The love-hate relationship between Ether.fi and OpenSea: legal risks exposed by a sudden delisting incident

Conflict between Ether.fi project party and OpenSea

The Ether.Fi project said on Tuesday that OpenSea has banned the trading of NFTs that require Ethereum as collateral.

“We launched ether.fan, an NFT series backed by collateralized ETH,” Ether.Fi CEO Mike Siragardze said in an open letter published on Medium. He continued: “By all accounts, it has been very successful. We minted all 3,000 NFTs in one day, with more than 6,200 ETH locked.”

Subsequently, Siragardze said, the entire series began to be listed on OpenSea for trading. "Then we were hit hard. All tradable NFTs on OpenSea disappeared. New NFTs appeared to be disabled with a cryptic error message attached. We received no notifications or warnings. None of our many contacts at OpenSea reached out to us. The series was inexplicably disabled just like that."

After a week or so of no response, OpenSea eventually responded with a “standard letter,” saying that the marketplace “**does not allow NFT series that conduct financial activities that require registration or licensing,” Siragardze said.

What is Ether.fi?

According to the official website, Ether.fi is a special kind of NFT that needs to pledge ETH to be minted. To sum it up in one sentence, "NFTs that will pay you interest."

Ether.fi official website screenshot source: Ether.fi official website

By staking ETH, buyers can mint fan NFT (that is, the protagonist Ether.fan in this conflict, which is distinguished from the project name Ether.fi) to earn membership points and obtain increased staking rewards. Additionally, the official website states that fan NFTs can also “enable you to participate in exclusive events and demonstrate your commitment to Ethereum’s decentralization.”

All ETH staked through ether.fan will be distributed to independent node operators using DVT (DeversiFi Exchange Token) and running physical nodes in different geographic regions. Fan NFT participates in the member loyalty reward program, and as the staking time increases, the share of staking rewards and agreement revenue will increase.

Staking is done through ether.fi's non-custodial staking protocol, and all revenue from the protocol goes back to stakers and independent node operators to subsidize the cost of staking hardware, with a small portion set aside to pay ether.fi interns.

According to a previous report by Odaily Planet Daily, Ether.Fi completed a round of financing in February, led by North Island Ventures and Chapter One, with a total of $5.3 million.

OpenSea's arguments and responses from both sides

OpenSea responded to Ether.fi with an email, which stated: OpenSea does not allow NFT to have the nature of financial activities that require registration or obtaining a license.

The inner meaning of this sentence is that because it is still unclear whether ETH is a security (even in the past few lawsuits, the SEC did not list ETH as a security, many people speculated that the SEC gave up listing Ethereum as a security and proceeding with the lawsuit), and the pledge service may also have a security nature, so whether registration is required has not yet been determined. OpenSea was unwilling to take the relevant legal risks to list Ether.fi, an NFT with financial activities, which led to the delisting.

OpenSea's response email. Source: Decrypt

However, this delisting was criticized by the Ether.fi team as "too conservative". Siragardze wrote in the open letter: "This means that OpenSea has taken the position that the pledged ETH needs to be licensed and registered. This position is very conservative, and even the SEC has not clearly stated this."

In this open letter, it is not difficult to see that Silagadze himself is very angry. He wrote: “We have been communicating with OpenSea prior to launch to ensure ether.fan is compatible with its marketplace, integrate their API to keep metadata up to date, and ensure collectibles are displayed correctly. We have been working on this for weeks leading up to launch.”

"But throughout the process, we didn't get any indication that any of our operations would be a problem." Then came the takedown.

He wrote:

** "OpenSea has been running a virtual unlicensed casino where people gamble ruinously and spend millions on pictures of monkeys etc. Obviously all of this is acceptable but not allowed to list a collection that actually has utility because it has utility. **

Actually, I don't think OpenSea is malicious here. I don't think anyone is doing anything wrong on purpose. It could be that they have miscommunicated internally. OpenSea is now a company of over 300 employees, and there may be many teams that don't know each other well. When a company scales, it tends to come under the de facto control of its legal and accounting teams and stop making any slightly risky moves. "

Apart from the initial email, OpenSea did not respond to any requests for comment from the crypto media. However, a relevant spokesperson gave the following response:

"While we won't go into the details of specific actions taken against individual collectibles, what I can share is that our terms of service define the types of content and behavior that is allowed on OpenSea. When we find collectibles or content that violate our terms of service, we enforce our policies in different ways, including removing collectibles and in some cases banning accounts."