Foreign on June 6, 2023, the SEC charged Coinbase saying the company is illegally acting as an unregistered Securities Exchange as many of the coins listed on its platform are securities. If Coinbase loses in court, this could be catastrophic, as they would be forced to discourage billions of dollars of ill-gotten gains and likely be forced to delist the majority of their coins. It is unclear which coin specifically the SEC believes are securities, but it is widely believed that they now view all coins with the exception of Bitcoin as Securities. Currently, about 29 of Coinbase's transaction fees come from Bitcoin Trading 25 come from Ethereum, and 46 comes from everything else.

If everything besides Bitcoin is considered to be a security, Coinbase would lose 71 of its Revenue overnight, which would likely result in the firm's bankruptcy. As the second most popular cryptocurrency, The legal status of Ethereum will have huge implications on the crypto industry and the viability of crypto exchanges like Coinbase. In this video, we'll take a look at what Ethereum is, who can rules it, and whether or not it can be considered a security. But before we go any further, let's briefly talk about the impact of AI and automation on today's markets.

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Foreign was founded in 2014 by the Russian-born computer scientist Vitalik. Buterin. Vitalik was interested in Bitcoin from the early days in 2011, just two years after Bitcoin was released, He co-founded a publication called Bitcoin Magazine, which was exclusively about the digital currency. While Buterin was a Bitcoin bull, he also recognized that it had key shortcomings which could prevent it from realizing the Revolutionary possibilities of blockchain.

Technology While Bitcoin's algorithm is very secure, it is also very simple. For the most part, it's only capable of keeping track of transactions between buyers and sellers. While people can theoretically use Bitcoin for day-to-day transactions, the slow speeds and high transaction costs make it impractical. Vitalik believe the crypto industry needed a more sophisticated blockchain to reach its full potential, which is why he co-founded Ethereum in 2014..

instead of just keeping track of transactions, Ethereum can support more complex functionalities. Specifically, it can support smart contracts. A Smart Contract is a self-executed contract with the terms of the agreement directly written into code. This code resides on the Ethereum blockchain, which makes it decentralized and theoretically tamper-proof Let's say Alice and Bob make a bet on whether it will rain tomorrow, Alice Bets it will rain and Bob bets it won't.

They decide to use an Ethereum Smart Contract to manage this bet. Alice and Bob each send one ether to the Smart contract. The contract is designed to connect with a trusted weather API Come tomorrow, if the API says it is raining, it'll automatically send the two ether to Alice and vice versa. No matter the outcome, the agreement is automatically enforced by the Smart contract, eliminating the need for trust or a third-party arbitrator.

The general public is free to think of use cases and create smart contracts on top of the Ethereum protocol. All applications built on top of the Ethereum network need to use the blockchain's native Ether token as their currency. Thus, as more applications are created, demand for the coin should increase, pushing up the price. There were a few ideas for real world use cases for Ethereum Smart contracts.

One example is non-fungible tokens or Nfts, which are meant to represent ownership in unique real-world assets. Smart contracts could also be used to enforce Financial agreements take the example of home insurance. If there is some trusted third party that can automatically verify damage to your home, a Smart contract could automatically disperse your insurance payment based on the contract. And finally, another use case is decentralized exchanges.

Decentralized exchanges like Uniswap use Ethereum Smart contracts to settle crypto transactions. They do this by matching buy and sell orders with liquidity pools which are governed by Smart contracts. Crypto investors can deposit their crypto into these liquidity pools and earn staking rewards from the transaction fees. With so many promising use cases, millions of investors and computers scientists around the world were captivated and they got a chance to own a piece of the network in 2014.

with Ether's initial coin offering or Ico In preparation for the Ico Vitalik and some of the other co-founders moved to Switzerland which has some of the world's most relaxed Financial regulations. There, they created the Ethereum Foundation, a non-profit entity with the sole purpose of supporting the adoption of Ethereum around the world. The offering happened in July of 2014. the sale lasted for 40 days.

