Ethereum's Compliance with OFAC Stumbles Post-Merge as Grayscale Forfeits PoW Tokens
Summary:
The Merge upgrade in September 2022, which transitioned Ethereum from proof-of-work to proof-of-stake, has led to a decline in Ethereum's compliance with Office of Foreign Assets Control (OFAC) standards. Notably, Ethereum's OFAC compliance dropped from 78% in November 2022 to 30% as of September 27. In response to this, operators are encouraged to use relays that do not adhere to OFAC rules. Amid reduced compliance, Grayscale has discontinued all rights to proof-of-work Ethereum tokens due to market liquidity issues.
In September 2022, a significant event in Ethereum's evolution occurred. Known as the Merge upgrade, this shift from proof-of-work (PoW) to proof-of-stake (PoS) has had a noticeable impact on Ethereum’s conformity with the procedures established by the Office of Foreign Assets Control (OFAC). Ethereum block compliance, which involves the censorship of specific transactions conforms to OFAC rules, can affect the impartiality of the Ethereum ecosystem. In August 2022, OFAC imposed sanctions on Tornado Cash and correlating Ethereum (ETH) addresses for facilitating concealed transaction processes.
Before the Merge upgrade, Ethereum's OFAC compliance was on an increasing trajectory, particularly as entities like cryptocurrency exchange platforms implemented censorial MEV-Boost relays on their validators. Data from MEV Watch lists major platforms including Binance, Celsius Network, Bitfinex, Ledger Live, Huobi (HTX) and Coinbase among the top censorship perpetrators.
Nonetheless, adherence to OFAC stipulations in Ethereum blocks has significantly reduced. In November 2022, Ethereum blocks had an OFAC compliance rate of 78%. However, as of September 27, compliance levels reduced to 30%, presenting an overall reduction by 57%.
To counter OFAC compliance, operators can resort to relays that do not regulate based on OFAC compliance rules. Seven prominent MEV-boost relays that operators often utilize include Flashbots, BloXroute Max Profit, BloXroute Ethical, BloXroute Regulated, BlockNative, Manifold and Eden. Regardless, not all system comply with OFAC considerations, as pointed out by MEV Watch.
While OFAC regulations primarily target entities based in the U.S., validators operating outside the U.S are encouraged to utilize non-censoring relays to improve network efficiency.
At a time when Ethereum’s OFAC compliance is dwindling, Grayscale has opted to forgo all rights to PoW Ethereum tokens (ETHPoW). This decision is reportedly due to market liquidity issues. Some cryptocurrency investment firms such as ETC Group have resorted to initiating dedicated EthereumPoW exchange-traded products (ETPs).
Published At
9/27/2023 8:22:13 AM
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