Cointime

Download App
iOS & Android

The One Word That Can Kill Crypto Is Back

Validated Individual Expert

Letitia James.

That’s a name that probably won’t mean much to you, but it’s none other than one of the most powerful people in the United States, the New York’s Attorney General.

This woman, from this position of immense power, has filed a lawsuit against KuCoin for failing to register as a broker-dealer for securities and commodities.

But even though this is quite a common action against Crypto exchanges, the lawsuit is in fact a first-ever attack on the native currency of the second-biggest blockchain in the world by market capitalization.

An attack that could threaten not only its survival, but could also mean the demise of all staking blockchains.

Yes, you read that right.

When security became a cause for concern

There’s one word that is a cause for pride to Crypto enthusiasts, but used in a different context inspires extreme fear.

And that word is security.

Security, the crown jewel of Crypto

Of course, one of blockchain’s most revered features is the high security and integrity that the ledger guarantees for data stored in it, due to its decentralized nature and shared state.

In layman’s terms, once data is registered into a blockchain is really hard to modify by anyone except the owner of the private key that allows that data to be modified (for instance, if the owner of a Bitcoin decides to sell it).

But while Crypto enthusiasts pride themselves on how secure the technology is, no one in the industry wants that adjective to be linked to a cryptocurrency.

Put bluntly, there’s no bigger nightmare in Crypto than the native cryptocurrency of your blockchain being considered a security.

But why?

Crypto, an investment or a security?

For years, all Crypto projects issuing cryptocurrencies have relied on one assumption: that their native crypto token is a currency or, in the worst-case scenario, a commodity.

The reason is simple. Because the alternative is ‘no bueno’ or, to be precise, ‘muy malo’.

But why?

An investment security is a financial instrument that represents a claim on an asset, such as stocks, bonds, or options. In other words, it is a way for investors to invest their money and potentially earn a return on their investment.

From this we get the very first conclusion: If your token is considered a security, you’re automatically not a currency.

Indeed, some would argue that having your wealth in fiat currencies is just another form of investment, but we can all agree that investing in an inflationary-by-design asset tends to be a question of liquidity or investing ignorance, not a decision with the expectation of future returns.

Cryptocurrencies that aren’t currencies, wow. That’s certainly a stab in the back for Crypto bros.

But if you think that’s the only consequence, I have bad news for you.

Brace yourself.

A whole lotta regulation and scrutiny

If a cryptocurrency is categorized as a security, it means that it is subject to regulations under securities laws. Sadly, this has horrifying implications, among which are:

  1. Compliance Requirements: Companies issuing the cryptocurrency may be required to comply with regulatory requirements, such as registering with securities regulators, providing regular financial reports, and ensuring that their offerings are marketed only to eligible investors.
  2. Increased Required Transparency: Securities regulations may require companies to provide more information about their operations, financials, and risks to investors, which can increase transparency and help investors make more informed investment decisions.

These points alone are screaming centralization, and that puts Ethereum in a position of imminent death.

But how exactly is the Attorney General justifying categorizing ETH as a security?

Well, sadly for me, she kind of has a point.

Howey, Waldstein, and Vitalik Buterin walk into a bar

New York’s Attorney General (NYAG from now on) was very clear in its filing that she considered ETH to be security for three main reasons.

ICOs, Vitalik, and Proof-of-Stake

The first reason wielded by the NYAG is that Ethereum launched an ICO back in 2014, as the project team behind, Vitalik et al, required funding for the project.

The NYAG then describes how the Ethereum Foundation, that project team, is a “small number of developers who hold positions in ETH and stand to profit from the growth of the network and the related appreciation of ETH”.

This doubles down on the first point, as not only they raised funds while keeping an important share, but claims that to this day they remain in considerable control over the direction the Ethereum blockchain takes.

Can you hear that? Yeah me too, it’s centralization again.

Thirdly, and probably the scariest of them all, is that the NYAG implicitly considers the Merge, the transition of Ethereum from a Proof-of-Work (PoW) blockchain to a Proof-of-Stake (PoS) one, a major turning point to consider ETH a security.

And considering that the majority of blockchains today are PoS blockchains, this is a statement that can be easily interpreted as a warning that all PoS cryptocurrencies could be considered securities in the near future.

That’s absolute chaos.

