Secret Probe Targets Ethereum Foundation Amid Regulatory Scrutiny

The Ethereum Foundation is under investigation by an undisclosed state authority, hinted by the removal of their website's warrant canary and transparency disclosures.

The Ethereum Foundation, the Swiss non-profit organization pivotal to the Ethereum ecosystem's operations, has found itself under the scrutiny of an undisclosed state authority. This revelation follows a period of presumed transparency and non-involvement in governmental probes, as highlighted by the Foundation's previous disclosures. The Ethereum Foundation had consistently assured its community that it had never been approached in a manner requiring secrecy. Yet, this stance dramatically shifted with the removal of such disclosures and the warrant canary from their website, signaling a potentially significant legal development.

Adding a layer of intrigue to the situation is speculation from legal experts familiar with the matter, suggesting that a Swiss regulator's involvement could be tied to collaborative efforts with the U.S. Securities and Exchange Commission (SEC). This comes at a time when the regulatory landscape for cryptocurrencies remains highly volatile, especially with the looming deadline for the SEC's decision on spot Ethereum ETFs.

Unnamed State Authority Shifts Its Focus to the Ethereum Foundation

The Ethereum Foundation, a Swiss non-profit organization at the core of the Ethereum ecosystem, is under investigation by an unnamed “state authority.”

“We have received a voluntary enquiry from a state authority that included a requirement for confidentiality,” said a Feb. 26, 2024 GitHub commit linked to the Ethereum Foundation’s website. The scope of this investigation remains unclear.

The Foundation’s website contained the following disclosure previously:

"The Ethereum Foundation (Stiftung Ethereum) has never been contacted by any agency anywhere in the world in a way which requires that contact not to be disclosed. Stiftung Ethereum will publicly disclose any sort of inquiry from government agencies that falls outside the scope of regular business operations."

However, this footer was removed in the Feb. 26 GitHub commit. The website’s warrant canary was also taken down on the same day, according to the repository’s changelog.

What Is a Warrant Canary?

A warrant canary is a method used by an organization to passively inform its users that it has not been subjected to secret government surveillance or data requests, such as those issued by a national security letter or a similar legal tool. The name derives from the historical use of canaries in coal mines, where the birds would succumb to toxic gases before humans, thus serving as an early warning system for miners. Similarly, a warrant canary serves as an alert mechanism, but instead of signaling the presence of danger, its disappearance or removal indicates that the service provider may have received a secret request for user data, and is legally prohibited from disclosing the request directly due to a gag order.

The mechanism typically involves the periodic publication of a digitally signed statement by the organization, affirming that it has not received any secret requests for user data up to a certain point in time. This statement is often included in transparency reports or placed on the organization's website. The key aspect of a warrant canary is that it relies on the absence of a statement to signal an event; the organization stops updating or removes the canary statement if it receives a request it cannot disclose, thereby alerting users to the change in status without violating the gag order.

The legality and effectiveness of warrant canaries have been subjects of debate. Some argue that they occupy a legal gray area, as the concept has not been thoroughly tested in courts. Critics also point out potential legal challenges and ambiguities in interpreting the disappearance of a canary, especially if an organization fails to update or remove the canary for reasons unrelated to secret data requests. Despite these concerns, warrant canaries have been adopted by a variety of organizations, especially those prioritizing privacy and transparency, as a tool to indirectly inform users about the confidentiality of their data and the potential exposure to government surveillance.

Potential Collaboration Between the SEC and Swiss Regulators

An attorney familiar with the situation said a Swiss regulator may have served a document request to the Ethereum foundation. The attorney added that this Swiss regulator may also be working with the U.S. SEC, which has garnered a reputation for its regulation by enforcement approach.

"I also think it's fair to say the Ethereum Foundation is not the only entity that they are seeking information from," said the attorney in a recent interview. This rumored activity with overseas counterparts could also be related to the May 23 approval deadline for spot Ethereum ETFs (exchange-traded funds), the attorney speculated.

This comes after the SEC recently postponed its decision for one of these ETFs. As a result, the regulator has no choice but to deliver a verdict on May 23, which is the final deadline for one of the applications.

The approval of spot Bitcoin ETFs in the U.S. at the beginning of the year led to a wave of optimism around the potential for other crypto-based ETFs to receive approval. Being the largest altcoin, investors and analysts were confident that an ETH ETF would receive approval shortly after the BTC-based investment products got the green light from the SEC.

However, hopes of spot ETH ETFs receiving approval in May this year have died down substantially. Analysts, including Bloomberg ETF analyst James Seyffart recently said that the applications will most likely get rejected by the SEC in May. His colleague Eric Balchunas echoes a similar sentiment. This is after both analysts were bullish on this potential approval in May earlier this year.