Video transcript

Did you see the news this morning? There's some traders that are hopeful for a Doge ETF that is wild to me. But you know, look, the thing about ETF S is you can put anything in them and then it's the wrapper around it that becomes a security. So, you know, that doesn't say anything about Doge. But um you know, I'll believe it when I see it, Liz Boyen. Welcome to First mover. Thank you. I asked Liz to join First mover because I needed some legal answers and I'm sorry, but they had nothing to do with do. Earlier this week, we learned that the Ethereum Foundation was facing a government inquiry. This was revealed after coin reporters noticed that a disclosure on Ethereum website was missing. Now, the website used to say this, the Ethereum Foundation has never been contacted by any agency anywhere in the world in a way which requires that contact to be disclosed. Ethereum will publicly disclose any sort of inquiry from government agencies that falls outside the scope of regular business operations. Now, that footer on the website was removed on February 26th along with the website's warrant. Canary. Now you're probably asking what is a warrant Canary? I also had no idea. But coin desks, Sam Kessler told me on a previous video, a wart Canary is pretty interesting. It's usually a text or visual on a website that a company will include to indicate that they've never been served with a secret government subpoena or document request. Now that that's removed, journalists were tipped off that a state agency was looking into Ethereum. But which one after Coindesk published the story, fortune confirmed that it was the SEC looking into Ethereum. And that report said that the SEC was looking to classify E as a security. When I read this, I asked myself, what does this actually mean? Does this have something to do with the E ETF deadline that's coming up in May? What does this mean for crypto firms in the United States? And more importantly, if E is deemed a security security, what does this mean for all of the people in the United States who hold E Liz is a partner at Hogan levels in the global regulatory practice based in Washington DC? She says that she's not surprised by this inquiry and she also says that it might not be as bad as it seems for the Ethereum Foundation, but she also said that Ethereum switch to proof of stake and staking could be a sticking point. Let's take a listen, we've known for a while that the SEC has been very interested in specifically staking. Um and that they have been sending subpoenas for at least the last year or so to uh various participants in the Ethereum ecosystem. While it may be surprising if true that the foundation itself has received a subpoena, I think that's really the news. Otherwise the SEC has very much articulated. Number one that it is interested in staking, especially around the time of the merge. Um and generally the proof of stake consensus mechanism. And number two, that it's using international counterparts to help it gather evidence in these various cases, Liz, you said it would be surprising if the SEC was actually looking into the Ethereum Foundation. Why is that surprising? You know, I think what they're looking for is evidence and either looking to the Ethereum Foundation as a witness or a subject. Remember receiving a subpoena does not necessarily mean that the recipient is a subject of an investigation merely that they might have information that could help the government in its fact finding mission. And so the fact that the Ethereum Foundation, you know, if we're to believe the warrant Canary um has received some form of process may or may not mean that it's a subject. Um I think it's somewhat surprising that the SEC would be going and looking at them potentially as the common enterprise or the centralized, you know, controllers really of the Ethereum network. That would seem to be the theory as the SEC is building out probably the Howie factors, you know, looking at staking and proof of stake as an investment of money and then looking to see if there's sufficient decentralization behind it, or if indeed the Ethereum Foundation is uh you know, controlling the code and very much directing things. And so questions that I've seen, you know, the SEC posed to others are around, you know, who launched the beacon chain, who made the decisions to delay. Um It's my understanding that the SEC may even be receiving github data to see who's actually working on various coding projects in the Ethereum ecosystem. And that they're really looking to see if it's controlled by a small group who also stands to benefit from an increase in value in e or if it truly is decentralized. You mentioned the Howie test. Now the Howie test is a four pronged test that is set out to determine whether an entity is offering a security or not or whether something is a security or not when you look at the, how we test and you look at the facts behind Ethereum and the Ethereum Foundation. Uh What do you see? What do you think the SEC is going to find here when they apply those four prongs to Ethereum? Yeah, I think the facts that they're trying to gather are, you know, whether staking really looks like an investment of money. Um And you know, essentially if I am locking up some of my Ether. Um I'm incurring an opportunity cost. I'm taking a risk. I'm not able to use those coins for something else. So that kind of looks like an investment of money. As I mentioned, there is the, the common enterprise question um as to, you know, who really controlled the launch of the new code based, how dispersed is the coding community? Um And then of course, the expectation of profit, you know, if you're a validator on the network, you're expecting