Ethereum, the world’s second-largest cryptocurrency, continues to fall in price after the long-awaited “Fusions” update, which led to the blockchain changing the Proof-of-Work algorithm to Proof-of-Stake. This was facilitated by a statement from Securities and Exchange Commission chief Gary Gensler, who believes the move to a new algorithm could be sufficient reason to recognize “ether” as a security.
Last week, a major update of the Ethereum network took place, as a result of which miners were replaced by validators, network participants who deposited at least 32 Ethereum coins as collateral. These assets have moved to a business address where they cannot be bought or sold. Collateralized tokens work like lottery tickets: the larger the pledge, the more likely it is to receive a winning ticket, thereby capturing the block in the Ethereum network’s “digital ledger” and rewarding its owner. This means that with the new algorithm, it is not the computing power that is the decisive indicator, but the amount of the pledged assets.
The SEC believes the move to proof-of-stake means that people who invest in ether and leave their assets as collateral treat their assets as something similar to securities, rather than cryptocurrency. This is especially true given that very few people use Ethereum to pay for real-world purchases. This position was notably supported by the head of the SEC, Mr. Gensler.
“From the coin’s point of view <…> this is another indication that according to the Howey test, investors expect returns based on the performance of others”says Gensler. Remember that the Howey test was developed by the US Supreme Court to determine whether a financial transaction is an investment in a security. It is considered positive if four conditions are met: funds are invested, the investor expects a profit, investments are made in a common enterprise, the expected profit is related to other people’s activities.
This official’s position regarding Ethereum has not made crypto investors optimistic. As a result, the exchange rate accelerated the decline that began after the transition to the proof-of-stake algorithm. Last week, before the “merger”, the price of Ethereum reached $1740, now the second most popular cryptocurrency in the world is trading around $1350, and a little earlier the rate even fell below $1300. Since the changeover last Thursday, the exchange rate has fallen by around 15%.
In addition to Ethereum, the Proof-of-Stake algorithm is currently used by the cryptocurrencies Cardano and Solana. At the same time, the price of Cardano fell by 80% and Solana by 78% in 2022 compared to the high indicators of the previous year.