US Commodity and Futures Commission (CFTC) chairman Heath Tarbert has questioned whether Ethereum’s cryptocurrency ether will be classified as a commodity or a security after its planned upgrade.
The upgrade, termed Ethereum 2.0, involves transitioning the Ethereum network from its current proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) model over the coming year. The US Securities and Exchange Commission (SEC), which is responsible for ruling on the cryptocurrency’s legal status, has up to now considered its PoW block validation process to be sufficiently decentralized to disqualify it as a security. But PoS authentication creates a profit-based system, effectively linking owners to returns. The system is generally in line with the SEC’s standard classification of a security.
The PoW model involves computer servers (termed “nodes”) that solve computation-intensive mathematical equations to validate transactions and process new blocks. In the PoS model planned for Ethereum 2.0, the nodes would stake assets (in the form of ether, the Ethereum cryptocurrency) and vote on new blocks rather than solve equations.
Since the PoS mechanism links returns to the amount staked by each validator, it can be compared to the system that rewards stockholders with dividends. Should the SEC take this view, Ethereum would be required to seek SEC approval.
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