the intermediaries,” Gensler said.

Gensler also suggested that token operators and intermediaries seek to come into compliance, following their promotion and development of protocols that often come from a small group of entrepreneurs and developers.

Gensler’s comments were made in response to those of Rostin Behnam, head of the Commodities Futures Trading Commission (CFTC), who stated last week that ether is a commodity that should be subject to CFTC regulation.

There has been tension between the two authorities because they disagree on which organization should have the upper hand in governing the cryptocurrency markets. Previously, Gensler has claimed that the “vast majority” of existing cryptocurrencies are securities, including Ethereum, and has been reluctant to relinquish control over their regulation.

Last month, the New York Attorney General’s Office (NYAG) filed a lawsuit against crypto exchange KuCoin, alleging that it violated U.S. securities laws by offering tokens, like ether, that meet the definition of security without registering with the proper regulatory bodies. This lawsuit is the first time a regulator has asserted in court that ether is a security, but it was filed in a state court rather than a federal one.

Furthermore, the SEC has also been ramping up enforcement efforts in the cryptocurrency sector, most recently compelling cryptocurrency exchange Kraken to suspend its staking offerings and pay a $30 million settlement. Gensler stated at the time that “if they want to offer staking, we’re neutral. Come in and register, because investors need that disclosure.”