Two reports on Wednesday have ignited conversations about the potential investigation of the Ethereum Foundation by regulatory authorities, notably the Securities and Exchange Commission (SEC).
The first report, published by Coindesk, highlighted the removal of certain confidentiality language from the Ethereum Foundation’s website in February 2024. The language, which is usually included to subtly indicate that a project had not received requests for information from any authorities, read:
“The Ethereum Foundation (Stiftung Ethereum) has never been contacted by any agency anywhere in the world in a way which requires that contact not to be disclosed. Stiftung Ethereum will publicly disclose any sort of inquiry from government agencies that falls outside the scope of regular business operations.”
This language was removed in February, though news of its removal only began to circulate on Wednesday.
Soon after, a second, more explosive report published by Fortune suggested the SEC had begun investigating the Ethereum Foundation shortly after Ethereum migrated to its current proof-of-stake model. This model, which rewards users for staking tokens and allows for participation in governance votes based on token holdings, may resemble traditional securities to the extent that the regulator may attempt to regulate it as such.
Fortune’s report revealed that the SEC began probing the Ethereum Foundation shortly after its blockchain transitioned to proof-of-stake. This information, sourced from individuals at companies who received subpoenas, suggests a focused interest from the SEC on how Ethereum’s new governance model could influence its classification, possibly as a security. These individuals, who requested anonymity due to concerns over retaliation, hinted at an energetic approach from the SEC to redefine Ethereum’s legal status.
The price of ether, Ethereum’s native cryptocurrency, fell almost 6% following the publication of the two reports on Wednesday late morning ET, but it has since recovered, according to CoinGecko. Ether was recently trading at $3,387, up 1.5% over the last hour.
Community Responses
The latest developments have sparked widespread speculation within the crypto community, although opinions vary on their significance. Some community members and observers have downplayed the potential impact of these investigations, suggesting that regulatory scrutiny of major cryptocurrency foundations is not uncommon.
Among those downplaying the seriousness of the news was Neeraj K. Agrawal, Communications Director for cryptocurrency policy think tank Coin Center, who questioned on X the substance of Fortune’s report and suggested that the crypto industry is overreacting. Meanwhile, others view the SEC’s actions as a continuation of its aggressive posture towards the crypto industry, potentially impacting the approval odds for spot Ethereum ETF applications, which analysts have recently been reducing.
Read More: Bloomberg ETF Analysts Now Predict SEC Will Reject Spot Ether ETFs in May
Is Ethereum a Security?
At the heart of the apparent investigation lies the complex legal status of Ethereum as either a commodity or a security. The SEC, under Chair Gary Gensler, has remained ambiguous on Ethereum’s status in spite of a willingness to declare other tokens securities in a variety of legal actions. Still others point to Gensler’s own shifting position in this regard, frequently highlighting his apparently contradictory statements regarding ETH’s status as a security during his time as a professor at MIT.
Today’s reporting suggests that may have changed in September 2022, when Ethereum successfully completed its transition to a proof-of-stake model. This move was part of Ethereum’s broader strategy to enhance efficiency and reduce its environmental footprint. However, it also introduced new complications on the regulatory front. Gensler has argued since then that U.S. securities laws are much more applicable to proof-of-stake blockchains since they allow holders to participate in governance votes and earn yield from their staked tokens.
The apparent investigation also comes at a critical time when major financial institutions, including BlackRock and Fidelity, have applied to launch Ethereum ETFs. The SEC’s actions have dampened hopes for the approval of these ETFs, with Bloomberg analysts predicting a rejection of spot Ether ETFs in May. This skepticism stems from the lack of engagement between the SEC and ETF issuers, a stark contrast to the flurry of dialogue observed prior to spot Bitcoin ETFs being approved.
As the situation unfolds, the crypto community remains watchful of the SEC’s actions and their potential impacts on Ethereum’s future developments and the broader cryptocurrency ecosystem.
