When the SEC filed a federal lawsuit on Monday against crypto influencer Ian Balina for its inability to register a cryptocurrency as security before launching a 2018 Initial Coin Offering (ICO), everything seemed normal at first – the SEC has, For yearsfiled civil lawsuits against individuals and organizations for the unregistered launch ICO.
Eagle-eyed observers then read the fine print a little deeper.
In a bold and potentially unprecedented move buried in paragraph 69 of the lawsuit, the SEC today said it has the right to sue Balina not only because her case involves transactions made in the United States, but also because, essentially, the entire Ethereum network falls within the remit of the US government.
In his grievance, the regulator noted that the ETH sent to Balina was “validated by a network of nodes on the Ethereum blockchain, which are more densely clustered 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 suggest that, as more Ethereum validation nodes currently operate in the United States than in any other country, everything Ethereum transactions globally should be considered of American origin. Currently, 45.85% of all Ethereum nodes operate from the United States, according to Etherscan. The second largest node density is in Germany, with only 19% in comparison.
“To say empowering [the SEC] to characterize doing business on the Ethereum blockchain, like doing business on a US stock exchange, “University of Kentucky law professor Brian Fyre said. Decrypt. “Which, from their regulatory point of view, is convenient. It makes things much simpler ”.
Should the SEC successfully classify Ethereum business as similar to an stock exchange, would be tantamount to the regulatory body that claims jurisdiction over all activities 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 activities takes place and the encryption 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 affect this specific matter. But that doesn’t mean the statement has no meaning.
“I think they are trying to get their insight into what Ethereum is, and how it works, in the judicial ecosystem,” Fyre said. Decrypt. “It’s the SEC that says, ‘The whole body of financial activity falls under the scope of the things we regulate, and so we’re going to regulate everything.'”
Fyre considers such a full claim of jurisdiction over the entire Ethereum ecosystem to be unprecedented.
“This is the first time I’ve seen the SEC really explain how it understands how the Ethereum ecosystem works and why it thinks it’s within the scope of what the SEC regulates,” he said.
Last week, in the hours following that of Ethereum successful union to a proof-of-stake consensus mechanism, chairman of the SEC insinuated Gary Gensler that the transition could bring the network closer to defining security in the eyes of the government.
Following testimony before the Senate Banking Commission, Gensler expressed his opinion on how “staking” (i.e. pledging assets to a crypto network in exchange for passive rewards) can be interpreted as an indication that an asset qualifies as a security under the so-called Howey Test, although it has not addressed any specific cryptocurrency or network by name.
Fyre thinks the closeness of this statement to today’s is not accidental.
“[Today’s language] it seems perfectly consistent with what Gensler was arriving at in his statement […] that the SEC sees this as a guarantee and will therefore make regulatory decisions in relation to the entire ecosystem, ”Fyre said.
Rather than addressing a simple case, the SEC is trying to use it to set a precedent by claiming that ALL CRYPTO is under the jurisdiction of the SEC.
This is a totally unacceptable overrun that will have to be aggressively rejected.
Under Gensler, the SEC has not yet taken an official stance on Ethereum, despite leadership within the Commission under the previous administration suggesting that Ethereum was “sufficiently decentralized”And therefore not a title. But if the SEC were to ever claim that Ethereum is an unregistered stock, Fyre doubts the courts would stand in its way.
“I see the judges absolutely accept it, sure: Ethereum is basically in the United States, to the extent that it runs on a bunch of computers and a bunch of those computers are located in the US,” Fyre said. “These are events that occur in the United States. No problem.”
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