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ETHGate 2022: The Ethereum Scandal XRP Investors Are Calling ‘Bigger Than Enron’

This article is excerpted from Tom Yeung’s Moonshot Investor newsletter. To make sure you don’t miss any of Tom’s potential 100x picks, subscribe to his mailing list here.

A concept image of a virtual coin based on the Ethereum logo.

Source: Filippo Ronca Cavalcanti / Shutterstock.com

#ETHGate Breaks The Internet

On Wednesday, hawkish Federal Reserve news sent both stock and crypto markets spiraling. Crypto markets would instantly lose $200 billion, while stocks would shed $1.4 trillion.

I’ve been warning investors since October that Fed Chair Jerome Powell was taking away the punch bowl.

“As we enter the later innings of the crypto bull run, it’s time to selectively take profits.”

But the market volatility has also hidden another disquieting trend:

#ETHGate

Though the hashtag has existed on social media since last year, the past several days have seen “ETHGate 2022” gaining significant traction. And with its $400 billion market capitalization, Ethereum is now worth almost six times more than Enron ever was.

A screenshot from Twitter alleging that the SEC is giving Ethereum a free pass.

Source: Twitter.com

Today’s Moonshot Investor will be an unusual one. Rather than consider specific picks, we’ll take a look at this offbeat theory, and what it means for crypto investors.

An illustration of an astronaut hanging off a moon-like arc.

Source: Catalyst Labs / Shutterstock.com

1. What is #ETHGate?

ETHGate is a conspiracy theory that Ethereum (CCC:ETH-USD) received a free pass from regulators. These critics reasonably claim that the Securities and Exchange Commission allowed Ethereum to move ahead while doling out harsher treatment to XRP (CCC:XRP-USD) and other rivals.

“[Ethereum] whales… could have possibly created multiple fake identities and accounts,” explained one Twitter commentator, “to make it look like the Ethereum Network and the initial coin offering was truly decentralized when in fact … it was manipulated to look more decentralized.”

Meanwhile, other coins have gotten shortchanged. In December 2020, the SEC filed a lawsuit against XRP parent Ripple Labs for “raising $1.3 billion through an unregistered, ongoing digital asset securities offering.” That lawsuit is ongoing.

2. Is #ETHGate Real?

The theory does have some merit. Financial regulators are notoriously inconsistent when it comes to choosing which initial coin offerings (ICOs) to label “unregistered securities offerings.” For-profit corporations from Binance (CCC:BNB-USD) to Crypto.com (CCC:CRO-USD) have been free to create centralized tokens like BNB and CRO, while others like Ripple have been nailed to the wall.

The rules are inconsistent even among lookalike cryptos. Ripple rival Stellar (CCC:XLM-USD) seems to have escaped the SEC’s wrath by registering as a non-profit and publishing its source code. Those with siblings might relate it to how the youngest always seems to get away with everything.

Allegations of fraud by the Ethereum Foundation, however, are hard to prove. ETH wallets are less concentrated than Bitcoin’s (CCC:BTC-USD) (the top 0.04% of addresses hold 62% of all BTC), but no one truly knows how many wallets are linked to the same individuals. Though #ETHGate might ultimately lead to further investigation, the Ethereum Foundation has so far escaped regulatory ire.

3. What does #ETHGate mean for Ethereum?

In the short run, #ETHGate will have little effect on the world’s second-largest cryptocurrency. SEC director William Hinman announced in 2018 that regulators would not treat Ether or Bitcoin as securities. SEC Chairman Gary Gensler and his predecessor Jay Clayton have been hamstrung ever since.

Longer-term however, public anger could turn the legislative tide. Congress introduced 35 cryptocurrency-focused bills in 2021, and anyone who’s traded Ethereum is intimately acquainted with the ridiculous fees the protocol can charge.

Those looking to buy $500 worth of Ethereum tokens or an NFT can easily spend $120 or more on “GAS” fees… before losing another 3% to 4% in slippage. Stricter legislation will eventually turn mega-cap cryptos into regulated assets.

4.What does #ETHGate mean for XRP?

The SEC has struggled to make a strong case against XRP, particularly given its previous classification of Bitcoin and Ether as “non-securities.” Multiple spokespeople for the SEC have since done an about-face.

“I don’t want to be overly technical but … there is no action that [the SEC] took to say Bitcoin is not a security, Ether is not a security,” the SEC’s lawyer said earlier last year.

The lack of enforcement action has since sent XRP on a nascent recovery, up 130% since last year.

Though #ETHGate won’t directly impact XRP’s prices, it underscores the uphill battle the SEC now faces in proving wrongdoing by Ripple Labs.

5. What is Ethereum?

Ethereum is the world’s second-largest cryptocurrency. Rather than acting like Bitcoin’s “digital gold,” Ethereum looks more like Apple Pay thanks to its capacity to create smart contracts and assign ownership of digital goods.

The protocol also supports 97% of the world’s NFTs, according to data from DappRadar.

Though ETH has dropped from first place, it remains the Moonshot Investor’s No. 3 pick for its relative usefulness and stability. 

Click here to learn more about Ethereum.

What Does #ETHGate Mean For Your Wallet?

“Ethereum-Gate” is still a small movement on the fringes of social media. Many of the allegations revolve around insider dealings early on, when Ethereum traded under $1. 

But anger on social media has a habit of snowballing. And #ETHGate highlights some well-founded reasons for anger.

I closed out my Powell-focused newsletter in October with a warning to investors:

“Those expecting 2021-style returns on BTC next year should reconsider the odds. With inflation expectations rising, it’s only a matter of time before the Fed ends the show.”

Now that lawmakers on Capitol Hill are turning their attention to crypto, it’s only a matter of time before the lowest-quality coins see their day of reckoning too.

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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.


Article printed from InvestorPlace Media, https://investorplace.com/2022/01/ethgate-2022-the-ethereum-scandal-xrp-investors-are-calling-bigger-than-enron/.

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