ethereum Foundation Under SEC Scrutiny

Cracks are appearing in the ethereum Foundation following reports that the U.S. Securities and Exchange Commission (SEC) is probing the group ahead of plans to label the ETH token an unregistered security.

Changes in the Repository

On March 20, sharp-eyed observers noticed a small but significant change in the ethereum/ethereum-foundation-website/commit/769b30603504b4b5e8f601f8014691a8d1821390″ target=”_blank” rel=”noopener nofollow” data-wpel-link=”external”>ethereum Foundation’s GitHub repository that was made on February 26. Gone from the site was a block of text declaring that the Foundation “has never been contacted by any agency anywhere in the world in a way which requires that contact not be disclosed.”

The change was made by developer Pablo Pettinari, whose description of the revision stated that the change was necessary due to the Foundation having “received a voluntary enquiry from a state authority that included a requirement for confidentiality.” A ‘warrant canary’ was also quietly removed from the Foundation site, indicating that it had been served with a subpoena or other secret government request.

SEC Subpoenas

Fortune subsequently reported that the SEC had served subpoenas on multiple companies seeking financial records and other documentation regarding their dealings with the Foundation. One of these companies told Fortune that the SEC had launched a probe into the Foundation following the ethereum network’s September 2022 transition from a consensus mechanism based on proof-of-work (PoW) to one based on proof-of-stake (PoS).

PoS requires ethereum transaction validators to post a ‘stake’ of 32 ETH tokens, a sum worth around US$51,000 at the time (currently worth over US$100,000), making it a prohibitive barrier for most ETH holders to clear.

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ETH as a Security

Fortune claimed that individuals at three companies that received SEC subpoenas said that the shift to PoS had offered the agency ‘a new pretext’ to define ETH as a security. SEC Chairman Gary Gensler commented at the time that entities offering PoS-based ‘staking services’ represented “another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others.”

The New York Attorney General’s Office filed charges against the KuCoin exchange, claiming that ETH is a security due to the concentration of its development and management by a small number of insiders.

Regulatory Turf War

Labeling ETH a security could set up a regulatory turf war between the SEC and the Commodity Futures Trading Commission (CFTC), which currently regulates ETH-based futures contracts.

This potential conflict could provoke Congress to set firm boundaries between the two regulators when it comes to digital assets.

ETF Approval and Uncertainty

The SEC has yet to comment publicly on the Fortune report, and the fate of ETH-based exchange-traded funds (ETFs) remains uncertain. The SEC’s reluctance to authorize new ETH-based ETFs has caused frustration in the ethereum community.

The ethereum community is up in arms over the mounting suspicion that the SEC wants to label ETH a security in order to justify the SEC’s refusal to authorize new ETFs.

Possible Legal Action

Meanwhile, Gensler may use information gleaned via the SEC’s subpoenas to file a complaint against the ethereum Foundation and key figures associated with it.

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By Team