Mankiw's Web3 Research: Understanding the Ethereum Foundation's 2024 Report and Meeting Compliance Challenges in the Trump Era

What to Know About Establishing a Web3 Foundation

Author: Iris, Lawyer Liu Honglin, Manqun Blockchain Legal Services

Cover: Photo by Shubham's Web3 on Unsplash

The 2024 US presidential election has finally settled, and Trump, who has received strong support from the crypto industry, has "returned to the palace". I wonder if your friends' circles were flooded at that time. Unlike the previous administration, his return to the White House may bring a more friendly and favorable regulatory environment for the crypto industry.

During the election campaign, "strange moves" such as BTC strategic reserves, Americanization of mining, and dismissal of the current SEC chairman frequently emerged. But to say the key regulations that will impact the development of crypto assets and Web3 projects in the next few years, it is the "Financial Innovation and Technology for the 21st Century Act" (FIT21).

Currently, this bill has been passed by the US House of Representatives with a high vote of 279:136, and it is very likely to be quickly passed by the Senate and enacted under the Trump administration.

We all know that most Web3 projects will choose to establish a foundation to coordinate local and global regulations as they grow in scale. So, what impact will the FIT21 bill have on Web3 projects, especially Web3 foundations? First, let's have Manqun Lawyer explain the core of FIT21 for everyone.

FIT21 Bill: Redefining Crypto Assets

The FIT21 bill, led by the Republican Party, on the one hand responds to the crypto industry's long-standing concerns about regulatory uncertainty, and on the other hand outlines clearer regulatory boundaries for the crypto industry, while also attempting to reduce potential market chaos at the source. The most notable aspect of the bill is that it redefines which crypto assets can be considered "commodities" rather than "securities", and this distinction directly determines the type of regulation these assets will be subject to.

To achieve this, the FIT21 bill has established three core evaluation criteria to define the nature and regulatory scope of assets:

1. 20% Token Control Threshold

The FIT21 bill stipulates that if any single entity or affiliated parties control more than 20% of the tokens, the project will be classified as a security and subject to strict SEC regulation. The intention of this provision is to prevent the market from being manipulated by a few major holders.

For projects that hope to be recognized as "commodities" and enjoy relatively lax regulation, this "20% cap" is both a constraint and a compliance guideline. Project parties need to design reasonable token distribution schemes to distribute control among many holders, forming a distributed governance model, rather than being controlled by a small core team.

2. Decentralized Governance Structure

The FIT21 Act also has strict requirements for "decentralized governance", aiming to ensure that the project's decision-making mechanism truly achieves "decentralization". This is not just about the decentralization of control, but also involves the transparency and independence of governance. For example, the project needs to introduce a publicly transparent voting mechanism, allowing token holders to truly participate in key decisions. In this way, governance is not just superficially decentralized, but has substantive public participation.

In addition, the Act also proposes transparency standards for the governance structure. In simple terms, the project party needs to publicly disclose key governance rules and processes, such as the execution conditions for major decisions or the trigger rules of the code, so that token holders can clearly understand the operation of the project and reduce the possibility of "black box operations" by the core team. This transparent governance structure can win more user trust for the project, and is also an effective means of compliance.

3 Information Disclosure and Transparency Requirements

The FIT21 Act is relatively flexible in its requirements for information disclosure, providing different disclosure standards based on the degree of decentralization and the nature of the project. For projects that meet the decentralization requirements and are classified as "commodities", the Act allows them to enjoy relatively relaxed information disclosure obligations, but key financial information, token distribution, and community governance proposals still need to be publicly disclosed on a regular basis to ensure transparency. For projects that are viewed as securities, they need to undergo comprehensive financial disclosure on a regular basis, just like traditional securities, to ensure investors' right to know.

