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Last week, Commodity Futures Trading Commission (CFTC) Chairman Heath Tarbert shared some insight on ether’s legal classification once the Ethereum Network’s 2.0 upgrade takes place. Ultimately, Tarbert says the commission is still evaluating ether’s future legal status. Some speculate the asset will maintain its commodity status, while others make the case for a security — which would make the asset subject to the Securities and Exchange Commission’s (SEC) regulations.
The Ethereum 2.0 Upgrade Explained
When it comes to digital assets powered by blockchain technology, very few have been cleared by regulators from the status of a security. In fact, there have been just two: Bitcoin and ether. The latter constitutes the only digital asset which was funded through an Initial Coin Offering (ICO) and is not a security. The SEC stated the Ethereum Network was ‘sufficiently decentralized’ to escape the classification — and regulatory requirements — of a security.
That is, of course, so long as the Ethereum Network does not undergo significant changes. Over the course of the next year however, Ethereum will see perhaps the most significant change a blockchain can experience: a transition in its consensus mechanism.
Currently, Ethereum leverages a Proof-of-Work (PoW) consensus mechanism. Here, high-powered servers, referred to as nodes, compete to solve extremely complex mathematical puzzles in order to validate transactions and approve new blocks. Due to the difficulty involved, the servers have a remarkably high rate of electricity consumption. Due to this, PoW has received a bad reputation for its negative effects on the environment.
Sometime over the next 12 months however, Ethereum will shift to the much more environmentally friendly Proof-of-Stake (PoS) mechanism. The transition has been officially deemed the Ethereum 2.0 upgrade. Under the PoS model, nodes stake blockchain-specific wealth — in this case ether (ETH) — to vote on and collectively approve new blocks.
Will Ether be a Security Token after Ethereum’s 2.0 Upgrade?
Whenever looking at the regulatory status of a digital asset, a variety of factors come into play. These include case-specific facts, circumstances, and economic realities surrounding the asset.
Despite being funded by an ICO — which of itself seems to typically constitute a securities offering — it was made known that the Ethereum Network was so decentralized that ether did not constitute a security. This shows then that the level of decentralization tied to a blockchain firm can affect its digital asset’s legal status.
That’s why some say a PoS model will only strengthen ether’s classification as a commodity. Under PoW, large mining pools band together to create greater hash power, which is commonly seen as mining centralization. With PoS however, this centralized aspect is eliminated. Ultimately, this could strengthen the argument that ether — even after the Ethereum 2.0 upgrade — is not a security.
At the same time, the case isn’t so clear. With PoS, profits are distributed on a routine basis. They are also distributed based on a validator’s participation in the network, not on behalf of others which is sometimes the case with PoW.
If PoS is considered a profit-based system, where investors receive a portion of the network’s ‘returns’, a case for ether as a security could be a concern. If regulators took this path, ether could become a security token and would be subject to the corresponding regulations.
Others argue that the PoS model features similar distribution as seen in PoW, meaning ether will retain its status as a commodity. Importantly, if ether does remain a commodity, the United States may see regulated ether futures trading within the next six months.
As for exactly what will transpire, we’ll have to wait and see. Chairman Tarbert said the CFTC’s evaluations are ongoing.
What do you think will happen to ether’s regulatory status after the Ethereum 2.0 upgrade? Will it remain a commodity? Let us know what you think in the comments section below.
Image courtesy of the CFTC.