we're trying to get an annual return, the more you stake, the more you earn. Those are the kinds of things that the SEC is looking at. And you know that from the efforts of other prong is, I think what they're really getting at with who managed this merge. Um And you know, is the, is the network actively monitored. Here's a part that uh I think is always interesting when we look at the SEC and the different entities, they're going after the Ethereum Foundation is Swiss based. The SEC has purview over Americans over the United States, over companies that are operating in the United States. Talk to me a little bit about the SEC sending an inquiry to a Swiss based foundation. What grounds does the, does the SEC have in sending this inquiry to a foundation that is not based in the United States? Yeah. Sure. Well, you know, you know, if asked to prove it in court, the SEC would say um that there are enough jurisdictional hooks between what the E Ethereum Foundation does and US markets. So for instance, they have people who have either bought the token here or otherwise invested in the network and those are us investors. There were us based developers participating um you know, who participate in either the merge or day to day validation. And the SEC has even argued before that the location of such a predominance of validator nodes in the US is one of the jurisdictional hooks available to it. It sees, you know, the US infrastructure as somehow essential to this network, that sort of brings it to, you know, how is it going to um gain evidence from the Ethereum Foundation and how did serve process there? We have the Cooper operation. It appears of the Swiss entities of the Swiss counterpart to the SEC. Um I've seen that in various cases that the SEC is using its Office of International Affairs to, you know, make friends um perhaps conduct joint investigations or parallel investigations. But you know, it's, it's too early to tell the Swiss authorities might have said will help you serve paper and gather evidence. But you know, that's the extent of our cooper operation. It does not necessarily mean that they have their own investigation going on or that they would take any further steps in terms of locating assets or other things that come along with an SEC investigation. Is this business as usual is, is this just something that crypto firms should expect that one day a regulator will be knocking on their door looking for information. It's possible. Um, and, you know, as I said, receiving process while it's a, you know, certainly daunting stack of paper. Um, and, you know, there, there is sometimes a voluntary and, and sometimes a legal requirement to respond. It is the government going about its evidence gathering function. Um, and it, you know, means that there may be relevant, investigative relative, investigative material at the uh you know, the recipients sort of fingertips in his within his possession or something that can access. It also does this through investigative interviews. So in addition to document requests, it can use the same subpoenas to try to ask questions of those located abroad. Um Generally those are voluntary. But if the local authority, so abroad here, the Swiss authority um does choose, you know, it can make those interviews a little bit less voluntary and invoke the authority of the local court over there to uh you know, make people sit down for an interview and give information. So it does not mean, you know, it still is business as usual largely, it does not mean, you know that any of this legal process is anything other than an information gathering exercise at this point. The big question here, I think when people read the story is, is it going to be deemed a security? And it's interesting that this comes up now because we have that deadline for the E ETF in May. And so from your perspective, I know you say that this is, um, this could possibly be just an information gathering exercise. But do you think that the SEC could deem e a security within the year? I don't think within a year. Um, I think what they would have to do is, you know, petition the authority of a court, go through the Howie test, you know, go through, um, you know, the fact finding and ultimately would be with the court who decides, um, the law. However, you know, I think it does call into question the possibility of proof of stake as a consensus mechanism. Um And if, and if that were to come under scrutiny more broadly even than just, you know, um that could be something that jeopardizes things in the long term, you know, then are you back to proof of work that requires computing power, energy expenditure and is being scrutinized in other ways by the US government? Um And so I think, you know, level one really needs to look to how to do its validation. Um You know, I think proof of stake ultimately will prevail, but this is a bump in the road for sure, for it. When you say it could jeopardize things. What do you mean? Sure. I mean, you know, if, if the concept of pledging tokens and making them unavailable and putting them at risk in order to support a network, make it more secure. All the things that, that, uh, staking does. If that is, you know, deemed to be an investment of money, then it could be either under the S ECs Authority, um, or another regulator, um, you know, looking to regulate that conduct and somehow, uh, make that investment of money a little bit more difficult. I mean, look when, you know, I'm locking up some of my assets, it makes me and if I were an institution, you know, less able to meet um you know, debt requirements, this could lead somehow to the liquidity crisis. And I think the SEC has seen this build through, you know, CD OS um the, the