SEC: all Ethereum transactions under US purview

In a civil complaint against crypto influencer Ian Balina, the regulator argued that all ETH transactions should be seen as taking place in the country since 43% of validator nodes operate in the US.

SEC Chair Gary Gensler. Image: SEC.
SEC Chair Gary Gensler. Image: SEC

Less than a week after the Merge, SEC appears to be gearing up for a closer look at Ethereum 2.0 and proof-of-stake. According to the Commission, the entire network falls under the US government jurisdiction, as validator nodes “are clustered more densely in the United States than in any other country.” Such a bold claim sets a dangerous precedent for other cryptocurrencies as well, experts warn.

In a federal complaint filed on Monday, SEC alleges that crypto researcher and YouTuber Ian Balina violated securities regulations when he conducted an unregistered ICO of Sparkster's SPRK tokens back in 2018. Moreover, Balina failed to disclose his financial interest in promoting (“shilling” in crypto-speak) the token sale on his social media, the Commission claims.

Such a lawsuit wouldn’t generate so much media buzz — after all, SEC has been consequently suing individuals and organizations for unregistered ICOs for years — if it wasn’t for one detail: the suit makes a point of the fact that nearly half of all Ethereum nodes are located in the US. Hence, in SEC's opinion, all transactions sent to the influencer were made in the United States.

"ETH contributions were 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 complaint reads. "As a result, those transactions took place in the United States."

According to Ethernodes, 42.92% of all Ethereum nodes currently operate from the United States. Germany and France are second and third, with 11.73% and 4.61% node density respectively.

If the complaint were to lead to the classification of Ethereum as a platform similar to the American securities exchange, it would have profound implications for the entire industry, since the Ethereum blockchain hosts the majority of decentralized finance within the crypto ecosystem and most of the smart contract applications.

Meanwhile, last Thursday SEC Chair Gary Gensler signaled that Ethereum’s transition to proof-of-stake consensus may result in ETH being considered a security. While he was careful to avoid mentioning any specific coin, his words nevertheless rattled the investors’ confidence in the world’s second-largest cryptocurrency — since September 15, ETH price has fallen by 17%.

Speaking of Ethereum's staking rewards, Gensler noted that “from the coin’s perspective, that’s another indicia that under the Howey Test, the investing public is anticipating profits based on the efforts of others,” the Wall Street Journal reported.

However, Aaron Lane, an Australian lawyer and senior research fellow at the RMIT Blockchain Innovation Hub, believes that now there is no reason to panic since the distribution of nodes is largely irrelevant to Balina’s case.

“The fact that we’ve got a U.S. based plaintiff, a U.S. based defendant and transactions flowing from the U.S. is what is most relevant here. It doesn’t matter whether the payment was done on Ethereum, Mastercard or any payment network for that matter,” Lane told CoinTelegraph. “Any concern about legal precedent at this stage is premature,” he added.

Meanwhile, Balina announced on Twitter that he was “excited to take this fight public” and vowed to fight “frivolous charges” in the US Supreme Court.

“This frivolous SEC charge sets a bad precedent for the entire crypto industry. If investing in a private sale with a discount is a crime, the entire crypto VC space is in trouble,” he added. “Turned down settlement so they have to prove themselves.”