SEC’s Gensler Reiterates ‘Proof-of-Stake’ Crypto Tokens May Be Securities

David Pan, Bloomberg News

Gary Gensler, chairman of the U.S. Securities and Exchange Commission (SEC), speaks during a House Appropriation Subcommittee hearing in Washington, D.C., US, on Wednesday, May 18, 2022. The hearing is titled "Fiscal Year 2023 Budget Request for the Federal Trade Commission and the Securities and Exchange Commission." , Bloomberg

(Bloomberg) -- US Securities and Exchange Commission Chair Gary Gensler suggested once again that so-called proof-of-stake tokens, which represent many major cryptocurrencies, should be regulated as securities.

“Proof-of-stake” describes the process that is used to run blockchains including No. 2 crypto network Ethereum, in which coin holders can earn financial rewards by allowing some of their tokens to be used in ordering transactions. Creators of protocols that underpin such tokens often promote their projects on social media, and investors flock to them based on the expectation of earning a return, according to Gensler.

“I would suggest that each of these token operators, obviously consulting with the appropriate talent, seek to come into compliance,” Gensler said during an open meeting of the SEC on Wednesday.

Crypto firms are seeking to avoid the security label because it carries investor-protection requirements that many say are incompatible with the asset class. But they are coming under increasing regulatory scrutiny.

Read more: Crypto Exchange Kraken Ends US Staking Program in SEC Deal

The SEC last month fined Kraken, a major US-based crypto exchange, $30 million for offering staking products that allowed users to earn passive income. And in a lawsuit filed last week against the KuCoin digital-asset exchange, New York Attorney General Letitia James said Ether is a security, one of the few rare cases that explicitly put the token that’s used to run Ethereum in that legal status.

Read more: NY Attorney General Says Ether Is a Security in KuCoin Suit

Gensler’s comment was in response to a question about the seeming disconnect between Gensler’s view and that of Commodity Futures Trading Commission Chairman Rostin Behnam, who recently said he thought Ether is a commodity. “I’m not going to comment on any one token,” Gensler said Wednesday. “As to regards to the Commodity Futures Trading Commission, I love it.”

Gensler expressed similar concerns over proof-of-stake during last year’s Ethereum “Merge,” when the blockchain upgraded to using that process instead of “proof-of-work” for ordering transactions; then as now, he was careful to say he wasn’t speaking about any digital coin specifically.

Read more: Gensler Raises Concerns Over ‘Staking’ Model on Ethereum

In proof-of-work, the method used by the Bitcoin blockchain, specialized power-hungry computers verify transaction data. Proof-of-stake tends to be much more energy-efficient.