Ethereum Might Be Classified As Security After The Merge

Ethereum might be classified as security after the Merge event according to recent reports from the SEC that we are reading more about in today’s latest Ethereum news.

A recent SEC insider trading lawsuit reignited discussions over which crypto assets should be considered as securities and whether Ethereum might be classified as one after the Merge. Some argue that the ETH passes the Howey test due to the way it was launched and because of its PoS transition. The ETH stakers earn revenue from validating blocks on the network so there’s an argument that the investors will buy the asset with the expectation of a profit but a security classification from the SEC seemed unlikely.

Ahead of the Ethereum launched in 2015, the network sold its native ETH token via an initial coin offering and 50 million ETH were sold during the ICO at that time. During its first few years, many argued that ETH passed the SEC Howey test which is used to assess whether or not an asset constitutes security. The test seeks to determine if a given transaction is an investment contract under three criteria.

The foundation sold ETH to the public directly which means it met the requirement of the investment of money. The Ethereum network for which ETH is the currency required a direct input of more than 100 developers to launch. Finally, the ICO happened in 2014 before the launch in 2015 and this suggests that the investors had a reasonable expectation that the purchased ETH will increase in value once the network launches. However, despite the ambiguity over Ethereum’s status as a security, the SEC has since weighed in on the network’s status and the former director of Corporate Finance of SEC William Hinman we read that:

“…putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.”

While Hinman’s comments spiked fears for ETH that it could be labeled as a security, the network’s upcoming Mege reignited the discussion. The update is scheduled to take place in September this year and it will change the underlying structure of how the network functions. The current PoW system will be replaced by a PoS validation mechanism. The protocol changes from the Merge can revive ambiguity around whether or not ETH is a security and the recent lawsuit only helped the SEC clarify its position on which assets are considered securities.

The wording in the lawsuit expanded on the definition of security outlined in the Howey test and it explained the SEC’s view if the organization that issued these assets removed itself from the development so the asset was not able to continue functioning and it will be considered as a security. The SEC made the case that RLY, DDX, AMP, RGT, LCX, and POWR are all fully considered securities. The combination of new filings from the SEC and the Merge brought the issues back into question, Will the SEC classify Ethereum as security sooner?