Investors could buy Ether tokens by transferring Bitcoin into a Smart contract. The price was originally set at 2 000 ether per Bitcoin after which the price would gradually start increasing to 1 337 ether per Bitcoin. This marketing gimmick was designed to entice a rush of investors buying in early to get the good price. This will create high volume in the beginning, which will then create hype and entice even more buyers to come in.

The Ico was a massive success. They sold 60 million Ether coins for the equivalent of 18.3 million dollars worth of Bitcoin. While this doesn't sound like a lot compared to the billions of dollars raised in the altcoin bubbles of 2017 and 2021., it was the largest Ico by far up to that point. In a lot of ways, the Ethereum Ico was very similar to a traditional IPO minus the due diligence and regulatory requirements and just like how a startup founder can become a paper billionaire after a successful IPO Vitalik Buterin became a very rich man overnight.

At the time of the Ico Ethereum's founding team received 8.3 percent of the total ether issued for free. The Ethereum Foundation received an additional 8.3 percent of the supply. As the most involved co-founder Vitalik received the largest allegation of 553 000 ether that was worth about 165 thousand dollars at the time, or a little over one billion dollars at today's market price. Not only that, but Vitalik and some of the other Founders used their own personal funds to pay the salaries of software Engineers they hired to create Ethereum.

1.8 million dollars of the Ico funds went to paying back the founders with interest. The Ethereum Foundation got 15.5 million dollars worth of Bitcoin, plus a little under 6 million ether, which would be worth well over 10 billion dollars. today. the Ethereum Foundation, which is controlled by Vitalik Buterin, is still operating today.

It has over 200 employees according to LinkedIn and they have over 1 billion dollars in assets. Their large endowment is mostly thanks to the appreciation and the value of Ether and Bitcoins that they received from the 2014 Ico. Their staff includes dozens of skilled software Engineers who are tasked with developing upgrades to the Ethereum protocol. With Vitalik himself and the Ethereum Foundation now well capitalized, they were ready to grow.

Thank you! Since its launch in 2014, the price of Ether Token has skyrocketed more than 6 000 volt from its initial price of 30 cents to more than one thousand eight hundred dollars at the time of recording this video. It currently has a total market cap of 226 billion dollars, making it the second largest cryptocurrency by a wide margin behind only. Bitcoin The Increased price of Ethereum is supported by the increasing usage among crypto. Traders The number of daily transactions have skyrocketed since 2017 and currently sits at about 1 million transactions per day.

A key question for Ethereum sustainability is whether these transactions are being made by day Traders Speculating on the price or people who are using Ethereum for real world applications. In 2016, just two years after Ethereum's Ico a German computer scientist named Christoph Jenge wanted to leverage Ethereum's blockchain for a revolutionary new Venture Jenge previously worked for the Ethereum Foundation and was intimately familiar with the technical aspects. He created a decentralized autonomous organ or Dao The idea of a Dao is that it will allow participants to pull their funds to make Collective Investments Because everything is governed by smart contracts on the Ethereum blockchain, this removes the ability of a corrupt centralized Authority from misappropriating the funds. This sounds great in theory.

If Bernie Madoff's investment fund was run on Ethereum where everyone could audit the code, it would have been much more difficult for him to conceal his Ponzi scheme. The Dao will raise money by issuing its own Dao tokens, which can be purchased with ether. The purpose of the Dao is to invest in other crypto projects. A startup can apply for funding from the Dao at which point the holders of the Dao tokens will vote on whether or not to finance the project.

Thus, the Dao's investment decisions are based on majority votes, not a centralized decision maker. Large parts of the crypto Community bought into this Vision with the Dao raising 150 million dollars worth of Ether, which represented 14 of the total circulating Supply at the time. Shortly after the Dao was launched, a number of computer scientists reviewed the code and found a glitch that could allow a hacker to effectively steal all the ether locked up within the Dao. They made this vulnerability well known and some of the concerned computer scientists publicly called for a moratorium on the Dao until this issue could be resolved.

