The Securities and Exchange Commission believes that Etherium operates in US jurisdiction. Why?
The day before, the US Securities and Exchange Commission (SEC) filed a lawsuit against well-known crypto-enthusiast Ian Balina. He is accused of evading registration of the ICO tokens of his own project Sparkster, which was held back in 2018. This news in itself is not that curious, as the SEC files crypto-related lawsuits often enough. The context of paragraph 69 of the documents filed by the regulator is interesting. We recount the situation in more detail.
In the mentioned part, SEC officials said that the agency has the right to sue Balina not only because his case involves transactions made in the US. It is also relevant because essentially the entire Etherium network, which became the platform for the Sparkster project, is allegedly "under the jurisdiction" of the government.
Such an approach creates certain risks in further regulation of the coin industry. Analysts have already commented on the situation.
Who owns Etherium?
The SEC’s statement drew criticism from the cryptocommunity not only for its context, but also for the absurdity of the regulator’s arguments of entitlement. So why is Etherium operating in US jurisdiction? Here’s how it’s explained in the lawsuit documents.
The ETH sent to Balina was validated by a network of nodes on the Etherium blockchain, which are more densely populated in the US than in any other country. That is, these transactions were conducted in the United States.
What the Commission’s officials mean is that the dominance of the US in the total number of nodes in the Etherium network supposedly gives the government of the country the right to assume that all transactions in ETH are conducted in America. The US does host more than 46 per cent of all Etherium nodes. As of today, 4,365 of the 9,327 nodes are located in this country.
The bottom line is that these nodes essentially stand for the number of active copies of the blockchain, in addition to being involved in the process of confirming transactions and ensuring that the network is up and running. However, the blockchain will work fine without US nodes, although it will become less decentralised. In any case, it is strange to talk about state ownership: networks exist autonomously, and they can be accessed from anywhere in the world.
Top 10 countries by number of nodes in the Etherium network
The distribution of the Etherium network’s nodes is shown more clearly in the map below.
Map of the distribution of Etherium network nodes
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The legitimacy of the regulator’s statements was commented on by University of Kentucky law professor Brian Fire in an interview with Decrypt.
Said allows the SEC to characterize working with the Ethereum blockchain as doing business on a US securities exchange, which from the regulator’s point of view is very convenient. It makes things a lot easier for him.
If the US Securities and Exchange Commission does “legalise” interaction with the Etherium blockchain, it would mean that the regulator is claiming control over the entire altcoin ecosystem, meaning DeFi and NFT too. And this is already a multi-billion dollar sphere with its own unique features, to which traditional market regulation methods are unlikely to apply.
So far, it’s not that bad: Fyre noted that the wording in the lawsuit against Balina has no legal weight, meaning we can’t expect any serious action in this direction from the regulator. But even an unsupported statement is already cause for concern. The expert continues.
I think they may be trying to communicate their vision of what Ethereum is and how it works to the court system. This is the first time I’ve seen the SEC really detail their understanding of how the Ethereum ecosystem works.
Recall that last week, shortly after the successful transition of the Etherium network to the new Proof-of-Stake consensus mechanism, SEC Chairman Gary Gensler said that PoS-based cryptocurrencies could well be considered securities and would therefore fall under the Commission’s purview. Fyre believes that this statement and the excerpt from the lawsuit against Balina are no coincidence.
The wording seems to be entirely consistent with what Gensler was trying to say in his statement, that the SEC views all this [crypto on PoS – editor’s note] as securities and is therefore going to make decisions about the entire ecosystem.
SEC chief Gary Gensler
Renowned crypto-enthusiast Adam Cochran also left a comment on the news.
Instead of taking up another court case, the SEC is trying to use it to set a precedent by claiming that all crypto is under the Commission’s jurisdiction. This is a totally unacceptable move that will have to be actively fought against.
We believe that such statements by the regulator are really unacceptable and have no basis whatsoever. The proof of this is very simple: even if all of the Etherium nodes in the US were to shut down, the cryptocurrency network would still work. However, it will still be decentralised, meaning that ETH, or any other crypto on a public blockchain, cannot belong to the jurisdiction of any country in the world. One would like to believe that the regulator will realise its mistake and drop such wording in the future.
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