The Ethereum Foundation in Great Difficulty

Fortune Magazine reports that several companies have been approached by the SEC as part of an investigation targeting the Ethereum Foundation.

The Ethereum Foundation in the Crosshairs

The SEC is said to have requested financial documents related to transactions with the Ethereum Foundation, co-founded in 2014 by Vitalik Buterin, Gavin Wood, and Joseph Lubin.

The foundation operates on funds raised during a controversial ICO in which 60 million pre-mined ETH were sold to a few hundred insiders for a song (18 million USD).

An additional six million ETH were generously given to a few dozen early contributors. Finally, another six million ETH went to the Ethereum Foundation, located in Switzerland, in the Zug valley.

In its 2022 annual report, the Ethereum Foundation describes itself as:

“Neither a tech company nor a normal non-profit organization. Just as Ethereum requires new concepts and technologies, it has spawned new types of organizations. We are at the frontier of a new kind of organization: one that supports a blockchain, without controlling it.”

“Without controlling it”… It is not reassuring that this needs to be specified. The transition to Proof of Stake – which essentially gives power to the wealthiest – hasn’t helped matters.

And let’s not talk about staking companies like Lido. This centralization is likely to worsen in light of the latest proposals by the indispensable Vitalik.

Ethereum: Security or Commodity?

According to information from Fortune, the SEC’s investigation began shortly after Ethereum’s shift to Proof of Stake (September 2022). After a break to deal with Bitcoin ETFs, the investigation has resumed in recent weeks.

According to the three sources who confided in Fortune, the SEC intends to use PoS to define Ethereum as a “security”. This is a question that has not yet been definitively resolved by the American judiciary.

There is a consensus that bitcoin is a “commodity”, like gold or cocoa. As a result, bitcoin falls under the supervision of the CFTC (Commodities and Futures Trading Commission).

However, Gary Gensler believes that the vast majority of other cryptocurrencies are “securities” within his jurisdiction.

If the SEC has ruled in this way in recent legal cases, the legal status of Ethereum remains unclear.

Ethereum a security?!
Who could have seen this coming?!

😂🤣😂🤣pic.twitter.com/kWys6V5iay

— Swan (@Swan) March 20, 2024

Former SEC chairman William Hinman, for example, stated in 2018 that Ethereum “did not appear to be a security”.

But everything changed following Ethereum’s shift to PoS in 2022. The SEC Chairman has since strongly suggested that any cryptoasset using the Proof of Stake system falls under the “securities” laws.

Does the ETF Have a Lead Balloon?

Ethereum’s defenders argue that the SEC has already settled the matter by greenlighting Ethereum ETFs backed by Futures. It must be remembered that the applications for Ethereum-based Futures contracts explicitly state that Ethereum “could in the future be classified as a ‘security’ by the SEC”.

The chief legal officer of the exchange Coinbase contributed his own thread on the subject to support the view that Ethereum should be granted the same legal status as bitcoin:

Sigh… again with the ETH misinformation as we await a decision on ETH ETPs. Ok–let’s talk about some basic facts about Ethereum. Millions of Americans hold ETH; it has been vital to crypto since its 2015 launch; and ETH is a commodity, not a security. 1/10

— paulgrewal.eth (@iampaulgrewal) March 20, 2024

Given this uncertainty, some companies are taking the initiative. Prometheum, for example, has announced its intention to offer custody services for Ethereum by choosing to come under the supervision of the SEC.

In any case, we know that three of the five decision-making members of the SEC (including G. Gensler) are vehemently opposed to crypto assets. Bitcoin ETFs were only approved after Grayscale won its lawsuit against the SEC.

Only a court decision could force the SEC to validate an Ethereum ETF. And still, it would probably require going to the Supreme Court, which will take time. No lawsuits are currently pending.

So there is a good chance that the SEC will reject the ETF applications (deadline in May). Especially since they have not gone back and forth with BlackRock and Fidelity, which was the case for the Bitcoin ETFs approved in January.