On Friday (September 16), Jake Chervinsky, Executive Vice President and Head of Policy at Blockchain Association, reacted to Bitcoin maxis, such as Michael Saylor, seemingly celebrating the fact that Ethereum’s Merge upgrade may have made $ETH more of a target for the U.S. Securities and Exchange Commission (SEC).

On Thursday (September 15), the day that Ethereum completed its Merge upgrade, i.e. its transition from proof-of-work (PoW) to proof-of-stake (PoS), Michael Saylor, Co-Founder and Executive Chairman of business intelligence software company MicroStrategy Inc. (NASDAQ: MSTR), implied that $ETH could get classified as a security (rather than a commodity) by the U.S. Securities and Exchange Commission (SEC).

After Ethereum’s Merge upgrade was completed in the early hours of September 15, several influential Bitcoin maxis expressed their reaction to this event.

Saylor, who is a Bitcoin maxi (i.e. believes that — with the exception of fiat-backed stablecoins such as Tether ($USDT) — Bitcoin is the only legitimate cryptocurrency), sent out a tweet in response to comments by SEC Chair Gary Gensler’s most recent comment on PoS cryptocurrencies that suggested he expects the SEC to eventually declare that $ETH is a security (unlike $BTC which they have publicly called a commodity and therefore not subject to U.S. securities laws).

The Wall Street Journal (WSJ) report that Saylor was referring to in his tweet says that “Ethereum’s big software update on Thursday may have turned the second-largest cryptocurrency into a security” in the eyes of the SEC. According to the WSJ report, although Gensler did not specifically mention Ethereum, he said yesterday that the native assets of PoS blockchains could pass the Howey Test since it was possible to view staking as an “investment contract” because “the investing public is anticipating profits based on the efforts of others.”

Here is how Investopedia explains the Howey Test:

The Howey Test refers to the U.S. Supreme Court case for determining whether a transaction qualifies as an ‘investment contract,’ and therefore would be considered a security and subject to disclosure and registration requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934. Under the Howey Test, an investment contract exists if there is an ‘investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.’

Earlier today, Chervinsky, who was General Council at Compound Labs before joining the Washington, D.C. based Blockchain Association, which represents “the reputable leaders of the US blockchain and cryptocurrency industry”, took to Twitter to defend Ethereum’s move to PoS consensus by explaining why despite what some people may think why the Merge has not turned $ETH from a commodity to a security.

Chervinsky went on to say:

The general idea seems to be ‘if you squint hard enough, staking sort of looks like a dividend or interest, & some actual securities have those, so maybe staked assets are securities too.’ That’s not how the law works. That just means holders of staked assets expect profit…

which alone doesn’t make the assets into securities. Expectation of profit is only one of four Howey test prongs & likely the least important for volatile assets (i.e., non-stablecoins). People hold all kinds of assets with an expectation of profit. Gold, cars, watches, etc.

In other words, expectation of profit is a feature of all investable commodities, not just securities. Whether that profit comes in the form of an increase in market price, a staking reward, or any other mechanism should make no difference to the securities analysis.

A short time later, he went even further, and suggested that rather than the Merge being a mistake, it is win for Ethereum since it reduces the chance that the SEC will classify $ETH as a security:

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