But why such an aggressive stance over Proof-of-Stake?

The dichotomy of PoS

The NYAG draws a clear line between PoW and PoS.

While PoW blockchains decide what node introduces the next block of transactions (receiving the reward for doing so) by a mathematical guessing competition, PoS decides the next node by random choice, in which the nodes stake their tokens to have a higher chance of being chosen.

To the NYAG, this sole difference is fundamental, as she claims that the sole concept of staking incentivizes ownership and staking of the crypto token in expectations of future profits.

Therefore, using these arguments, the NYAG claims that ETH passes the Howey Test, the procedure used in the United States to define what’s a security.

But what is the Howey Test and why it matters so much?

70-year-old Howey is alive and strong

The decades-old Howey Test consists of three criteria:

  1. Investment of Money: The first requirement is that the investment involves an exchange of money or something of value.
  2. Expectation of Profit: The second requirement is that the investment is made with the expectation of earning a profit.
  3. Common Enterprise: The third requirement is that the investment is made in a common enterprise.

The first point is clear, buying ETH requires an investment of money or a valuable asset.

For the second criterion, the NYAG targets the concept of staking, as she argues that staking alone incentivizes people to buy ETH with the sole purpose of staking it to earn passive interest.

Regarding the third, for sure the most controversial point, she argues that the people in the Ethereum Foundation have considerable power over the network and a clear interest in heading the blockchain in a direction that favors them, as they allegedly own considerable amounts of ETH and thus have a clear interest in accruing the value of the token.

And here’s the real issue. If ETH really meets the third criterion, then ETH is unequivocally centralized. And there’s no other way to put it… centralization means death.

Being a security is the worst possible outcome

Common enterprise.

The two words that all Crypto projects should avoid.

Put simply, if ETH is considered a security, it automatically becomes a centralized asset to the eyes of the world.

Whether is it really centralized or not — the power and the control attributed by the lawsuit to the Ethereum Foundation is probably overstated — it really doesn’t matter, as the impact this categorization alone would have over the token and the overall industry is devastating.

As I’ve said many times, any indication that a Crypto project is centralized automatically makes it completely worthless, because the sole concept of blockchains is intrinsically related to the concept of decentralization.

Without decentralization, high security and integrity of data are no more, as the ledger relies on its distributed nature to guarantee the high-security thresholds it claims to have.

In short, public ledgers in this scenario provide absolutely zero reasons to be used.

But the question is, if ETH is considered a security, will there be an option for it to stop being one eventually, becoming a commodity or even a medium of exchange?

How do we survive this?

Personally, I think the concept of “you made an ICO, you’re a security” is a rather poor argument by itself, so US regulators will probably double down on the alleged power the Ethereum Foundation holds to guide the decision-making of the project as the main argument to consider ETH a security.

In that scenario, the Ethereum Foundation must focus on undermining such claims, with a few options, like:

  • Burning their ETH — render them unusable — to eliminate their economic incentive
  • Proving a continuous track record of protocol improvements not pushed forward by them — this is not probable in my view
  • Reducing Vitalik’s influence over the project’s direction

However, all these three are potentially very negative for the prospects of the project, so decisions aren’t going to be easy.

But one thing is for sure, there’s no way to put in good light the fact that ETH could be soon considered a security and thus, tell the world that what was once considered decentralized, was actually not.

And if this precedent extrapolates to the rest of PoS in the industry, that’s complete Armageddon.

A final word

When it comes to Crypto, knowledge is everything.

And by subscribing to my weekly newsletter, you’ll gain free access to such knowledge much earlier than everyone.

But I won’t lie to you, even though Crypto assets are potential investments, I can’t promise you success in venturing into Crypto, let alone profits; that would be me deceiving you.

That being said, I can promise you knowledge, and there is no wealth without knowledge.