Sure enough, just a few weeks later, a hacker used this exploit to steal 50 million dollars of ether from the Dao. The only reason they didn't take the entire 150 million dollars is that people in the community noticed in White Hat hackers used the exploit themselves to withdraw the funds with the intention of eventually returning them to their original owners. Investors incurred huge losses and the Dao was finished. Given that the Dao was the highest profile project built on top of Ethereum blockchain at the time, investors could lose confidence in the entire system.

Because the Dao was autonomous and decentralized. Nobody controlled it. Nobody. Not even the founders had the ability to reverse the transactions and return the stolen either to their rightful owners.

However, there was a solution. If over 50 percent of the Ethereum miners collude, they can falsely alter the blockchain. This would allow them to effectively rewrite history in reverse the fraudulent transactions. This is called a hard fork.

In July of 2016, a majority of Ethereum miners agreed to the hard Fork. The blockchain was altered, and the victims of the Dao hack received their ether back. While it's great that the victims were made whole, this raises a serious question about Ethereum itself. If its blockchain can be changed at the discretion of the miners.

Is it really decentralized? We'll return to this question later in the video. While the Dao was an interesting idea, it's unlikely it would have achieved meaningful success even if it had not been hacked. Because it has no management team or legal standing, the only things it could invest in were cryptocurrencies. Given that this is the case, there's no reason that crypto investors couldn't just buy whatever cryptos a Dio is buying on their own.

The Dao just adds another layer of complexity, which is completely unnecessary. There have been a few other attempted daos, but they've mostly been failed gimmicks. For example, in 2021, someone set up a Dao that raised over 40 million dollars worth of ether to buy an original copy of the US Constitution at a Sotheby's auction. It failed to raise enough money and was disbanded.

Even if it did work, it wouldn't even have been decentralized, as the founders would have to bid for the Constitution and arrange for a place for it to be stored. Another supposed use case for Ethereum is non-fungible tokens or Nfts. These are smart contracts which can keep track of who owns a given object. So far, they've mostly been used to transact digital artwork.

This Market has been fraught with pump and dumps and other scams and has little or no utility in the real world. However, there are ideas for how Nfts could be useful. Counterfeiting is a big problem for many luxury goods if you buy a name brand item on the secondary Market it can be very difficult to tell whether it's legitimate. If every item comes with an Nft, you could verify whether the person you're buying from owns the official Nft of the product.

If they don't, you can assume it was either stolen or counterfeit stock. X is an e-commerce platform which allows users to buy and sell second-hand name brand. Goods mostly expensive sneakers. items sent to Stockx are physically inspected in the warehouse to make sure they are real.

In 2022, they launched an Nft collection where each Nft is tied to a physical item which Stockx verified as authentic. Nike is currently suing Stockx for falsely advertising as they found that some Nike shoes that had been verified authentic were actually counterfeited. That's one of the major problems with Nfts. Even if the code itself is secure, it relies on human input somewhere along the line, which is prone to errors and fraud just like anything else.

If a brand like Nike wanted to give its customers some way to verify secondary Market transactions, they could create their own verification system. They could have customers create Nike accounts every time a pair of shoes is sold at a participating retailer. your account will update to show that you owned the pair of shoes. and if you sell the shoes to someone else, you can record the transaction on your Nike accounts which would then update the ownership accordingly.

This hypothetical system could be accomplished by Nike maintaining an internal database. There would be no need to use any crypto. Of course, it would be a centralized system, but if you don't trust Nike to maintain such a database, you probably wouldn't want to buy their shoes anyway. These legal and practical problems make the widespread adoption of Nfts for real world verification purposes a non-starter That's why thus far the Nft market has only been used for people to speculate on digital art.

