Cracks are appearing in the Ethereum Foundation following reports that the U.S. Securities and Exchange Commission (SEC) is investigating the group ahead of its plans to classify ETH tokens as unregistered securities.
On March 20, keen observers noticed a small but significant change in the Ethereum Foundation’s GitHub repository created on February 26. Gone is a block of text from the site declaring that the foundation has “never been contacted by any organization in the world.” The world in a way that demands that contact not be made public.”
The changes were made by developer Pablo Pettinari, and the revision description states that the changes were necessary because the foundation “received unsolicited inquiries from state authorities containing confidentiality requirements.” A ‘warrant canary’ was also quietly removed from the Foundation site, indicating that a subpoena or other secret government request had been received.
Fortune subsequently reported that the SEC had issued subpoenas to several companies seeking financial records and other documents related to their dealings with the foundation. One of these companies told Fortune that the SEC began investigating the foundation following the September 2022 transition of the Ethereum network.
From a proof-of-work (PoW)-based consensus mechanism to a proof-of-stake (PoS)-based consensus mechanism.
PoS requires Ethereum transaction validators to post a ‘stake’ of 32 ETH tokens. This represents a prohibitive barrier for most ETH holders to pass, as the total amount at the time was approximately US$51,000 (more than US$100,000 today). The end result of these changes is that a small number of ETH whales, including many foundation insiders who have claimed a significant portion of the ETH distributed through controversial pre-mining of the network, are now reaping most of the rewards in return for maintaining the network. no see.
Fortune reports that individuals from three companies who received SEC subpoenas alleged that the move to PoS gave the agency a “new pretext” to define ETH as a security. This isn’t all that surprising. SEC Chairman Gary Gensler noted at the time that companies offering PoS-based ‘staking services’ “represent yet another indicator under the Howey test that the investing public is expecting profits based on the efforts of others.” ”
Gensler was not alone in making this observation. In March 2023, the New York Attorney General’s Office charged the KuCoin exchange for failing to register as a securities broker-dealer. NYAG called the complaint “one of the first times a regulator has argued in court that ETH, one of the largest cryptocurrencies, is a security.”
NYAG states that “the development and governance of ETH is primarily driven by a small number of developers who hold positions in ETH and can benefit from network growth and ETH-related valuation… (Ethereum co-founder Vitalik Buterin) and the Ethereum Foundation maintain significant influence over Ethereum and often Driving force behind key initiatives It’s about the Ethereum blockchain that affects the functionality and price of ETH.”
Ahead of the network’s launch, Buterin himself publicly stated “If you are investing in Ethereum, I would say you are investing in the team and the community.” Recently, former Ethereum insider Steven Nerayoff provided evidence that Ethereum Foundation members understood from the beginning that ETH was a security.
Nerayoff released emails showing Ethereum co-founder Joseph Lubin requesting legal opinions from lawyers to ensure insiders are “well protected from criminal liability related to securities laws.” This acknowledgment of ETH’s security posture helps explain why Lubin and other insiders gave such sweeping press to Gensler’s predecessor, William Hinman. William Hinman controversially declared in June 2018 that ETH was originally a security but later “became something other than a security.”
(g)ETF(*cked)
The SEC has not yet commented publicly on the Fortune report and has said it does not comment on possible investigations, whether or not one exists. As this story broke, the ETH token suffered a temporary plunge, but has since recovered its losses and then some.
Nonetheless, the Ethereum community is up in arms over growing suspicions that the SEC is seeking to classify ETH as a security to justify its refusal to approve new ETH-based exchange-traded funds (ETFs). Rightly or wrongly, the launch of several BTC-backed ETFs in January was seen as an unfair surge in the fiat value of those tokens, with ETH holders hoping to artificially pump their bags in the same way.
Foundation members decided to participate in the ETF spoils after learning that BTC Core’s developers had been promised a 5-10% revenue share over 10 years by at least two BTC ETF issuers.
So far, the SEC has refused to play ball, using all procedural options to avoid having to make formal decisions on multiple ETH ETF applications. Just this week, the SEC asked ETF applicants to relax and invite the public to submit additional comments.
The SEC must make a decision one way or another by May 23, but the reported lack of communication between the SEC and applicants regarding the details of the paperwork has been taken as a sign that ETH will not get the BTC treatment. .
Classifying ETH as a security could lead to a regulatory turf war between the SEC and the SEC.
The Commodity Futures Trading Commission (CFTC) currently regulates ETH-based futures contracts. A year ago, CFTC Chairman Rostin Behnam told Congress, “We would not have allowed Ethereum futures products to be listed on CFTC exchanges if we did not feel strongly that they were commodity assets.”
This inter-agency slap fight could prompt Congress to finally set firm boundaries between the two regulators when it comes to digital assets. But don’t hold your breath if the current Congress seems infinitely more interested in performative stunts than actually legislating.
Meanwhile, with everyone focused on the ETF issue, Gensler is also likely to use all the information he gathers through the SEC’s subpoenas to file complaints against the Ethereum Foundation, Buterin, Lubin, and countless others associated with the centralized mothership. .
It’s not like there aren’t a lot of options to choose from in terms of number of destinations and types of rates.
See: Digital currency regulation and the role of the BSV blockchain
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