Ethereum, the second-generation blockchain platform that enables decentralized applications and smart contracts, is at a crossroads. The project, with a second-highest market capitalization of $74.5 billion, faces potential regulatory and technical challenges ahead.

Last week the Wall Street Journal reported that U.S. regulators are currently examining whether Ether (ETH) and similar cryptocurrencies are securities under federal law. The piece focused on a recent speech by Gary Gensler, former chairman of the Commodity Futures Trading Commission (CFTC), in which he opined that ETH and Ripple (XRP) are unregistered securities. The article suggests that the Security and Exchange Commission (SEC) is conflicted about the determination of Ether's legal status. Although the article did not cite specific government sources, it was picked up by many news outlets in the crypto space.

The debate's fundamental question is: Does Ether pass the Howey test? The Howey test, named after a 1946 Supreme Court decision involving orange groves, asks if an instrument qualifies as an investment contract. It defines an investment contract under securities law as a contract that involves an investment of money from an expectation of profits arising from a common enterprise depending only on the efforts of a promoter or third party.

Ethereum Foundation cofounder Joseph Lubin remains confident that Ether is not a security. The crypto advocacy nonprofit Coin Center establishes an argument as to why. The main point is that even if the initial fundraising agreement in 2014 constituted an investment contract, Ether the token itself was not a security because of its utility and decentralized distribution. Regardless, if the rumors are true, and the SEC or CFTC decide to classify ETH or XRP as securities, then litigation will likely ensue.

Also, Ethereum is undergoing the process of shifting from proof-of-work to proof-of-stake. On May 8, developers released the first version of Casper, a planned improvement to the Ethereum network's consensus protocol. The updated version is a joint effort between the Ethereum Foundation research team, client developers, security auditors, and community members. Casper will change the Ethereum software so that the process of maintaining and securing the blockchain combines mining and voting. The voting system, called staking, involves users who stake deposits of ETH, which they risk losing in case of dishonesty, in order to help validate transactions and new blocks. Though there is no concrete timeline for completely switching the Ethereum network to Casper, a hard fork will be necessary in the future to finish the proof-of-stake transition.

ETH holders and users have estimated that wallet owners who stake ETH may be able to earn a yield of up to 5 percent per year. However, the staked funds will be locked up for a time period. If the node that the wallet owner is validating breaks the rules of consensus, then an undefined percentage of the staked ETH will be burned. Therefore, incentive for securing the network is a percentage of block rewards, and the risk is the lockup and loss of staked funds.

Ethereum is at an exciting time in its life. Regulatory considerations and proof-of-stake updates will continue to make the news.

The author does not hold any positions in any of the securities above.