Staking ETH fails to meet the second and fourth prongs of the Howey Test.
Source: Ethereum's New ‘Staking’ Model Does Not Make ETH A Security (Paradigm)
Authors: Rodrigo Seira, Amy Aixi Zhang, Jake Chervinsky
Translated by: 0x11
Following Ethereum’s transition to Proof-of-Stake (PoS), new concerns emerged within the community: Could the PoS model lead to ETH being classified as a security under U.S. securities law? Some even argue that tokens in PoS systems inherently qualify as securities.
However, these arguments misinterpret the Howey Test and overlook the foundational purpose of securities laws—to address information asymmetries, which are absent in this context.
As detailed below, ETH (including staked ETH) does not constitute an "investment contract" under PoS, rendering securities laws inapplicable.
Understanding Securities Law
U.S. securities laws require issuers to register offerings with the SEC unless exempted. Registration mandates disclosures to ensure investors make informed decisions, mitigate information asymmetry, and prevent agency issues.
The Securities Act of 1933 defines "security" to include "investment contracts," which the Supreme Court in Howey outlined as requiring:
- Investment of money
- In a common enterprise
- Expectation of profits
- Derived from others’ efforts
Courts apply an "economic reality" test, focusing on whether the investor-promoter relationship justifies regulatory oversight.
Applying Howey to PoS Ethereum
Critics argue staking ETH satisfies Howey:
- Investment: Locking 32 ETH as collateral.
- Common Enterprise: Validators collaborate in network validation.
- Profit Expectation: Staking rewards.
- Others’ Efforts: Rewards depend on other validators’ work.
This misinterprets prongs 2 and 4, as explained below.
1. PoS Lacks a "Common Enterprise"
Legal Standard: Courts require either:
- Horizontal commonality: Pooled funds with shared profits.
- Vertical commonality: Investor-promoter interdependence.
ETH Staking Fails Both:
- No Horizontal Commonality: Validators’ ETH remains distinct in deposit contracts, with rewards tied to individual performance, not pooled profits.
- No Vertical Commonality: Ethereum is decentralized; no promoter exists to link validator success.
👉 Explore Ethereum’s decentralization
2. Staked ETH Doesn’t Rely on "Others’ Efforts"
Legal Standard: Profits must derive primarily from third-party efforts (e.g., managerial skill).
ETH Staking:
Rewards hinge on:
- Self-staked ETH amount (up to 32 ETH).
- Random block proposal opportunities.
Validators control outcomes via:
- Uptime maintenance.
- Network participation.
Schaden factors confirm validators retain control:
- Transparent data (on-chain rewards).
- Autonomous operation (no third-party reliance).
Conclusion
Staking ETH fails Howey due to:
- No common enterprise.
- No dependence on others’ efforts.
Applying securities law would be practically absurd—there’s no issuer to disclose information or asymmetry to rectify.
Disclaimer: This content represents the authors’ views and not investment advice. Always comply with local regulations.
FAQ
Q1: Does staking ETH make it a security?
A: No. ETH staking lacks key Howey elements like a common enterprise or reliance on others’ efforts.
Q2: Why is Ethereum’s decentralization relevant?
A: Decentralization negates the need for a promoter, eliminating vertical commonality.
Q3: Can regulators still target ETH?
A: While possible, legal and economic realities don’t support classifying ETH as a security under current frameworks.