Ethereum Under Potential SEC Scrutiny after The Merge: WSJ

Ethereum's latest software update may have caught the Securities and Exchange Commission (SEC) chair's attention to categorize the second-largest cryptocurrency as a security, according to a report from the Wall Street Journal (WSJ).

Chair Gary Gensler shared his comments hours after Ethereum's successful update, known as The Merge, which shifted its framework from proof of work to proof of stake.

According to the report, Gensler spoke about the Howey test, which is a test used by courts to determine if an asset is a security. He stated that cryptocurrencies and intermediaries that allow holders to “stake” their coins might have to pass that test.

Howey test also examines whether investors expect to earn a return from the work of third parties, according to the WSJ.

"From the coin’s perspective…that’s another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others," Gensler told reporters after a congressional hearing.

However, he did not provide firm clarity. According to the WSJ report, Gensler said he was not referring to any specific cryptocurrency.

Under the laws passed in the 1930s, securities — assets such as stocks and bonds — issuers must file extensive disclosures with the SEC. Exchanges and brokers conducting securities trading must comply with rules designed rigidly for the safety of investors to protect them from conflict of interest, according to the WSJ.

Currently, due to the undeterminable nature of cryptocurrencies, issuers and trading platforms face strict liabilities if they sell any assets that are deemed to be securities by the SEC or courts.

One way through which cryptocurrency networks - including Solana, Cardano and, as of this week, Ether - verify transactions is staking, which allows investors to lock up their tokens for a specified amount of time to receive a return.

Gensler commented about crypto exchange offering staking services, saying it "looks very similar—with some changes of labelling—to lending."

Over the past year, Gensler has reiterated that firms offering crypto-lending products should register with the agency. After failing to conform to the SEC's request, BlockFi Lending was forced to pay $100 million in February.

The Merge has shifted Ethereum into a more environmentally sustainable framework by reducing Ethereum’s energy consumption. It will also set the stage for future improvements that will make the platform easier and cheaper to use, according to a report from Blockchain.News.

The technical details of the Merge are extremely complex, but, basically, the process boils down to a shift in how cryptocurrency transactions are verified.

The report added that after completing the Merge, Ethereum has now shifted from a verification system called proof of work (PoW) to "proof-of-stake" (PoS) - which consumes less energy and does not involve an energy-guzzling computational race, unlike its previous system. PoS also deposits or "stakes" a certain amount of participants' crypto savings in a pool, which additionally enters them into a lottery. The new system also has a reward system; every time a crypto transaction requires approval, a winner is selected to verify the exchange and receive a reward.

Popular estimates show that Ethereum’s shift to proof of stake will reduce its energy consumption by more than 99%.

The developers involved in the Merge have said that the switch from PoW to PoS will make it easier and friendlier to design future updates that lower gas fees - the costs of executing a transaction in cryptocurrency associated with the Ethereum platform, Ether.

The completion of the Merge has come after years of intense study and debate. Founded in 2013 by Vitalik Buterin, Ethereum is now run by a loose network of coders from around the world who spent months gathering on video calls streamed on YouTube to discuss the intricacies of the Merge.