SEC Claims All of Ethereum Falls Under US Jurisdiction

When the SEC filed a federal complaint on Monday against crypto influencer Ian Balina for its failure to register a cryptocurrency as security before launching an initial coin offering (ICO) in 2018, it all seemed trivial at first: the SEC has, for yearsfiled civil lawsuits against individuals and organizations for deploying ICOs.

Eagle-eyed watchers then read a little deeper into the fine print.

In a bold and potentially unprecedented move buried in the 69th paragraph of the lawsuit, the SEC today asserted that it had the right to sue Balina not only because his case involves transactions made in the United States, but also because that, essentially, all Ethereum network is under the jurisdiction of the US government.

In his complaint, the regulator noted that ETH sent to Balina is “validated by a network of nodes on the Ethereum blockchain, which are clustered more densely in the United States than in any other country.” The SEC then concludes: “As a result, these transactions took place in the United States.”

The SEC seems to suggest that because more Ethereum validating nodes are currently operating in the US than in any other country, everything Ethereum transactions around the world should be considered US-origin. Currently, 45.85% of all Ethereum nodes operate from the United States, according to Etherscan. The second highest node density is found in Germany, with only 19%, in comparison.

“To say that it allows [the SEC] to characterize doing business on the Ethereum blockchain, like doing business on an American stock exchange,” said Brian Fyre, a law professor at the University of Kentucky. Decrypt. “Which, from their regulatory point of view, is practical. It makes things so much simpler.

If the SEC succeeded in classifying activity on Ethereum as similar to that of a In the US exchange, this would amount to the regulator claiming jurisdiction over all activity on the seemingly decentralized Ethereum network. Such a development would constitute a major escalation in the SEC’s role in overseeing both Ethereum, in particular – where the vast majority of NFT and DeFi activity takes place – and crypto as a whole.

Fyre noted that the language of today’s complaint carries no legal weight, and due to the nature of the SEC’s lawsuit against Balina, the court in this case is unlikely to rule on this. specific question. But that doesn’t mean the statement has no meaning.

“I think maybe they’re trying to push their vision of what Ethereum is and how it works in the forensic ecosystem,” Fyre said. Decrypt. “It’s the SEC saying, ‘This whole set of financial activities is within the scope of what we regulate, and therefore, we’re going to regulate everything. “”

Fyre considers such a claim to jurisdiction over the entire Ethereum ecosystem to be unprecedented.

“This is the first time I’ve seen the SEC really explain how they understand how the Ethereum ecosystem works and why they think it falls within the scope of what the SEC regulates,” he said. declared.

Last week, within hours of Ethereum successful merger to a proof-of-stake consensus mechanism, the SEC Chairman Gary Gensler implies that the transition could bring the network closer to the government’s definition of security.

Following testimony before the Senate Banking Committee, Gensler offered his thoughts on how “staking” (i.e., pledging assets on a cryptonet in exchange for rewards liabilities) could be interpreted as an indication that an asset qualifies as a security under the so-called Howey. Test, although it did not address any specific cryptocurrency or network by name.

Fyre thinks the closeness of this statement to today’s is no accident.

“[Today’s language] seems perfectly consistent with what Gensler meant in his statement […] that the SEC considers all of this to be securities and therefore will make regulatory decisions regarding the entire ecosystem,” Fyre said.

Under Gensler, the SEC has yet to take an official position on Ethereum, despite leadership within the Commission under the previous administration suggesting that Ethereum was “sufficiently decentralized” and therefore not a security. But if the SEC were to ever assert that Ethereum was an unregistered security, Fyre doubts the courts would argue against it.

“I can see the judges absolutely accepting this, of course: Ethereum is basically located in the United States, in that it runs on a bunch of computers, and a bunch of those computers are in the United States,” said Fyre. “These are events that are happening in the United States. No problem.”

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