U.S. regulators might soon gain a lot more leverage over the world’s second-largest blockchain network, a prospect that has been the subject of growing crypto-world concern in recent days.
Ethereum developers are moving closer to a tentative date for a long-anticipated network upgrade called “the Merge,” which will update and speed up the way it processes transactions. As that happens, industry fears are growing that the post-Merge network would be more susceptible to government control — particularly Treasury Department sanctions. Currently, a small number of services that administer Ethereum deposits on behalf of their owners are positioned to have an outsized say in which new blocks of data will be recognized by the network after the Merge. (Think of it as roughly analogous to the power delegated to large asset managers like BlackRock to cast corporate governance votes on behalf of clients.) Most of those big services are subject to U.S. jurisdiction. So, despite crypto’s promise of decentralization, they might, collectively, have the power to block sanctioned addresses from the Ethereum network. And the day of reckoning is drawing near: The Merge is currently scheduled for Sept. 15. Many crypto firms have already blacklisted sanctioned addresses from accessing their blockchain-based services, but the fear in the industry is that, post-Merge, U.S. regulators will take enforcement one step further, forcing the depository services to block transactions involving sanctioned addresses from making it onto the Ethereum blockchain at all. Such a policy could take several forms, and it’s not clear how most large service providers would respond. (Last week, Brian Armstrong, CEO of Coinbase, which runs one of the most popular services, said on Twitter that he would be inclined to give up that part of the business altogether rather than block certain transactions from the Ethereum blockchain.) Several factors add to the uncertainty of how a post-Merge sanctions push might play out. Pro-compliance and anti-compliance factions of network operators might each try to gang up on the other camp to enforce their preferred approach, or the camps could part ways, with each administering its own version of the Ethereum blockchain. Some researchers argue that this uncertainty might make it difficult for regulators to know what action to take, and therefore increase the chances that they do little. Jeff Dorman, chief investment officer at digital asset manager Arca, argued that the feared sanctions push is unlikely to materialize anytime soon, if it all, given a general tech-friendly drift among U.S. regulators. And if U.S.-based operators were hobbled by sanctions requirements, Dorman predicted, that activity would quickly move overseas. “Others would step in,” he said, “to fill that void.” | 
