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 on Monday against crypto influencer Ian Balina for failing to register a cryptocurrency as a security before launching an initial coin offering (ICO) in 2018, it all seemed run of the mill at first: the SEC has, during yearsfiled civil lawsuits against individuals and organizations for deploying ICO.

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

In a bold and potentially unprecedented move buried in paragraph 69 of the lawsuit, the SEC today asserted that it had the right to sue Balina not only because her case involves transactions conducted in the United States, but also because essentially everything the Ethereal network falls under the purview of the US government.

In its complain, the regulator noted that the ETH sent to Balina was “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, those transactions took place in the United States.”

The SEC appears to be suggesting that, because more Ethereum validating nodes currently operate in the United States than in any other country, everybody Ethereum transactions globally 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 in Germany, at just 19%, by comparison.

“To say that it allows [the SEC] to characterize doing business on the Ethereum blockchain as doing business on a US stock exchange,” said Brian Fyre, a law professor at the University of Kentucky. decipher. “Which, from their regulatory perspective, is convenient. It makes things so much simpler.”

If the SEC were to successfully classify activity on Ethereum as similar to that of a US stock exchange, would amount to the regulatory body 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 Ethereum, specifically, where the vast majority of NFT and DeFi activity takes place, and cryptography as a whole.

Fyre noted that the language in today’s complaint does not carry legal weight and, due to the nature of the SEC’s lawsuit against Balina, it is unlikely that the court in this case will weigh in on this specific issue. But that doesn’t mean the statement is unimportant.

“I think they may be trying to get their insight into what Ethereum is and how it works, in the court ecosystem,” Fyre said. decipher. “It’s the SEC saying, ‘This whole body of financial activity is within the scope of what we regulate and therefore we’re going to regulate it all.'”

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

“This is the first time I’ve seen the SEC really expose how it understands the Ethereum ecosystem to work and why it thinks it falls within the scope of what the SEC regulates,” he said.

Last week, in the hours after Ethereum successful merger to a proof-of-stake consensus mechanism, SEC Chairman Gary Gensler implicated that the transition could bring the network closer to the definition of security in the eyes of the government.

Following testimony before the Senate Banking Committee, Gensler gave his opinion on how “participating” (i.e., pledging assets to a crypto network in exchange for passive rewards) could be interpreted as indicating that an asset qualifies as a security under the called Howey Test, although he did not refer to any specific cryptocurrency or network by name.

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

“[Today’s language] seems perfectly consistent with what Gensler was saying in his statement […] that the SEC sees all of this as securities and therefore is 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, even though leadership within the Commission under the previous administration suggested that Ethereum was “sufficiently decentralized” and therefore not a security. But if the SEC were ever to claim that Ethereum was an unregistered security, Fyre doubts the courts would stand in its way.

“I can see the judges absolutely accepting that, for sure: Ethereum is substantially located in the United States, insofar as it runs on a lot of computers, and a lot of those computers are in the United States,” Fyre said. “Those are events that occur in the United States. No problem.”

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