The only part of the ecosystem which has lived up to expectations is decentralized exchanges such as Uniswap, which are built on top of Ethereum. These platforms allow people to buy and sell various cryptocurrencies to each other based on Smart contracts. The coins being traded on these decentralized exchanges have no real world utility themselves. utilized exchanges have no real world utility themselves.

so the whole thing is basically a giant digital casino that has no interaction with the real economy. But the lack of real world use cases may be the least of Ethereum's concerns. The most immediate threat is the impending Crackdown on Ethereum by the SEC, which could see The Ether token effectively banned in the U.S A key question for all cryptocurrencies is whether they should be considered a security similar to a stalker Bond or whether they should be considered a commodity similar to Gold. If the SEC considers you to be a security, that's a major disaster.

The ongoing Regulatory and Reporting requirements would make it impractical for crypto security to be used for real world applications. Vitalik Buterin and the Ethereum Foundation knew this from the beginning in their 2014 Ico documents. They specifically said The Ether token is not a security, but just because they said that doesn't make it true. For something to be considered a security, it must constitute an investment of money in a common Enterprise with the expectation of making a profit based on the efforts of others.

Buying ether is clearly an investment of money, and the people who buy it expect to make a profit. and the profits are based on the efforts of developers who are building applications on top of Ethereum. Thus, the efforts of others' condition is also clearly satisfied. The only remaining question is whether Ethereum can be considered a common Enterprise Gary Gensler is currently the chairman of the U.S Securities and Exchange Commission.

He's a crypto skeptic, and over the past year he has been ramping up the commission's efforts to crack down on the industry. According to coinbase, the SEC privately told him that they view all cryptocurrencies except for Bitcoin as Securities which would obviously include Ethereum. While the SEC has not formally given a list of which cryptos they believe are securities, Gensler's recent Congressional testimony gives us some hints about his thinking: uh, but you've You've also made it clear in the past that Bitcoin is not a security Now Some SEC staff have also previously said that Ethereum is not a security. The Sec's style report characterizes Ethereum as decentralized.

So here's my question briefly and without getting deep into the Weeds on this and and I acknowledge your belief that most tokens have a large degree of central control. But generally speaking, is it fair to say that a significant factor for you, and whether or not a digital asset is a security, is whether it is centrally controlled or decentralized. Well, I I Look to the Supreme Court That's often written about this Uh, probably close to a dozen times in 50 years And it's whether the investing public is anticipating profits and that includes anticipating profits from appreciation as well as from as you mentioned rights based upon a common Enterprise about the efforts of that common Enterprise right? So so I Guess another way to put my question would you you haven't answered is is it possible to have a common Enterprise If it's something is decentralized, how could I have a common Enterprise I Mean it doesn't Central Is it isn't centralization necessary to constitute a common Enterprise So I I Think we're We might have a difference is there are many factors and so it's not one spectrum of centralization versus decentralization. What the Supreme Court and I try to stick to.

They're the Supreme Court And you know there'll be debates about other laws I Try to stick to what they say: a common Enterprise I Think about a group of individuals in the middle, that developer is in the middle, and the investing Public's betting on them counting on them, even if the token might be on a thousand computers. That's not what the Supreme Court's looking at. It's not about the token being on a thousand computers. it's just like a group of developers in the middle.

But there's even if the blockchain itself is decentralized and stored on thousands of different computers around the world, this doesn't necessarily mean there is no common Enterprise Ethereum is technically decentralized in that no single person or entity can control it. However, unlike Bitcoin, the founder of Ethereum is publicly known and is still actively involved in the Ethereum community. Not only that, but the Ethereum Foundation, which is controlled by Buterin, has over one billion dollars of assets and hundreds of employees and is also deeply involved in the Ethereum community. Even if Buterin and the Ethereum Foundation do not have direct control over Ethereum, they have tremendous influence and have been instrumental to its developments.

For example, one of the biggest and most important applications built on top of Ethereum is a decentralized exchange uniswab. The volume that Unit Swap brings to The Ether token has been a major factor in its price appreciation over the past few years. As it turns out, the Ethereum Foundation gave unusual a fifty thousand dollar Grant plus 120 Ether of Seed funding to help get unit swap up and running in 2018. Uniswap is just one example.

