Potential crisis: Will Ethereum be recognized as a security after it turns to POS? two different views

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https://twitter.com/AdamLevitin/status/1550990967670554624

https://twitter.com/adamscochran/status/1551278224218488832

As the merger date of Ethereum is gradually approaching, whether the ETH converted to the PoS mechanism can be qualified as a security has once again become the center of the topic.

Recently, Adam Levitin, a law professor at the Georgetown University Law Center in Washington, D.C., said that all blockchain network systems that run the PoS mechanism can be classified as securities for the following reasons:

• "Securities" includes "investment contracts". An "investment contract" is defined as K by the U.S. Supreme Court in the Howey case, and is used for investment in a joint investment enterprise, and the profit expectation "comes solely from the efforts of a third party."
• Howey was talking about an investment of "money", but this has always been interpreted to mean just an investment of value. Staking easily satisfies this element.
• The joint venture element is also easily satisfied with staking: the entire verification system requires the participation of multiple parties. This is crowdfunding (i.e. a harsher interpretation of joint ventures: horizontal commonality).
• The expectation of profit is also very clear, and stakers are rewarded for staking.
• Which leads to the last element: profits are expected to come "entirely" from the efforts of others. In Howey, the U.S. Supreme Court said "totally" several times. If this is the measure, stakers do not meet the test because stakers are also participants.
• But the lower court has essentially read the definition of "full" from Howey, at least for something like a multi-level distribution pyramid, where participants do have to work hard to recruit more downlines.
• Basically, the appellate courts (Second, Ninth, etc.) understood "entirely" to mean more likely "primary" or "emphasis". The U.S. Supreme Court has no objection to this. It discussed the issue in a 1975 opinion paper, but took no position.
• Given that the contribution of any one individual staker relative to the sum of efforts in the enterprise is likely to be rather limited, I doubt that the element "exclusively [=mainly] from the efforts of others" is eligible.
• But none of this answers the tougher question: who is the "issuer" when you're dealing with a decentralized system. But this is part of the broader question of how to incorporate a decentralized system into a human-centered legal system.

Venture capital partner Adam Cochran believes that the merged ETH is not a security for the following reasons:

• First, Howey tested three elements: An investment of money, In a common enterprise, and the expectation of profit from the efforts of others.
• For the point of "money investment", ETH does not matter. After all, almost all risky assets, commodity services, and even Bitcoin meet this point. The latter two points are more controversial, and different courts have different measures, many of which have never been adopted by the United States Supreme Court.
• For the definition of "joint investment enterprise", there are many disputes, and the schools of thought are also relatively complicated, such as horizontal commonality, extensive vertical commonality, and strict vertical commonality. Among the horizontal commonality, the court looks for the characteristics of proportional distribution of profits, or the pooling of funds to bind investors' assets together. The specific application is in ETH 2.0. The ETH you pledge is independent and bound to the node. It has nothing to do with other pledged funds. It is also rewarded and punished according to the performance of your own node and does not affect other nodes. Therefore, it does not have horizontal commonality . The vertical commonality emphasizes the relationship between investors and issuers/promoters. For example, investors and issuers/promoters do not necessarily have the same profit and loss on ETH. But the first challenge is, who is the issuer and promoter of the Ethereum network as a decentralized open source project? What's more, the people who wrote the code for Ethereum in the first place are not the people who currently run the network.
• Regarding the point of "the expectation of profit from the efforts of others", some cases show that its core is "a reasonable expectation of profits from the entrepreneurial or management efforts of others"; some cases show that profits cannot come from one's own efforts or services; This is a subtle but important distinction, for staking, which again relies heavily on proof of joint ventures. The important question for this piece is: What are you being rewarded for? Why can I get rewards when staking? In fact, the ultimate argument has two aspects, one is to sell block space to users and get rewarded; this view can be regarded as a joint investment enterprise, but not from the promoter or issuer, because the block space is formed in cooperation with the validator , and what the verifier actually sells is the act of verifying. Then the question arises, whether the verification behavior of the verifier is "self-reliance". In fact, in previous cases, the SEC has indirectly given the answer, that is, the verifier's participation in network verification is a substantive effort, and it is rewarded for it .
• To sum up, for the three elements of the Howey test, the last two points are currently controversial in ETH. Although the model of "buying coins and pledging to earn coins" looks a lot like securities, if you have a deeper understanding, the funds for pledge verification are not the same as those of others. Mixed, independent rewards do not meet the second point; and verifiers are rewarded through their own online verification efforts, which does not meet the third point. However, even if the SEC wants to identify ETH as a security, it has nothing to do with the transition from Ethereum to PoS.