full panel plea even last year, you know, as recently as the SVB bank failure, the banking regulators see this and whenever you have a long term commitment, such as a staking obligation, it's less liquidity and could cause other players to have short term liquidity lapses and that's of concern to regulators. So I think if they, you know, are indeed, um you know, interested in uh preserving, you know, the sanctity of the US investor system and making products that are or overseeing products that are safe, that would be among their concerns. All right. And what does this mean for people in the United States who are holding Ether? You know, I, I think this is um depending on what they intend to do with it. You know, if they are using it for investment purposes, they might see a fluctuation in value, they might have seen a fluctuation in value with the ETF, I don't think that things are coincidental either way. I think these investigations have been going on for some time and while they might delay ETF approval, you know, look that's happened before, um, you know, ETF approval has being kicked down the road even further if they're looking to, you know, use them for staking purposes, no immediate consequence to that. Um But you know, they should be aware that uh the SEC is looking at that as an investment of money and if they're encouraging others to do so they could be deemed to be promoting that kind of activity. So, um you know, even off offering staking as a service um could be deemed some sort of promotion of making that kind of investment of money over the longer term, you know, if they're looking to use Ether tokens, you know, as a developer or somehow build on top of the ecosystem, I do see this as a serious threat to innovation, I think, you know, before it was the lack of regulation in the US kind of chilling innovation. And now this is a real specter of the US government, you know, trying to intervene in a network that really should be, you know, um the infinite computer and really should be the infinite machine um you know, capable of, of doing great things. And so I think that's a really unfortunate potential consequence, Liz. Thanks so much for joining the show. Ok, thank you. So it seems that this could just be the government gathering evidence for a number of different reasons and crypto companies should be ready for this. Given the regulatory uncertainty in the United States, even if an organization like the Ethereum Foundation is based in another country, it could have jurisdictional hooks to us markets and these jurisdictional hooks could look like developers being based in the United States or people in the United States having access to your platform or your token, we're going to continue following this story so you can get all of the latest updates on coindesk.com. That's it for first mover.Did you see the news this morning? There's some traders that are hopeful for a Doge ETF that is wild to me. But you know, look, the thing about ETF S is you can put anything in them and then it's the wrapper around it that becomes a security. So, you know, that doesn't say anything about Doge. But um you know, I'll believe it when I see it, Liz Boyen. Welcome to First mover. Thank you. I asked Liz to join First mover because I needed some legal answers and I'm sorry, but they had nothing to do with do. Earlier this week, we learned that the Ethereum Foundation was facing a government inquiry. This was revealed after coin reporters noticed that a disclosure on Ethereum website was missing. Now, the website used to say this, the Ethereum Foundation has never been contacted by any agency anywhere in the world in a way which requires that contact to be disclosed. Ethereum will publicly disclose any sort of inquiry from government agencies that falls outside the scope of regular business operations. Now, that footer on the website was removed on February 26th along with the website's warrant. Canary. Now you're probably asking what is a warrant Canary? I also had no idea. But coin desks, Sam Kessler told me on a previous video, a wart Canary is pretty interesting. It's usually a text or visual on a website that a company will include to indicate that they've never been served with a secret government subpoena or document request. Now that that's removed, journalists were tipped off that a state agency was looking into Ethereum. But which one after Coindesk published the story, fortune confirmed that it was the SEC looking into Ethereum. And that report said that the SEC was looking to classify E as a security. When I read this, I asked myself, what does this actually mean? Does this have something to do with the E ETF deadline that's coming up in May? What does this mean for crypto firms in the United States? And more importantly, if E is deemed a security security, what does this mean for all of the people in the United States who hold E Liz is a partner at Hogan levels in the global regulatory practice based in Washington DC? She says that she's not surprised by this inquiry and she also says that it might not be as bad as it seems for the Ethereum Foundation, but she also said that Ethereum switch to proof of stake and staking could be a sticking point. Let's take a listen, we've known for a while that the SEC has been very interested in specifically staking. Um and that they have been sending subpoenas for at least the last year or so to uh various participants in the Ethereum ecosystem. While it may be surprising if true that the foundation itself has received a subpoena, I think that's really the news. Otherwise the SEC has very much articulated. Number one that it is interested in staking, especially around the time of the merge. Um and generally