The historic Merge upgrade marked a pivotal moment in Ethereum’s history as it transitioned from proof-of-work (PoW) to proof-of-stake (PoS). However, this significant shift had unintended consequences. This has resulted in a decline in compliance with the standards set by the Office of Foreign Assets Control (OFAC).
Pre-Merge Surge in OFAC Compliance
Before the Merge upgrade, Ethereum witnessed a surge in OFAC compliance. This was primarily driven by entities such as cryptocurrency exchanges opting to run censoring MEV-Boost relays on their validators.
These relays had a significant impact on the network’s censorship, with popular platforms like Binance, Celsius Network, Bitfinex, Ledger Live, Huobi (HTX), and Coinbase emerging as top censorship offenders, as per MEV Watch data.
Post-Merge OFAC Compliance Decline and Challenges
However, following the Merge upgrade, Ethereum’s overall OFAC compliance experienced a substantial decline. In November 2022, a staggering 78% of Ethereum blocks complied with OFAC regulations. Fast forward to September 27, and Ethereum’s OFAC compliance has plummeted to a mere 30%, reflecting a stark 57% reduction.
To counter the OFAC compliance challenges, operators must turn to relays that do not censor transactions based on OFAC requirements. Among the prominent MEV-boost relays in use, including Flashbots, BloXroute Max Profit, BloXroute Ethical, BloXroute Regulated, BlockNative, Manifold, and Eden, only three do not censor in accordance with OFAC compliance requirements.
It’s important to note that not all blocks built by OFAC-compliant relays are censoring. However, they will do so when non-compliant transactions are broadcast to the network.
Global Implications and Grayscale’s Response
While OFAC regulations primarily target U.S.-based organizations, validators outside the United States must also consider running non-censoring relays for the greater benefit of the Ethereum network. The global nature of blockchain and its decentralized ecosystem means that compliance issues ripple beyond borders.
Amid Ethereum’s reduced OFAC compliance, Grayscale faced a decision regarding PoW Ethereum tokens (ETHPoW). However, the decision to abandon these rights was not solely due to compliance issues. It was also influenced by the lack of liquidity in the market.
According to an official announcement from Grayscale, they stated:
“As such, it is not possible to exercise the rights to acquire and sell the ETHPoW tokens, and on behalf of the record date shareholders, Grayscale is abandoning the rights to these assets.”
Exploring New Avenues
On the flip side, cryptocurrency investment firms like ETC Group have ventured into launching dedicated EthereumPoW exchange-traded products (ETPs). This move showcases the continued interest in Ethereum’s evolving landscape, even as compliance challenges persist.