Comments

All Comments

Recommended for you

  • Zhipu Secures $5 Billion Financing Through Zero-Coupon Convertible Bonds and Premium Share Placement

    On September 13, Zhipu (02513.HK) announced the completion of approximately $5 billion in financing, which includes around $2 billion from a share placement and about $3 billion from the issuance of convertible bonds. This financing is primarily aimed at developing the next-generation GLM model, a fully self-training system, and related computing infrastructure. According to the announcement, the share placement price is set at HKD 714 per share, representing a discount of approximately 9.96% compared to the closing price before the announcement, with the placed shares accounting for about 4.50% of the expanded issued capital. The convertible bonds are structured as zero-coupon bonds, issued at 100.5% of the principal, redeemable at maturity at par value; the initial conversion price is set at HKD 892.50 per share, which is a 25% premium over the placement price and approximately 12.55% over the closing price prior to the announcement. The combination of zero-coupon and premium issuance serves as an important signal for this round of financing. With the R&D budget and funding arrangements becoming clearer, Zhipu is enhancing its capital foundation for ongoing training experiments, advancing model iterations, and improving its computing system, thereby strengthening its position in the upcoming competition for leading global models.

  • Iranian Cargo Ship Attacked, 1 Dead and 4 Injured

    On September 13, the Islamic Republic News Agency reported, citing local Iranian officials, that an Iranian container cargo ship was attacked by an unidentified projectile near the Strait of Hormuz, resulting in 1 death and 4 injuries. (Xinhua)

  • ETH Falls Below $2500

    Market data shows that ETH has fallen below $2500, currently priced at $2498.62, with a 24-hour decline of 1.19%. The market is experiencing significant volatility, so please ensure proper risk management.

  • BTC Falls Below $77,000

    Market data shows that BTC has fallen below $77,000, currently priced at $76,989.22, with a 24-hour decline of 0.41%. The market is experiencing significant volatility, so please ensure proper risk management.

  • Ukrainian Official: Ukraine Prepares for New Round of Tripartite Talks with US and Russia in October

    On the 12th local time, Andriy Yermak, the head of the Ukrainian President's Office, stated that Ukraine is preparing to hold a new round of negotiations in October, involving Ukraine, Russia, and the United States. Yermak did not disclose specific details about whether the upcoming talks would take place in the Middle East or elsewhere. The day before, Kremlin spokesperson Dmitry Peskov mentioned in an interview that the Kremlin expects a tripartite meeting between Russia, the United States, and Ukraine to take place soon to continue dialogue. (CCTV News)

  • SpaceX to Increase Weight in Nasdaq-100 Index After Rebalancing

    Later this month, SpaceX's weight in the Nasdaq-100 Index will be increased, potentially generating billions of dollars in buying demand from passive funds that track the benchmark index. According to estimated data from the Nasdaq Global Index Watch platform, its weight is expected to rise from approximately 1.28% to about 2.82%. The weight adjustment is significant, as passive funds linked to the index must adjust their holdings accordingly, including the $481 billion Invesco QQQ Trust.

  • Major Central Banks of the US, Japan, and UK to Announce Monetary Policy This Week

    On September 12, the Federal Reserve, the Bank of Japan, and the Bank of England will announce their monetary policy decisions this week, with the focus on whether the Federal Reserve will raise interest rates for the first time in three years. Iran and Gulf countries have been negotiating a temporary management agreement for shipping in the Strait of Hormuz.

  • Anthropic CEO: We Must Slow Down the Advancement of AI Model Capabilities

    On September 12, the co-founder and CEO of Anthropic stated that the pace of enhancing AI model capabilities must be slowed down. 'Slowing down the pace' does not mean halting model training or technological progress, but rather ensuring that companies have ample time for alignment and to ensure the safety of the models.

  • Morgan Stanley Increases Bitcoin Holdings for Three Consecutive Days, Total Holdings Exceed 7,800 BTC

    On September 12, Morgan Stanley increased its Bitcoin holdings for three consecutive days through its spot Bitcoin exchange-traded fund MSBT, investing $15.81 million to acquire approximately 203.45 BTC. The total holdings now amount to 7,855 BTC, valued at over $600 million.

  • Anthropic IPO Approaches, Off-Market Valuation Peaks and Retracts to $2.159 Trillion

    On September 12, HIP-3 market deployer Entropy launched the Anthropic Pre-IPO market on Hyperliquid. As the Anthropic IPO draws near, its market valuation peaked at over $2.3 trillion on the platform on the 9th before retracting to $2.159 trillion. As of the time of this report, the pre-market contract volume for Anthropic reached $28.19 million, with a trading volume of $6.74 million. Additionally, OpenAI's pre-market contract valuation on Entropy is currently reported at $164 million, with a volume of $7.67 million.