The SEC claims that all of Ethereum falls under US jurisdiction

The SEC claims that all of Ethereum falls under US jurisdiction

The SEC claims that all of Ethereum falls under US jurisdiction

When the SEC filed a federal lawsuit Monday against crypto flu Ian Balina for his failure to register a cryptocurrency as a security before launching an initial coin offering (ICO) in 2018, everything seemed run-of-the-mill at first: the SEC has, for yearsfiled civil suits against individuals and organizations for rolling out unregistered ICOs.

Eagle-eyed observers then read a little further into the fine print.

In a bold and potentially unprecedented move buried in the lawsuit’s 69th paragraph, the SEC argued today that it had standing to sue Balina not only because his case involves transactions made in the United States, but also because, essentially, the entire Ethereum network falls under the purview of the US government.

In his complaint, the regulator noted that the ETH sent to Balina was “validated by a network of nodes on the Ethereum blockchain, which is clustered more closely 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 appears to suggest that, because more of Ethereum’s validating nodes currently operate in the United States than in any other country, everyone Ethereum transactions globally should be considered of US origin. Currently, 45.85% of all Ethereum nodes operate from the United States, according to Etherscan. The second highest density of nodes is in Germany, with only 19%, by comparison.

“Saying it enables [the SEC] to characterize doing business on the Ethereum blockchain as doing business on a U.S. stock exchange, said University of Kentucky law professor Brian Fyre. Decrypt. “Which from their regulatory perspective is convenient. It makes things so much easier.”

If the SEC were to succeed in classifying activity on Ethereum as equivalent to that on a American Stock Exchange, it would amount to the regulatory body claiming jurisdiction over all activity on the apparently decentralized Ethereum network. Such a development would constitute a major escalation in the SEC’s role in overseeing both Ethereum, specifically – where the vast majority of NFT and DeFi activity takes place – and crypto as a whole.

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

“I think they might be trying to get their vision of what Ethereum is, and how it works, into the legal ecosystem,” Fyre said Decrypt. “It’s the SEC saying, ‘All this financial activity is within the scope of the things we regulate, and so we’re going to regulate everything.'”

Fyre considers such a full-fledged claim to jurisdiction over the entire Ethereum ecosystem unprecedented.

“It’s the first time I’ve seen the SEC really lay out how it understands the Ethereum ecosystem to work and why it believes it falls within the scope of what the SEC regulates,” he said.

Last week, in the hours after Ethereum’s successful merger to a proof-of-stake consensus mechanism, the SEC Chair Gary Gensler implied that the transition may bring the network closer to the definition of a security in the eyes of the state.

After testifying before the Senate Banking Committee, Gensler offered his view on how “staking” (i.e. pledging assets to a crypto network in exchange for passive rewards) could be interpreted as an indication that an asset qualifies as a security under the so-called Howey Test, even though he did not address any specific cryptocurrency or network by name.

Fyre believes that the statement’s proximity to today’s is no accident.

“[Today’s language] seems completely consistent with what Gensler meant in his statement […] that the SEC sees all of this as securities and is therefore going to make regulatory decisions in relation to the entire ecosystem, Fyre said.

Under Gensler, the SEC has yet to take an official stance on Ethereum, despite leadership at the commission under the previous administration suggesting that Ethereum was “sufficiently decentralized” and therefore not a security. But if the SEC were to ever claim that Ethereum was an unregistered security, Fyre doubts the courts would stand in the way.

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

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