- The SEC is suing crypto YouTuber Ian Balina for doing undisclosed promotions of an Ethereum-based ICO-era crypto project, Sparkster.
- In its filing, the SEC said that Ethereum transactions should be considered to have occurred in the United States as there are more nodes in the United States than in any other country.
- The SEC has been widely criticized for its regulatory approach towards cryptocurrencies.
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New judicial documents from the Securities and Exchange Commission show that the regulator argues that since there are more Ethereum nodes in the United States than in any other country, Ethereum transactions should be regarded as “occurred” in the United States.
Ian Balina accused of undisclosed promotion
The Securities and Exchange Commission (SEC) filed a lawsuit today against crypto YouTuber Ian Balina for failing to disclose the compensation he received for promoting Sparkster and its token, SPRK. The SEC is also charging Balina for failing to register with the regulator before selling some of its SPRK tokens in its Telegram investment pool.
Sparkster held its initial coin offering (ICO) for SPRK between April and July 2018. Built on Ethereum, Sparkster was launched as a decentralized cloud network; the project has yet to deliver a product and was addressed with a class action (which Balina joined). According to the SEC filing, the company (based in the Cayman Islands) is guilty of raising more than $ 30 million from investors in the United States and abroad by selling them unregistered securities.
But SEC lawyers made the unprecedented claim in their court filing that Ethereum transactions should be regarded as coming from the United States, despite the decentralized nature of the blockchain.
“At that point, [SPRK investors’] ETH contributions have been validated by a network of nodes on the Ethereum blockchain, which are more densely clustered in the United States than in any other country. As a result, these transactions took place in the United States “.
According to ethernodes.org, Ethereum is currently operated by over 7,771 nodes. 42.33% of them are based in the United States, 11.60% in Germany, 4.55% in Singapore and 4.54% in France, while the rest are distributed in 72 different countries.
The SEC and cryptocurrencies
While the US regulator has indicated that Bitcoin should be treated as a commodity and fall under the supervision of the Commodity Futures Trading Commission (CFTC), SEC Chairman Gary Gensler has repeatedly reiterated his belief that most crypto tokens they should be considered titles.
The SEC announced in July that it would bring nine lawsuits against nine different ICO-era crypto projects for the sale of unregistered securities; it is also reportedly now the regulatory agency to investigate major US cryptocurrency exchanges, including Coinbase and Binance, for listing these tokens. Gensler also has he has declared who saw “no difference” between cryptocurrency exchanges and securities exchanges. However, Gensler was ambiguous regarding his views on Ethereum. He has refused to clarify if he believes it is safe, although some past comments indicate that it may be.
Gensler’s tone has changed slightly over the past week. On September 15, Ethereum successfully switched from Proof-of-Work to Proof-of-Stake, which means the blockchain no longer uses cryptocurrency miners, but validators. Validators participate in the block production process with ETH staking and are rewarded for their work with multiple ETH tokens. Shortly after the update, Gensler he has declared that at least one feature of this consensus mechanism could lead the SEC to consider a project’s cryptocurrency a security. However, he did not name Ethereum specifically. Other Proof-of-Stake blockchains include Solana, Binance Smart Chain, and Avalanche.
The SEC’s ambiguous approach was heavy criticized by industry leaders. Coinbase asked the agency to develop a “viable regulatory framework” for cryptocurrency companies, and CFTC commissioner Caroline Pham criticized it for indulging in “regulation by enforcement.” Congressman Tom Emmer (R-MN) went so far as to do so call the “power-hungry” SEC, claiming it is “using the application to expand its jurisdiction.”
Information on cryptocurrencies‘pole
Due to its level of decentralization, Ethereum is widely seen as a stateless decentralized network. While it may be true that more Ethereum nodes operate in the US than in any other country in the world, US nodes still make up only 42.33% of the network, not even the majority of total nodes.
Even if they were the majority, it would still be difficult to argue that Ethereum transactions take place in the United States itself. This would mean that Bitcoin should fall under the supervision of the European Union, since most of its nodes currently are. located there? And what would be the threshold percentage of Ethereum nodes necessary for the blockchain to be considered outside the US jurisdiction? The SEC does not provide any details in its filing.
It is always possible that the SEC’s claims in the Balina case are simply the work of attorneys with a weak understanding of the mechanics of consent. But considering the agency’s previous tendencies to regulate through enforcement, it’s quite plausible that the SEC’s wording is intentional. This would mark a new step in the search for the agency for regulatory oversight of the crypto space. After all, claiming that Ethereum transactions take place in the US is only a short step away from saying Ethereum itself works in the US.Also, by covertly introducing this claim into a relatively small lawsuit against a YouTube influencer, the SEC may be looking to set a precedent. If the lawsuit goes in its favor, the agency may be able to recall the case if it attempts to claim jurisdiction over Ethereum at a later date. Not only could ETH be considered an unregistered security, but also most (if not all) ERC-20 tokens.
Disclosure: At the time of writing, the author of this piece owned BTC, ETH, and many other cryptocurrencies.