The Ethereum Foundation gives many millions of dollars worth of Grants to new projects which they believe will bring increased volume to Ether. Thus, the Ethereum Foundation, which is controlled or at least heavily influenced by Buterin, has been instrumental to the success of the Ether Token as an investment. While Buterin and the Ethereum Foundation are not directly compensated for their efforts, their primary source of wealth is their holding of Ether tokens. Thus, they have a clear Financial incentive for the price of either to rise, and their influence over Ethereum goes well beyond giving grants to Developers.

One of the biggest problems with Ethereum in Bitcoin was their use of a proof of work verification mechanism. Ethereum miners maintain massive data centers which validate transactions, and they're rewarded with newly minted Ether tokens as compensation. This is controversial because the miners require huge amounts of electricity to power their computers, which has a negative environmental impact, not to mention the fact that it's a massive waste of money and resources. There is an alternative system called Proof of Stake, which accomplishes the same verification tasks, but requires only a tiny fraction of the energy consumption.

In 2017, one of Ethereum's co-founders named Charles Hoskinson left the Ethereum Foundation to start his own cryptocurrency called Cardano. Cardano is very similar to Ethereum except for the fact that it uses proof of stake instead of proof of work. Cardano skyrocketed in popularity and at the peak of the 2021 Crypto bubble, it achieved a market capitalization of almost 100 billion dollars. This was a major threat to Ethereum.

If people ditched Ethereum in favor of Cardano, the price of Ether could crash, which would have a negative impact on Vitalik's net worth as well as the Ethereum Foundation's ability to pay its more than 200 employees. They needed to do something to save the situation. Remember that the code underlying Ethereum's blockchain can be overwritten if more than 50 percent of the miners agree to the change. In September of 2022, a majority of the miners agreed for Ethereum transition to proof of stake.

The fact that Ethereum can be so fundamentally altered calls into question the claims that it is not a security. For a true commodity like gold, nobody can change its chemistry or functionality. On the other hand, Ethereum is acting a lot more like a company which affirmatively decided to Pivot his business strategy in light of competition. in this case, competition from Proof of State coins like Cardano.

If the decisions such as Proof of Stake Hard 4 truly came from the decentralized community of Ethereum miners, you could potentially argue that Ethereum is not a security as a lack of centralization means it is not a common Enterprise. But if these key decisions ultimately come from Vitalik and the Ethereum Foundation, that would be a completely different story. In March of 2023, the State of New York sued an offshore crypto exchange called Goo Coin, which they alleged selling unregistered. Securities Specifically, they claim that Ether, which is traded on Kucoin is a security.

In their complaint, the New York Attorney's office says Vitalik, Buterin and the Ethereum Foundation retain significant influence and are often a driving force behind major initiatives on the Ethereum Blockchain, which impact the functionality and price of Ether. Specifically, they played key roles in facilitating the recent fundamental shift of the transaction verification method from Proof of Work to Proof of Stake. One developer who worked on creating the software necessary for the transition stated that his team was granted permission by the Ethereum Foundation to work on the shift to Proof of Stake. In the Ethereum Foundation's own report, they admit that since 2018, they have given funding grants to multiple teams working on Ethereum's transition to Proof of Stake.

Since they're the ones pulling the purse strings, they undoubtedly exert at least some level of control. While the decision to transition to a Proof of Stake may have been approved by the decentralized network of Ethereum miners, it was fully supported by Vitalik in the Ethereum Foundation, and likely would not have happened without their involvement. We know. Buterin supported the Proof-of-stake transition because he literally wrote a book called Proof of Stake.

