By Michael B. Cohen
Vice President of Global Operations
The Ethereum Merge was a momentous event for cryptocurrency enthusiasts and is expected to make the blockchain more efficient and greatly reduce energy consumption.
However, an unexpected result from the Ethereum Merge may be a greater likelihood of government regulation, due to the changed status of returns from Ethereum trading.
One of the key changes inaugurated by the Ethereum Merge is the transition from a Proof of Work (PoW) mechanism to verify coins and prevent double-spending to a Proof of Stake (PoS) system. These consensus mechanisms are needed in the absence of any central regulatory authority for the blockchain to prevent double transactions and other errors.
The differences between PoW and PoS are complex, but basically, the new PoS system means that Ethereum holders can lock up their ether for a specific period of time and earn rewards.
The SEC Weighs in on the Ethereum Merge
The PoS mechanism has caught the attention of U.S. Securities and Exchange Commission Chairman Gary Gensler, who released a statement declaring that, under the PoS framework, Ethereum may now be classified as a security because it yields profits for holders.
While not mentioning Ethereum by name, Gensler said that the PoS structure may cause a cryptocurrency to qualify as a security under the Howey Test: “From the coin’s perspective…that’s another indicia under the Howey test, the investing public is anticipating profits based on the efforts of others,” he was reported as saying by Bloomberg.
Given Gensler’s statement, there is some indication that Ethereum may belong to a category that requires government oversight and SEC regulation.
Will Ethereum and Other Cryptocurrencies Be Regulated by the SEC?
Currently, bitcoin, which doesn’t work under the stake structure and uses its own blockchain, isn’t categorized by the SEC as a security. However, as ether adopts the more efficient PoS system, which has reduced its energy consumption by 99%, it may face the reality of SEC oversight.
This also could increasingly be the case with other cryptocurrencies as pressure mounts to reduce the carbon footprint of digital currencies. The PoS model answers two major points posed by crypto critics – the environmental harm caused by outsized energy consumption required by the PoW model and the lack of regulation of cryptocurrencies, which has created risks on the blockchain with the rise of crypto frauds.
Perhaps the time for regulation of crypto assets has come and may be more likely if the Proof-of-Stake model is more widely adopted. This can be seen as beneficial to crypto users, especially those who are concerned about losing their funds to hackers, fraudulent platforms and crypto trading schemes.
Increased oversight of crypto assets by agencies like the SEC provides recourse to those who have lost their funds to crypto schemes. In the meantime, MyChargeBack experts will assist you in locating your funds on the blockchain.
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