the proof of stake consensus mechanism. And number two, that it's using international counterparts to help it gather evidence in these various cases, Liz, you said it would be surprising if the SEC was actually looking into the Ethereum Foundation. Why is that surprising? You know, I think what they're looking for is evidence and either looking to the Ethereum Foundation as a witness or a subject. Remember receiving a subpoena does not necessarily mean that the recipient is a subject of an investigation merely that they might have information that could help the government in its fact finding mission. And so the fact that the Ethereum Foundation, you know, if we're to believe the warrant Canary um has received some form of process may or may not mean that it's a subject. Um I think it's somewhat surprising that the SEC would be going and looking at them potentially as the common enterprise or the centralized, you know, controllers really of the Ethereum network. That would seem to be the theory as the SEC is building out probably the Howie factors, you know, looking at staking and proof of stake as an investment of money and then looking to see if there's sufficient decentralization behind it, or if indeed the Ethereum Foundation is uh you know, controlling the code and very much directing things. And so questions that I've seen, you know, the SEC posed to others are around, you know, who launched the beacon chain, who made the decisions to delay. Um It's my understanding that the SEC may even be receiving github data to see who's actually working on various coding projects in the Ethereum ecosystem. And that they're really looking to see if it's controlled by a small group who also stands to benefit from an increase in value in e or if it truly is decentralized. You mentioned the Howie test. Now the Howie test is a four pronged test that is set out to determine whether an entity is offering a security or not or whether something is a security or not when you look at the, how we test and you look at the facts behind Ethereum and the Ethereum Foundation. Uh What do you see? What do you think the SEC is going to find here when they apply those four prongs to Ethereum? Yeah, I think the facts that they're trying to gather are, you know, whether staking really looks like an investment of money. Um And you know, essentially if I am locking up some of my Ether. Um I'm incurring an opportunity cost. I'm taking a risk. I'm not able to use those coins for something else. So that kind of looks like an investment of money. As I mentioned, there is the, the common enterprise question um as to, you know, who really controlled the launch of the new code based, how dispersed is the coding community? Um And then of course, the expectation of profit, you know, if you're a validator on the network, you're expecting we're trying to get an annual return, the more you stake, the more you earn. Those are the kinds of things that the SEC is looking at. And you know that from the efforts of other prong is, I think what they're really getting at with who managed this merge. Um And you know, is the, is the network actively monitored. Here's a part that uh I think is always interesting when we look at the SEC and the different entities, they're going after the Ethereum Foundation is Swiss based. The SEC has purview over Americans over the United States, over companies that are operating in the United States. Talk to me a little bit about the SEC sending an inquiry to a Swiss based foundation. What grounds does the, does the SEC have in sending this inquiry to a foundation that is not based in the United States? Yeah. Sure. Well, you know, you know, if asked to prove it in court, the SEC would say um that there are enough jurisdictional hooks between what the E Ethereum Foundation does and US markets. So for instance, they have people who have either bought the token here or otherwise invested in the network and those are us investors. There were us based developers participating um you know, who participate in either the merge or day to day validation. And the SEC has even argued before that the location of such a predominance of validator nodes in the US is one of the jurisdictional hooks available to it. It sees, you know, the US infrastructure as somehow essential to this network, that sort of brings it to, you know, how is it going to um gain evidence from the Ethereum Foundation and how did serve process there? We have the Cooper operation. It appears of the Swiss entities of the Swiss counterpart to the SEC. Um I've seen that in various cases that the SEC is using its Office of International Affairs to, you know, make friends um perhaps conduct joint investigations or parallel investigations. But you know, it's, it's too early to tell the Swiss authorities might have said will help you serve paper and gather evidence. But you know, that's the extent of our cooper operation. It does not necessarily mean that they have their own investigation going on or that they would take any further steps in terms of locating assets or other things that come along with an SEC investigation. Is this business as usual is, is this just something that crypto firms should expect that one day a regulator will be knocking on their door looking for information. It's possible. Um, and, you know, as I said, receiving process while it's a, you know, certainly daunting stack of paper. Um, and, you know, there, there is sometimes a voluntary and, and sometimes a legal requirement to respond. It is the government going about its evidence gathering function. Um, and it, you know, means that there may be relevant, investigative relative, investigative material at the uh you know, the recipients sort of