Veteran has also published a road map for future hard Forks at the Ethereum Foundation is working on aimed at further changing the functionality of Ethereum with the ultimate goal of increasing Ether's price. Even though Vitalik and the Ethereum Foundation do not technically have control over the Ethereum Blockchain, they remain incredibly influential and to this day are actively driving the growth of the ecosystem. As the founder, Buterin is highly respected within the Ethereum community, giving him great power to propose changes that the miners will vote in favor of. While he has no official title, he is effectively in charge.

This is the point that Gensler made as Congressional testimony. It doesn't matter whether the code of a cryptocurrency is decentralized. if the people buying Ether believe that some centralized entity. In this case, Buterin and the Ethereum Foundation are responsible for running Ethereum, this could be considered a common Enterprise And thus, Ether could be a security.

If Ether is considered a security, the immense regulatory burden would make transacting in it in the U.S Alba and practical. SEC Chairman Gary Gensler has recently come under criticism from the Crypto Community due to his Hardline stance on regulation. Specifically, he is being accused of hypocrisy due to his previous statements about Ethereum. Prior to becoming SEC chair, Gensler was a professor of the Massachusetts Institute of Technology where he ironically taught classes on blockchain.

A recently resurfaced video from 2018 appears to show against her telling his class that Ethereum is not a security. Over 70 percent of the Crypto Market is Bitcoin Ether Litecoin Bitcoin cash. Why did I name those four they're not Securities under Gensler The SEC has not officially made any statements about Ethereum status as a security, but if you read between the lines of his Congressional testimony, he clearly believes that it is. So what explains the change? In 2018? a man named William Hinman was the Sec's Director of Corporate Finance.

He gave public statements saying the Commission views neither Bitcoin nor Ether as Securities. So you said in your speech that neither Uh Bitcoin nor Ether would be considered Securities and thus, not under the purview of the SEC. Can you very briefly explain what your reasoning is sure? Bob These are complex facts and circumstances tests, but when we look at Bitcoin or if we look at Ether and the highly decentralized nature of the networks, we don't see a third party promoter we're applying the disclosure regime would make a lot of sense, so we're comfortable in some uh sort of viewing these as items that don't have to be regulated as securities. When Gensler told his class at Ethereum is not a security in 2018, he was just going off Hinman statements at the time.

Now that has become a commissioner himself, he's free to have a different perspective based on his interpretation of the facts and the law. Also, there have been significant developments since 2018, particularly the proof of Stake Hard Fork which Vitalik and the Ethereum Foundation played a pivotal role in. This provides new evidence showing a tremendous amount of de facto centralized control. A lot of people have a lot of different opinions, but at the end of the day, Ethereum status will be decided in the courtroom.

Coinbase is currently being sued by the SEC, which claims that many of the coins on its platform are unregistered Securities. While they have not given a list of which coins in particular they believe are securities, is widely believed, it is everything besides Bitcoin. The SEC wants Coinbase to discourage all the revenue they've generated from transaction fees of unregistered Securities and to de-list them from the platform for the full year of 2022. 29 of Coinbase's transaction Revenue came from Bitcoin, 25 came from Ethereum, and 45 came from all other coins.

So if it could only trade Bitcoin, it would effectively lose three quarters of its Revenue overnight. This would be catastrophic as the company is already losing money due to the crypto winter. Not only that, but they'll have to pay billions of dollars of discouragement of all the revenue they've ever generated from anything besides Bitcoin. Coinbase's business model is fundamentally incompatible with the Gensler Sec's views on regulation, because because of this, there's really no room for a negotiated settlement between the two parties, so they are instead joined to court where a federal judge will decide their fate.

The President said by the Coinbase lawsuit will be applied to all crypto exchanges in the U.S So if the ruling is unfavorable, almost all the crypto exchanges will either go bankrupt or switch to trading only Bitcoin which is a far less lucrative proposition. This is a complex case that may take months or even years to play out. so make sure to subscribe to the channel and we'll be sure to update you on all future developments. Alright guys, that wraps it up for this video.

What do you think about Ethereum? Is it a security? Does Vitalik Buterin effectively control it? Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one. Wall Street Millennial Signing out.