The SEC tries to put the Ethereum toothpaste back in the tube

The SEC tries to put the Ethereum toothpaste back in the tube

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The stakes in the bitter war between the Securities and Exchange Commission and the crypto industry have just risen. As Fortune reported On Wednesday, the agency is going after Ethereum, issuing subpoenas to US companies requiring them to provide all records of their transactions to the foundation that oversees the blockchain. This is a big deal since much of the crypto industry is built on top of Ethereum, not just applications but entire secondary blockchains like Polygon. If the SEC follows through with its plan to declare all Ethereum subject to its securities laws, it will have broad and unpredictable consequences.

The most curious thing about the SEC's tactic is not so much why the agency does this, but why it does it. now. Let's put aside the hypocrisy of Gary Gensler when he stated in 2018, before he was president of the SEC, that Ethereum is not a security (you can see it on video here). Consider, instead, that the Ethereum network will turn a decade next year, and that the time to regulate it would have been during the ICO mania of 2017, when scammers used it to launch a wide variety of scams. Every year since then, the network has grown larger and more disbursed, and for the SEC to exert control over it today is like trying to put the proverbial toothpaste back into the tube.

People familiar with the investigation told me they suspect the timing has to do with the Ethereum crash. switch to a proof-of-stake model at the end of 2022. For anyone not proficient in cryptocurrencies, this involved switching to a different mechanism for confirming the legitimacy of blockchain transactions that relies on a network of disbursed validators. Previously, Ethereum had been based on the Bitcoin model, which involves consuming enormous amounts of energy to solve random mathematical problems. The change meant that Ethereum reduced its carbon emissions by more than 99% but, as proof that no good deed goes unpunished, it appears to have caused legal problems. The new argument is that the validation model means that Ethereum is now a series of stock-like investment contracts. Or something.

This argument is not strong, it does not help the agency's argument that numerous people have relied on the SEC's previous signals that Ethereum is No a guarantee. If the going gets tough, the agency will almost certainly lose in court. And yet the SEC, rather than retreat or help design a new regulatory framework for decentralized blockchains, is ramping up an investigation. Because?

The best answer is politics. Justin Slaughter, one of DC's most astute cryptocurrency watchers, has pointed out that Gensler is taking heat from die-hard progressives, who are as bigoted as the worst cryptocurrency nut. Sacrifice points to an editorial on the left-handed touchstone Prospect That takes the unusual step of calling out Gensler for allowing Bitcoin ETFs to go ahead in January. Although a unanimous appeals court virtually ordered the SEC to approve ETFs, Prospect says Gensler should have continued “fighting and letting the chips fall where they may.”

That language suggests an ideological fixation, but these are key allies of Gensler's stance. in fact boss, Senator Elizabeth Warren (D-Mass.). Some of her concerns about cryptocurrencies are legitimate, but it's a losing battle when it comes to trying to exert control over Ethereum. That horse left the barn a long time ago.

Jeff John Roberts
jeff.roberts@fortune.com
@jeffjohnroberts

DECENTRALIZED NEWS

Crypto VC Giant Haun Ventures called Anchorage founder Diogo Mónica as its first new general partner. (Bloomberg)

bitcoin bounced above $67,000 and other currencies rose on dovish comments from the Federal Reserve chairman. (CoinDesk)

a new Ethereum layer 2 project called transform, which offers a “developer-friendly” way to create financial and gaming apps, raised a $19 million Series A from Dragonfly Capital. (Fortune)

Robin Hood made its crypto wallet available to all Android users, a year after launching the iOS version. (The block)

Sam Bankman-FritoMichael's lawyers say prosecutors have unfairly portrayed him as a “depraved supervillain” and have complained that the proposed sentence of 40 to 50 years is a “medieval” death sentence. (Fortune)

MEME OF THE MOMENT

Sam “I'm no supervillain” Bankman-Fried:

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