fingertips in his within his possession or something that can access. It also does this through investigative interviews. So in addition to document requests, it can use the same subpoenas to try to ask questions of those located abroad. Um Generally those are voluntary. But if the local authority, so abroad here, the Swiss authority um does choose, you know, it can make those interviews a little bit less voluntary and invoke the authority of the local court over there to uh you know, make people sit down for an interview and give information. So it does not mean, you know, it still is business as usual largely, it does not mean, you know that any of this legal process is anything other than an information gathering exercise at this point. The big question here, I think when people read the story is, is it going to be deemed a security? And it's interesting that this comes up now because we have that deadline for the E ETF in May. And so from your perspective, I know you say that this is, um, this could possibly be just an information gathering exercise. But do you think that the SEC could deem e a security within the year? I don't think within a year. Um, I think what they would have to do is, you know, petition the authority of a court, go through the Howie test, you know, go through, um, you know, the fact finding and ultimately would be with the court who decides, um, the law. However, you know, I think it does call into question the possibility of proof of stake as a consensus mechanism. Um And if, and if that were to come under scrutiny more broadly even than just, you know, um that could be something that jeopardizes things in the long term, you know, then are you back to proof of work that requires computing power, energy expenditure and is being scrutinized in other ways by the US government? Um And so I think, you know, level one really needs to look to how to do its validation. Um You know, I think proof of stake ultimately will prevail, but this is a bump in the road for sure, for it. When you say it could jeopardize things. What do you mean? Sure. I mean, you know, if, if the concept of pledging tokens and making them unavailable and putting them at risk in order to support a network, make it more secure. All the things that, that, uh, staking does. If that is, you know, deemed to be an investment of money, then it could be either under the S ECs Authority, um, or another regulator, um, you know, looking to regulate that conduct and somehow, uh, make that investment of money a little bit more difficult. I mean, look when, you know, I'm locking up some of my assets, it makes me and if I were an institution, you know, less able to meet um you know, debt requirements, this could lead somehow to the liquidity crisis. And I think the SEC has seen this build through, you know, CD OS um the, the full panel plea even last year, you know, as recently as the SVB bank failure, the banking regulators see this and whenever you have a long term commitment, such as a staking obligation, it's less liquidity and could cause other players to have short term liquidity lapses and that's of concern to regulators. So I think if they, you know, are indeed, um you know, interested in uh preserving, you know, the sanctity of the US investor system and making products that are or overseeing products that are safe, that would be among their concerns. All right. And what does this mean for people in the United States who are holding Ether? You know, I, I think this is um depending on what they intend to do with it. You know, if they are using it for investment purposes, they might see a fluctuation in value, they might have seen a fluctuation in value with the ETF, I don't think that things are coincidental either way. I think these investigations have been going on for some time and while they might delay ETF approval, you know, look that's happened before, um, you know, ETF approval has being kicked down the road even further if they're looking to, you know, use them for staking purposes, no immediate consequence to that. Um But you know, they should be aware that uh the SEC is looking at that as an investment of money and if they're encouraging others to do so they could be deemed to be promoting that kind of activity. So, um you know, even off offering staking as a service um could be deemed some sort of promotion of making that kind of investment of money over the longer term, you know, if they're looking to use Ether tokens, you know, as a developer or somehow build on top of the ecosystem, I do see this as a serious threat to innovation, I think, you know, before it was the lack of regulation in the US kind of chilling innovation. And now this is a real specter of the US government, you know, trying to intervene in a network that really should be, you know, um the infinite computer and really should be the infinite machine um you know, capable of, of doing great things. And so I think that's a really unfortunate potential consequence, Liz. Thanks so much for joining the show. Ok, thank you. So it seems that this could just be the government gathering evidence for a number of different reasons and crypto companies should be ready for this. Given the regulatory uncertainty in the United States, even if an organization like the Ethereum Foundation is based in another country, it could have jurisdictional hooks to us markets and these jurisdictional hooks could look like developers being based in the United States or people in the United States having access to your platform or your token, we're going to continue following this story so you can get all of the latest updates on coindesk.com. That's it for first mover.

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