On February 26, 2024, a subtle change was made to the Ethereum Foundation website. The footer of the website and the warrant canary were removed, as stated in a GitHub commit. The commit explained that the removal was due to a voluntary inquiry from a state authority that required confidentiality.
A warrant canary is a feature some companies include on their websites to indicate that they have not received a government subpoena or document request. If a company does receive such a request, they may remove the warrant canary to imply that they have been served with a subpoena.
By removing this key section, the Ethereum Foundation is indicating that it is under a confidential investigation. However, due to the confidentiality clause, the foundation 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) approach.
The debate over whether Ether is a security has been ongoing for several years, but now doubts are starting to arise. Questions arise as to why the SEC would investigate the Ethereum Foundation nearly a decade after its launch, whether the SEC has jurisdiction over a Switzerland-based organization, and whether the upcoming Ether ETF will be delayed due to this investigation. Most importantly, if Ether is classified as a security, what impact would it have on Ethereum and the cryptocurrency market?
The Ethereum Foundation cannot provide further details about the investigation due to the confidentiality clause. However, it is important to note that receiving an inquiry from a state authority does not necessarily mean that the organization is the subject of the investigation.
Carol Goforth, a professor at the University of Arkansas School of Law specializing in business associations and securities regulation, explained that the SEC may believe that the Ethereum Foundation has information that could assist them in a separate investigation. Goforth also mentioned that the foundation would likely be willing to cooperate with the authorities to ensure Ether continues to be actively traded in US markets.
Cooperating with the SEC would help the Ethereum Foundation explain why Ether does not meet the Howey investment contract test, which would prove that it is not a security. However, if the foundation is indeed the subject of the investigation, it could take years before the SEC moves from an investigation to a lawsuit.
If Ether is classified as a security, it could have significant implications for Ethereum and the broader crypto market. The ongoing investigation would be detrimental to Ethereum until the case is resolved and could impact decisions such as the approval of an Ether ETF and the adoption of the asset. Basel Ismail, CEO of Blockcircle, believes that if a market-leading blockchain like Ethereum is considered a security, it could potentially categorize most crypto projects in the same way. This could lead to the downfall of many companies in the sector, as they may not have sufficient funds to weather such a shock.
Crypto exchanges that list Ether and operate in the US markets would be required to support an asset classified as a security. They would have to choose between delisting Ethereum from their platform or registering as securities broker-dealers with the SEC. Registering as a securities exchange requires extensive disclosures and approval from the SEC, which may lead many exchanges to opt for delisting.
The SEC’s jurisdiction over the Ethereum Foundation, which is based in Switzerland, may be questioned. However, if the challenged activity has a material impact in the United States, the SEC could claim extraterritorial jurisdiction. This has been demonstrated in the past, such as when the SEC imposed a worldwide injunction against Telegram’s planned issuance of its GRAM token.
While centralized exchanges may shut down Ether trading in the US market, decentralized exchanges (DEXs) could emerge as 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.
It is important to note that decentralization does not guarantee safety from regulators. U.S. authorities have shown their ability to shut down platforms by targeting developers or individuals and organizations that support the open network.
The classification of Ethereum as a security by the SEC would have significant implications. In the short term, it would be detrimental to markets and adoption. However, in the long run, it could provide regulatory clarity and benefit the crypto market valuation.
If the SEC brings the Ethereum Foundation to court, the outcome of the case would have ripple effects on the token’s market valuation and the ecosystem built on the Ethereum blockchain. It could become a landmark lawsuit in the crypto ecosystem.