At the same time, in addition to setting standards, the FIT21 Act very humanely introduces a "safe harbor" clause, providing crypto projects with a critical compliance transition period. For projects that have not yet fully achieved decentralization, as long as the project party promises to meet the decentralization standard within a specified time, they can continue to operate during the exemption period without being subject to the strict constraints of securities regulation. This clause gives project parties time to gradually improve their governance structure and community management, reducing the short-term adjustment risks caused by compliance pressure. This flexible buffer mechanism not only protects the innovation space of the project parties, but also ensures their long-term compliance direction, creating a stable policy environment for the healthy development of the crypto industry.

So, in the context of the imminent enactment of the FIT21 Act, how should Web3 projects respond, whether in terms of token governance or organizational structure?

Manqun Lawyers have long recommended and assisted Web3 project parties in setting up foundations to ensure global compliance (for support, you can add Manqun customer service: mankunlvsuo). At the same time, they have also written articles to share the advantages of setting up a foundation and the establishment plan, such as "Web3 Project Compliance: Why Choose the Cayman Foundation for Token Issuance?" and "V God's Selection: Why Choose the Swiss Foundation for Web3 Project Token Issuance?".

So after establishing a foundation, how can this organizational structure meet the decentralization standards of the FIT21 Act? Coincidentally, the Ethereum Foundation (EF) has released its 2024 annual report. Manqun Lawyers take this opportunity to interpret it.

Three Key Points of the Ethereum Foundation 2024 Report

The 2024 annual report released by the Ethereum Foundation is 27 pages long, with not many words but very rich information. From the organizational structure to the treasury funds, and then to the annual expenditures, the Ethereum Foundation's report has clear disclosures, allowing us to have a glimpse of the structure and current status of the world's largest Web3 foundation.

Manqun Lawyers specially remind: For Web3 project parties who want to set up a foundation, this report is a compliant "sample room". Next, combined with the FIT21 Act, we will unpack the compliance path of the Ethereum Foundation in responding to regulations. Please "take good notes".

1 Decentralized Governance

In the 2024 annual report, the Ethereum Foundation has detailed the functions and divisions of several key teams, including the development team, research department, ecosystem support team, and risk management group. These teams operate independently and supervise each other. Not only do they have clear divisions of labor in technical development and project support, but they also demonstrate the foundation's commitment to decentralization in the governance structure. For example, the development team focuses on the technical upgrades of the core protocol, the research department is responsible for future innovation exploration, and the ecosystem support team promotes community education and ecosystem expansion. This functional division avoids the concentration of decision-making power in a single team, ensuring the decentralization of governance.

In addition, the foundation also delegates some key decision-making power to token holders and ecosystem participants through community voting and open proposals, allowing the community to truly participate in the future development of the project. In this way, not only are the team's functional boundaries clear, but the governance also maintains transparency and community involvement. This governance model fundamentally meets the decentralization requirements of FIT21, reducing the risk of single-party control, and provides a guarantee for the long-term healthy development of the project.

2 Treasury Fund Holdings

The 2024 annual report of the Ethereum Foundation discloses its current treasury fund holdings. The data shows that the Ethereum Foundation currently holds a total of $788.7M in crypto assets, of which 99.45% are ETH, with a total ETH value of approximately $784.4M. Combining the current ETH market data, the Ethereum Foundation holds about 261,000 ETH, accounting for about 0.22% of the total ETH supply.

This data shows that the Ethereum Foundation's ETH holdings are maintained at a relatively low level, avoiding excessive impact on the market and reducing the liquidity pressure of concentrated holdings, and are far below the 20% red line of the FIT21 Act, ensuring that ETH will no longer be criticized by the SEC as a security under the new law. In addition to crypto assets, the Ethereum Foundation also holds about $300 million in traditional financial assets such as fiat currency and bonds, ensuring its risk resistance in market fluctuations.

This diversified financial management approach not only increases financial stability, but also demonstrates the Ethereum Foundation's emphasis on decentralization and transparency. This "lightweight holding + diversified allocation" financial strategy also provides an important reference for other Web3 projects: while promoting ecosystem development, ensure long-term financial support through reasonable allocation, laying a solid foundation for more resilient growth in the ever-changing regulatory environment.

