Everything initially seemed routine when the SEC filed a federal lawsuit against crypto influencer Ian Balina on Monday for his failure to register a cryptocurrency as a security prior to launching an initial coin offering (ICO) in 2018. After all, the SEC has been bringing civil lawsuits against people and organisations for launching unregistered ICOs for years.
The SEC today asserted that it has the power to sue Balina because, in essence, the entire Ethereum network is subject to the jurisdiction of the US government, which was a daring and potentially unprecedented move hidden in the lawsuit’s 69th paragraph.
Then, keen readers looked a little closer at the small print.
The agency stated in its complaint that the ETH delivered to Balina was “verified by a network of Ethereum blockchain nodes, which are grouped more densely in the United States than in any other country.” “As a result, the transactions took place in the United States,” the SEC concludes.
According to Brian Fyre, a legal professor at the University of Kentucky, “saying so permits [the SEC] to classify conducting business on the Ethereum blockchain, as doing business on a US stocks market.” Which is practical from their regulatory standpoint. It greatly simplifies matters.
The SEC seems to be arguing that since there are currently more validating nodes for Ethereum operating in the US than any other nation, all Ethereum transactions worldwide should be seen as coming from the US. According to Etherscan, the United States now hosts 45.85% of all Ethereum nodes. Germany has only 19% of the second-highest node density, in contrast.
The SEC would effectively assert control over all activity on the allegedly decentralised Ethereum network if it were to correctly designate conduct on Ethereum as comparable to that on an American securities market. Such a move would represent a significant expansion of the SEC’s role in regulating both cryptocurrency generally and Ethereum in particular—where the vast majority of NFT and DeFi activity occurs.
Fyre stated that the language of the current complaint carries no legal weight and that the court in this instance is unlikely to address this particular problem given the nature of the SEC’s lawsuit against Balina. However, this does not imply that the sentence has no meaning.
According to Fyre, who spoke with Decrypt, “I think they may be attempting to bring their view of what Ethereum is, and how it operates, out into the judicial ecosystem.” It’s the SEC stating, “Since this entire body of financial activity is under our purview of regulation, we shall regulate it all.” Such a strident assertion of control over the entire Ethereum ecosystem, in Fyre’s opinion, is unprecedented.
It’s the first time, he added, that the SEC has truly explained how it sees the Ethereum ecosystem operating and why it believes it fits under its purview of regulation. In the hours following Ethereum’s successful shift to a proof-of-stake consensus mechanism last week, SEC Chair Gary Gensler made the suggestion that the change might move the network closer to the government’s definition of a security.
Gensler gave his opinion on how “staking,” or pledging assets to a cryptocurrency network in exchange for passive rewards, could be interpreted as a sign that an asset meets the requirements to be considered a security under the so-called Howey Test, though he avoided mentioning any particular cryptocurrency or network by name. This was done after testifying before the Senate Banking Committee. The proximity of that statement to the present, in Fyre’s opinion, is no coincidence.
The wording used today, according to Fyre, “sounds absolutely consistent with what Gensler was driving at when he said […] that the SEC views all of this as securities and, as a result, is going to make regulatory decisions in connection to the entire ecosystem.” Despite leadership within the Commission during the previous administration indicated that Ethereum was “sufficiently decentralised” and hence not a security, the SEC has yet to adopt a formal position on the cryptocurrency under Gensler. But Fyre doubts that the courts would object if the SEC ever asserted that Ethereum was an unregistered security.
Insofar as it’s run on a number of computers, many of which are in the United States, I can see judges definitely recognising that, said Fyre: “Ethereum is essentially located in the United States. “Those are American events, I believe.
- SEC Asserts That US Has Jurisdiction Over All Ethereum
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