U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler has long taken the position that the majority of crypto tokens should be treated as securities. In March 2023, Gensler stated:
“The investing public is investing anticipating a return, anticipating something on these tokens, whether they're proof-of-stake (PoS) tokens, where they're also looking to get returns on those proof-of-stake tokens and getting 2%, 4%, 18% returns. Whatever they're promoting and putting into a protocol, and locking up their tokens in a protocol, a protocol that's often a small group of entrepreneurs and developers are developing, I would just suggest that each of these token operators ... seek to come into compliance, and the same with the intermediaries.”
This article is part of CoinDesk's "Staking Week." Graeme Moore is the head of tokenization at the Polymesh Association.
This is a false or misleading position as proof-of-stake, or PoS, tokens are not securities – even if some PoS token holders purchase them as investments with the expectation of profit. Even if most token holders purchase PoS tokens due to an economic incentive, not every purchase made as an investment is an investment in a security. People often treat sneakers as investments, but this doesn’t make buying a pair of Yeezy’s automatically the same as buying a stock.
PoS tokens are a critical component of proof-of-stake consensus mechanisms. Their function is to secure the blockchain by providing economic incentives to align participants’ behavior. Staking PoS tokens enables token holders to benefit economically from their tokens, but the primary purpose is to secure the network.
See also: We Need to Reclaim the Narrative on Staking | Staking Week
Gensler is wrong to blanket an entire token class as securities only because some can be loosely bent to fit provisions of the Howey Test. He would classify your house as a security if he could, citing that it is an investment in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others (contractors, painters, landscapers).
An increase in disclosures required for investors looking to purchase PoS tokens could make sense, so that individuals can decide if it’s the right investment for them. However, classifying things that are not securities as securities is where we must draw the line. PoS tokens, as United States District Judge Analisa Nadine Torres pointed out in the recent XRP ruling, could be sold in such a manner that would necessitate an investment contract (i.e. sales by an insider team to investors clearly expecting profit), but the actual tokens themselves are not securities simply because some people expect their price to appreciate.
And that's the case, no matter how much a regulator wants to inflate its own importance.