CFTC Chairman Heath Tarbert said last month that ether is a commodity, and he expects to see regulated ether futures in the U.S. in the next six months.
The ethereum network is expected to transition from its current proof-of-work consensus mechanism to a proof-of-stake model over the next year, in an upgrade known as Ethereum 2.0.
Asked about this shift, Tarbert said Tuesday the CFTC is still evaluating whether ether will remain a commodity under the new model.
Ethereum developers and proponents believe proof-of-stake may actually bolster the case that ether is “sufficiently decentralized” to be considered a commodity in the eyes of U.S. regulators.
U.S. regulators are not yet sure about what to make of ethereum’s impending transition to a staking-based protocol.
Commodity Futures Trading Commission (CFTC) Chairman Heath Tarbert, who recently declared his view that the world’s second-largest cryptocurrency by market capitalization is a commodity that could support a futures market, said this week his agency is still evaluating whether this will remain true after ethereum upgrades its network sometime in the coming year.
Speaking at CoinDesk’s Invest: NYC conference on Tuesday, Tarbert said the CFTC and its sister agency, the Securities and Exchange Commission (SEC), were both “thinking carefully” about the forthcoming Ethereum 2.0 upgrade which is designed to replace the coin’s current proof-of-work (PoW) model for transaction validation.
In PoW, computer servers called nodes solve computationally-intensive mathematical equations in order to validate transactions and process new blocks. However, in Ethereum 2.0, these same nodes will stake wealth (in the form of ETH) and vote on new blocks rather than solve for them.
“Staking is obviously different than mining in the sense that mining is by its very nature sort of more decentralized, whereas with the stake obviously it reduces energy costs because you’re just giving it to one validator or line of validators,” Tarbert said Tuesday.
The CFTC, which has been looking into ethereum and its potential shift to proof-of-stake (PoS) since at least December 2018, is now looking into how decentralized the ethereum network will be after the 2.0 upgrade. In addition, Tarbert said regulators are also examining the requirements expected of users to run nodes on the Ethereum 2.0 network.
“That’s exactly the kind of analysis that that we’re undertaking and the SEC is undertaking right now,” Tarbert said.
This analysis will be key for any evaluation and eventual approval by U.S. regulators for a regulated ether futures market – which according to Tarbert’s earlier statements is “likely” in the next six to 12 months.
What’s at stake
According to Jehan Chu, managing director of Hong Kong-based crypto investment firm Kenetic Capital, a regulated ether futures market would be game changing in the U.S.
“What regulated futures will do is allow institutional investors to trade this commodity,” Chu said. “They’re not going to be logging on to Bitmex and trading in size. They will potentially on Bakkt, the NASDAQ, etc. This is why you need to have regulated financial instruments and why CFTC’s commodity designation is so important.”
Adding to this, Aaron Wright, founder of ethereum startup OpenLaw, said another core benefit of a regulated futures market would be better “price discovery” for ether.
“Without futures, it’s more difficult for those that think the price of ether is overvalued to signal that to the market,” said Wright. (According to recent remarks by former CFTC Chairman Christopher Giancarlo, the introduction of bitcoin futures in late-2017 brought BTC prices back down to earth.)
Some industry experts say both the demand and maturity of ethereum as a technology is still far too nascent for a futures market to be supported in the U.S. This is because ethereum futures contracts do trade on exchanges based outside of the U.S. – such as on U.K.-based Kraken Futures – but trade volumes for these contracts are relatively thin.
Still, the most ardent supporters of ethereum are optimistic about the successful delivery of Ethereum 2.0. In fact, most believe the case for a regulated ether futures market is only strengthened in light of the upcoming transition to PoS.
There are two reasons why.
1. ‘Better decentralization’
In June 2018, the SEC’s director of corporation finance, William Hinman, argued ether was not a security based on the understanding of the ethereum network as a “decentralized structure.”
Danny Ryan, an Ethereum 2.0 researcher at the Ethereum Foundation, explained one of the key aims of ethereum’s PoS network is “better decentralization.”
“With [PoW], there is some intrinsic centralization due to the hardware component tied to the real-world supply chain in which some people are more entrenched and can get more specialized hardware than average consumers,” s