The historical merger upgrade that took place in September 2022, signaling Ethereum’s shift from proof-of-work (PoW) to proof-of-stake (PoS), had a notable impact on compliance with standards outlined by the Office of Foreign Assets Control (OFAC).
Ethereum blocks that adhere to OFAC compliance are responsible for censoring specific transactions, which, in turn, raises concerns about the neutrality of the Ethereum ecosystem. In early August 2022, Tornado Cash and multiple Ether addresses connected to it were subjected to OFAC sanctions due to their capacity to obscure and anonymize transactions.
Prior to the merger upgrade, Ethereum’s adherence to OFAC compliance was on the rise, especially as entities such as cryptocurrency exchanges chose to operate censoring MEV-Boost relays on their validators. Prominent platforms like Binance, Celsius Network, Bitfinex, Ledger Live, Huobi (HTX), and Coinbase were among the top offenders when it came to censorship, as reported by MEV Watch data. However, there has been a substantial decline in the overall OFAC compliance of Ethereum blocks. In November 2022, approximately 78% of all Ethereum blocks adhered to OFAC regulations. As of September 27th, the OFAC compliance for Ethereum has dwindled to 30%, marking a significant 57% decrease.
To address OFAC compliance issues, operators are required to use relays that do not enforce OFAC compliance standards. Among the most commonly used major MEV-boost relays are Flashbots, BloXroute Max Profit, BloXroute Ethical, BloXroute Regulated, BlockNative, Manifold, and Eden. However, it’s worth noting that not all of these systems adhere to OFAC compliance; according to MEV Watch, out of the 7 major relays available, only 3 do not enforce OFAC compliance requirements.
Furthermore, it’s important to emphasize that not all blocks constructed by OFAC-compliant relays are necessarily involved in censoring transactions. However, all blocks created by OFAC-compliant relays will engage in censorship when non-compliant transactions are broadcast across the network.
While OFAC regulations primarily target organizations based in the United States, validators operating outside of the U.S. must contemplate running non-censoring relays for the betterment of the network. In the context of Ethereum’s reduced OFAC compliance, Grayscale decided to relinquish all rights associated with PoW Ethereum tokens (ETHPoW). Nonetheless, this choice was attributed to market liquidity issues, as stated in an official announcement that stated, consequently, the ability to exercise rights pertaining to the acquisition and sale of ETHPoW tokens is not feasible, and Grayscale is abandoning these asset rights on behalf of the record date shareholders.
Conversely, certain cryptocurrency investment firms like ETC Group have endeavored to introduce dedicated EthereumPoW exchange-traded products (ETPs).
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