Vitalik Buterin speaks in defense of Ethereum’s PoS transition

Ethereum co-founder has responded to criticism from Swan Bitcoin’s managing editor Nick Payton about ETH falling under the definition of security after mowing to proof-of-stake consensus.

An octahedron with projected visions floating in virtual space.

“The fact that you can vote on something to change its properties is proof that it's a security,” Payton wrote in a tweet that led to some polarizing reactions in the crypto community. The heated debate in his replies is understandable in light of the ongoing bitter battle between the Securities and Exchange Commission and Ripple over the legal status of XRP.

Vitalik, however, dismissed Payton’s claims as a “bare-faced lie.”

“It's amazing how some PoW proponents just keep repeating the unmitigated bare-faced lie that PoS includes voting on protocol parameters (it doesn't, just like PoW doesn't), and this so often just goes unchallenged,” he tweeted, adding, “Nodes reject invalid blocks, in PoS and in PoW. It's not hard.”

Earlier this month, Buterin exchanged Twitter blows with Bitcoin maximalist Jimmy Song, who argued that PoS doesn’t address the Byzantine Generals Problem, a game theory problem that describes a situation where involved parties must agree on a certain strategy while knowing that some actors are corrupt or unreliable. According to Song, those who don’t understand his tweet are completely unqualified to make any claims about Ethereum’s PoS transition.

But for Vitalik, Song’s reasoning relies on a “one-line technicality,” making it an example of “bad philosophy.”

“Pro-tip: if there’s a long-established tradition of people debating A vs B based on deep arguments touching on math, economics and moral philosophy, and you come along saying “B is dumb because of a one-line technicality involving definitions”, you’re probably wrong,” said Buterin.

The ticking regulatory bomb

Some experts warn that the proof-of-stake Ethereum 2.0, expected to go live in August-September, may face severe regulatory obstacles. Given SEC’s commitment to cryptocurrency enforcement under Chair Gensler, it may deem the network’s new system as falling under the definition of securities. The fact that Ethereum was originally funded through ICO in 2014, its issuers are known, and rewards for the network validators can technically count as dividends, can result in passing the Howey test.

According to the Howey test, a token is an investment contract if:

  • It is an investment of money
  • There is an expectation of profits from the investment
  • The investment of money is in a common enterprise
  • Any profit comes from the efforts of a promoter or third party

Of course, the best interest of all crypto issuers is not to pass the test, as it would mean that their cryptocurrency has been deemed a security, falling under the jurisdiction of the SEC. Moreover, the offering of the unregistered security under US laws is punishable by fine or worse, setting the stage for exhausting legal battles similar to the one of Ripple.

Two weeks ago, SEC Chair Gary Gensler reaffirmed Commission's view that Bitcoin is a commodity but refused to comment on other cryptocurrencies.

"Some, like Bitcoin, and that's the only one, Jim, I'm going to say because I'm not going to talk about any one of these tokens, my predecessors and others have said, they’re a commodity," Gensler said in his interview with CNBC’s Jim Cramer.

The previous SEC administration believed that both Bitcoin and Ethereum fell under the definition of commodities, but Gensler so far refrained from clarifying his position on Ethereum.