On February 26, 2024, a subtle change was made to the Ethereum Foundation website. The footer of the website and the warrant canary, which indicates whether the company has received a government subpoena, were removed. The foundation stated that this removal was due to a voluntary inquiry from a state authority that required confidentiality.
The Ethereum Foundation’s warrant canary is a visual element, in this case, a yellow bird, that signifies the absence of a government subpoena. If a company receives a subpoena, they usually remove the warrant canary to imply that they have received one.
By removing this key section, the Ethereum Foundation is indicating that it is indeed under a confidential investigation. However, due to the confidentiality clause, they cannot provide further details.
According to anonymous tips reported by Fortune, the United States Securities and Exchange Commission (SEC) is investigating the foundation as part of an effort to classify Ethereum’s underlying asset, Ether (ETH), as a commodity.
This investigation comes at a critical time as the SEC’s deadlines for approving Ether exchange-traded funds (ETFs) are approaching. The debate over whether Ether is a security has been ongoing for years, but doubts are now starting to arise.
The reasons for the SEC’s investigation, the jurisdiction over a Switzerland-based organization, and the potential impact on the upcoming Ether ETF are all important questions. Most importantly, if Ether is classified as a security, what would be the consequences for Ethereum and the cryptocurrency market?
The Ethereum Foundation cannot provide further details due to the confidentiality clause, so it is unclear whether they are the subject of the SEC investigation.
Carol Goforth, a professor specializing in securities regulation, explains that the SEC may believe the Ethereum Foundation has information that could assist them in another investigation. She also believes that the foundation would be willing to cooperate with the authorities to ensure Ether continues to be actively traded in US markets.
If the Ethereum Foundation is the subject of investigation, it could take years for the SEC to move from an investigation to a lawsuit.
An ongoing investigation would be detrimental to Ethereum until the case is resolved. It could affect the approval of an Ether ETF and the adoption of the asset. This can be seen in the Ripple/SEC lawsuit, which has had a significant impact.
According to Basel Ismail, the CEO of Blockcircle, if Ethereum is considered a security, it could have a ripple effect on other crypto projects. Many projects could fall into the same category and be subject to the same registration processes and rules.
Crypto exchanges that list Ether and operate in the US market would be required to support an asset considered a security. They would need to either delist Ethereum or register as securities broker-dealers with the SEC. Registering as a securities exchange requires extensive disclosures and approval from the SEC.
Goforth explains that exchanges would likely choose to delist ETH rather than register as securities exchanges. This is because once an exchange registers as a securities exchange, they cannot provide exchange services for any unregistered security asset.
While the SEC technically only has jurisdiction over US companies, it can claim extraterritorial jurisdiction if the challenged activity has a material impact in the US. This has been demonstrated in the SEC’s worldwide injunction against Telegram.
The Ethereum Foundation is not legally required to cooperate with the SEC. However, cooperation can be valued by the SEC when deciding on their course of action. If the foundation does not cooperate, the SEC can issue a subpoena to force the organization to share requested data.
If centralized exchanges shut down ETH trading in the US market, decentralized exchanges (DEXs) could become an alternative. DEXs are difficult for regulators to target due to their decentralized nature and global reach. However, they may face new compliance requirements in certain jurisdictions.
Decentralization does not guarantee safety from regulators, as demonstrated by the SEC’s ability to target platforms like Tornado Cash by going after developers and individuals supporting the open network.
While the SEC classifying Ethereum as a security would have negative short-term effects, it could offer regulation clarity in the long run. The Ethereum Foundation could potentially pay a fine and register as a security, which would require Ether trading to adhere to the same rules as stocks or bonds. This clarity could benefit the market participants and contribute to the long-term valuation of the crypto market.
If the SEC takes the Ethereum Foundation to court, the outcome would determine whether Ether is classified as a commodity or a security. Either outcome would have significant effects on the token’s market valuation and the ecosystem built on the Ethereum blockchain. It could be the most important lawsuit in the crypto ecosystem.