The SEC is trying to use Ethereum's recent shift to proof-of-stake to regulate it. Jakub Purzycki – Norphoto/Getty Images
The stakes in the bitter war between the SEC and the cryptocurrency industry are getting higher. like luck It was reported on Wednesday that the agency is going after Ethereum, issuing subpoenas to US companies requiring them to provide all records of their dealings with the institution that oversees the blockchain. This is important since much of the cryptocurrency industry is built on Ethereum — not just applications but entire secondary blockchains like Polygon. If the SEC goes ahead with its plan to declare Ethereum fully subject to its securities laws, it will have widespread and unforeseen consequences.
What's most curious about the SEC's maneuver is not why the agency does it, but why it does it. now. Let's leave aside the hypocrisy of Gary Gensler who stated in 2018, before he became SEC Chairman, that Ethereum is not a security (you can see it in video here). Instead, keep in mind that the Ethereum network will be a decade old next year, and a good time to regulate it would be during the initial coin offering (ICO) mania of 2017, when scammers used it to launch a wide range of scams. Every year since then, the network has become larger and more distributed, and the SEC's exercise of control over it today is like trying to put toothpaste back in the tube.
People familiar with the investigation told me they suspect the timing has something to do with Ethereum switching to a proof-of-stake model in late 2022. For anyone not fluent in cryptocurrencies, this would entail switching to a different mechanism for confirming the legitimacy of blockchain transactions. Which relies on a distributed network of validators. Previously, Ethereum was based on the Bitcoin model, which entails consuming huge amounts of energy to solve random mathematical problems. The change means that Ethereum has reduced its carbon emissions by more than 99%, but as evidence that no good deed goes unpunished, it appears to have raised legal issues. The new argument is that the validator model means that Ethereum is now a series of equity-like investment contracts. Or something.
This argument is not strong, as it does not help the agency's argument that many people relied on the SEC's previous signals that Ethereum is… no security. If things come to a head, the agency will almost certainly lose in court. However, rather than withdrawing or helping create a new regulatory framework for decentralized blockchains, the SEC is ramping up the investigation. Why?
The best answer is politics. Justin Slaughter, one of DC's savviest cryptocurrency watchers, noted that Gensler is taking heat from hardcore progressives — who are just as fanatical as the worst crypto crazies. slaughter points for Editorial in the left touchstone Prospect What represents an unusual move for them is to condemn Gensler for allowing Bitcoin exchange-traded funds to go ahead in January. Although the appeals court unanimously ordered the SEC to approve ETFs, Prospect Gensler says he should have kept “fighting and letting the chips fall where they may.”
Such language suggests ideological consistency, but these are key allies of Gensler In reality Chair Senator Elizabeth Warren (D-Mass.). Some of their concerns about cryptocurrencies are legitimate, but it is a losing battle when it comes to trying to control Ethereum. This horse left the barn a long time ago.
Jeff John Roberts
jeff.roberts@fortune.com
@jeffjohnroberts
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Mimi, oh wait
Sam “I'm not a supervillain” Bankman Fried:
