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This week in crypto: Ethereum may or may not be an unregistered security

Harry Hamburg
Harry Hamburg
5 min read

Today, I’m writing to you from departure gate three in Sofia airport.

It’s been a hectic week, and I’ve managed to miss most of the merge memes and hype, and also all of the royal memes and hype.

Although I did hear something about Prince King Charles and a pen.

As for the Ethereum memes, I think these two sum it up pretty well:

Okay, so that second one isn’t really a meme, but it’s an interesting take. What is going to happen with the (reportedly) billions of dollars of Ethereum mining equipment that now serves no purpose?

There’s a hard fork of Ethereum called EthPoW (EthW) that some miners are really trying to make a thing. But the value of Ethereum is in its developers, dApps and network effect.

EthW is likely to have none of those. Also, EthW uses a lot of energy. And as we all know by now post-merge Ethereum does not.

Although, if you remember the whole Bitcoin Cash debacle, you’ll probably remember that Bitcoin Cash and its derivatives did shoot up in value for no good reason a few times.

So, I’m sure some interesting things will happen with EthW.

As for price action, the merge so far has been a classic case of “buy the rumour, sell the news”.

It went off without a hitch, and so Ethereum’s price dropped. This is crypto remember, nothing ever moves in the way people predict. And it’s kind of reassuring to see that hasn’t changed, yet.

So, what else has been happening?

Matt Levine wrote some interesting things about Gary Gensler’s questionable approach to crypto.

(Gary Gensler is the head of the US Securities and Exchange Commission)

I can recommend reading Levine’s take in full, because it’s a lot more nuanced than the part I’m quoting here, but this was his conclusion:

Gensler’s posture seems like a massive bet against crypto ever being important. His message is basically “I should be the main regulator of crypto, and as the main regulator my plan is mostly to ban it.” That’s not, abstractly, an insane posture: That’s more or less the view that the US Drug Enforcement Agency takes toward cocaine, for instance. (Or the view that China takes toward crypto, for that matter.) But most of the people who are jockeying to be the main regulator of crypto want to regulate a thriving ecosystem; they want it to be big, and they want to be in charge of it. Gensler wants to be in charge of it and have it be irrelevant and cumbersome and slow-moving.
That might be a good pitch, now, in the crypto winter, when so many crypto stories are about people losing their life savings to unregulated scams. But it is not going to appeal to anyone in the crypto industry, and I don’t think it’s going to appeal to the politicians who are interested in crypto and who are writing their own legislation to decide who should regulate it. Gensler’s posture is that he should be in charge of writing the rules for crypto, but not write them. I don’t see how that can work.

This was all around the time that Gensler sort of said that Ethereum could now be classed as a security.

From Coin Telegraph:

Speaking to reporters after the Senate Banking Committee on Thursday, SEC chairman Gary Gensler reportedly said that cryptocurrencies and intermediaries that allow holders to “stake” their crypto may define it as a security under the Howey test, according to The Wall Street Journal.
“From the coin’s perspective […] that’s another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others,” WSJ reported Gensler as saying.
The comments came on the same day as Ethereum’s transition to PoS, meaning the network will no longer rely on energy-intensive proof-of-work (PoW) mining and instead, allows validators to verify transactions and create new blocks in a process that involves staking.
Gensler said that allowing holders to stake coins results in “the investing public anticipating profits based on the efforts of others.”
Gensler went on to say that intermediaries offering staking services to its customers “looks very similar — with some changes of labeling — to lending.”

It will be interesting if Gensler decides to go nuclear and declare Ethereum an unregistered security.

If he did, then the US would pretty much bow out of the world of crypto. Developers, projects, exchanges, DeFi and everything that comes with it would likely move out of the US to more crypto friendly territories.

Okay, maybe not exchanges. It’s pretty hard to move a listed company like Coinbase.

But I think that’s unlikely to happen. There’s a lot of money to be made in crypto, a lot of promise, a lot of jobs, a lot of innovation and a lot of political clout.

As I’ve said many times before, banning crypto now is akin to banning the internet in the mid-90s.

America wouldn’t be today’s global leader in tech if it had taken that approach. And, thankfully, it seems many people in power agree.

I would expect that if Gensler did decide to go after Ethereum, he might swiftly lose his appointment.

And if Ripple wins its never-ending legal battle with the SEC, then I’d also imagine the SEC would definitely lose a case against Ethereum… especially as there isn’t really a central Ethereum authority to sue in the first place. That’s kind of the point.

In other news…

US inflation data came in and it was 0.1% higher than it was last month.

That might not sound very bad. But everyone was hoping and expecting it would continue to decline, not increase.

The result of this was that everyone freaked out and stocks, once again, tanked. They had their worst day in the whole of 2022… and 2022 has already had many “worst” days when it comes to stocks.

Actually, it was the worst day since June 2020 – which is even worse.

Why did people freak out? Because it’s now virtually guaranteed that the Fed will keep raising interest rates, maybe by as much as 1% (or 100 basis points, as real financial writers like to say).

And that will devalue stocks, cause borrowing and mortgages to increase, and very possibly tip the US into recession.

It also doesn’t help that FedEx said demand significantly decreased last quarter, which is another sign that a recession could be on the cards.

And of course, when stocks fall, crypto tends to fall even further.

So that’s one plausible theory as to why crypto prices have fallen again this week.

But, honestly, the world of finance and crypto is so complex and it has so many moving parts that the most plausible theory might not be the actual thing that caused it.

Still, our brains like a nice, simple narrative. So, that’s what we’ll go with today.

Okay, that’s it for this week.

I’m sure there was something else I was supposed to cover, but I’m now writing to you from a tiny airplane seat, somewhere over the Alps and I have no internet to check.

Thanks for reading.

Harry

Full disclosure: At time of writing, I held the following cryptos: Ethereum, IOTA, Radix, Mina Protocol, Aleph Zero.

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Harry Hamburg

This is all, just like... my opinion, man.