3 Annual Financial Data

The 2024 annual report of the Ethereum Foundation has detailed the financial situation of the past two years, clearly showing the fund usage and management status between 2022 and 2023. The data shows that the foundation's expenditures are mainly concentrated in three major areas: core development, ecosystem grants, and operational reserves, covering the security upgrades of the core protocol, ecosystem support, and risk management.

Specifically, the report shows that the Ethereum Foundation has made significant investments in core protocol development over the past year, including the research and development of emerging technologies such as Layer 2 scaling and zero-knowledge proofs, in order to maintain the innovation and security of the Ethereum network. In addition, the foundation has increased its support for the ecosystem, supporting the developer community and incubating various new projects, thereby promoting the long-term development of the Ethereum ecosystem. These grant programs cover new project incubation, educational training, and community activities, providing momentum for the sustainability of the Ethereum network.

The Ethereum Foundation's transparent financial management strategy is in line with the financial disclosure requirements of the FIT21 Act, providing a strong compliance reference for the future development of the Web3 industry. At the same time, this fully transparent data disclosure also helps to build market trust and lays a foundation of compliance and resilience for the project's sustainable development.

Advice from Mankun Lawyers

Currently, with the inauguration of Trump, the FIT21 bill seems to be "set in stone". Just as the EU's MiCA bill has a significant impact on the global regulation of crypto assets, once the FIT2 bill is officially passed by the Senate and enacted, it will undoubtedly have a crucial impact on the classification of global crypto assets. Therefore, whether for those who want to establish a foundation or for Web3 projects that are already considering compliance regulations, it is necessary to copy the "homework" of the Ethereum Foundation:

• Reasonable token distribution, ensure decentralized governance is implemented

The 20% control threshold proposed by the FIT21 bill requires many projects to be more cautious in token distribution. Therefore, at the initial stage of the project, designing a reasonable token distribution plan is crucial. By introducing multi-party governance mechanisms, such as token holder voting and community proposal management, the decision-making power is gradually delegated to community members. This transparent governance model not only helps the project meet the decentralization standards of FIT21, but also greatly increases community participation, laying a solid foundation of support for the project.

• Diversify fund holdings, enhance financial stability

The diversified fund allocation demonstrated by the Ethereum Foundation is a typical robust strategy, not only holding crypto assets, but also covering traditional financial instruments such as fiat currencies and bonds. Web3 projects can also refer to diversification in fund management, avoiding concentrated holding of a single asset, especially the market volatility risk caused by highly volatile crypto assets. Through flexible allocation, project parties can maintain sufficient liquidity and risk resistance in market fluctuations, ensure financial stability, and provide reliable support for the long-term development of the project.

• Attach importance to information disclosure and transparency

Under the FIT21 framework, information disclosure has become one of the key factors affecting project compliance. Web3 projects should proactively disclose information on fund flows, token distribution, governance mechanisms, etc. They can refer to the disclosure methods of the Ethereum Foundation, regularly publish key information such as project progress and fund utilization, and provide reliable reference data for the community and investors. This not only helps with compliance, but also enhances community trust and reduces potential legal and reputational risks.

Of course, if you intend to establish a Web3 foundation and hope to achieve compliance in the start-up stage, Mankun Law Firm will be a trustworthy partner. As a law firm deeply involved in the blockchain and new economy field, our team has several lawyers with rich experience in Web3, covering foundation location, establishment, and architectural design, and has successfully co-organized foundation projects many times.

We always believe that compliance is not only a protection for the project, but also the cornerstone for the stable development of the Web3 industry. If you have any related needs, feel free to consult Mankun Law Firm, and we will be happy to provide you with compliance consulting and professional guidance, helping your project develop in a compliant and robust manner in the Web3 ecosystem, and jointly promote the Web3 industry towards a more compliant and transparent future.

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