When the SEC (US Securities and Exchange Commission) filed a lawsuit on Monday (19) against crypto influencer Ian Balina for failing to register a cryptocurrency as a security before launching an initial coin offering (ICO) In 2018, everything seemed normal: the SEC has, for years, been filing civil actions against individuals and corporations for organizing unregistered ICOs.

But the most attentive eyes decided to dig deeper and study the lawsuit.

In a bold and potentially unprecedented move hidden in paragraph 69 of the lawsuit, the SEC claims it has the right to sue Balina not only because his case deals with transactions made in the United States, but also because, essentially, the Ethereum network as a whole comes under the jurisdiction of the US government.

In its complaint, the regulator noted that the ETH sent to Balina was “validated by a network of Nodes on the Ethereum blockchain, which is more densely clustered in the US than in any other country.” He concludes: “As a result, these transactions took place in the US.”

The SEC appears to be trying to propose that because Ethereum Validation Nodes currently operate more in the US than any other country, all Ethereum transactions globally should be considered to be of US origin. Currently, 45.85% of all Ethereum Nodes operate from the US, according to Etherscan. In comparison, the second highest density of nodes is in Germany, with just 19%.

“Saying that allows [à SEC] define that doing business on the Ethereum blockchain is the same as doing business on a US stock exchange,” Brian Fyre, a law professor at the University of Kentucky, told Decrypt. “Which, from a regulatory perspective, is convenient. It makes things a lot simpler.”

Ethereum surveillance

If the SEC manages to classify activity on Ethereum as being the same as on an American stock exchange, that would be tantamount to the regulatory body demanding jurisdiction over all activity on the Ethereum network — ostensibly decentralized. If that happens, we would see an escalation in the SEC’s role in overseeing both Ethereum specifically — where most NFTs and DeFi activities take place — and cryptocurrencies as a whole.

Fyre noted that the language used in today’s complaint has no legal weight and, given the nature of the SEC’s lawsuit against Balina, the court in this case is unlikely to consider this particular issue. But this does not mean that the declaration has no legal significance.

In Fyre’s view, they “are probably trying to understand what Ethereum is and how it works, within the judicial ecosystem.” “It’s the SEC saying, ‘This whole body of financial activity is within the scope of the things that we regulate and therefore we are going to control all of this.’”

He regards this claim to jurisdiction over the entire Ethereum ecosystem as unprecedented.

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

Keeping an eye on staking

Last week, hours after Ethereum’s successful merger into a proof-of-stake model, SEC Chairman Gary Gensler hinted that the transition could bring the Network closer to defining a security in the government’s eyes.

After testimony before the Senate Banking Committee, Gensler gave his opinion on how “staking” (i.e., placing assets on a cryptocurrency network in exchange for passive income) could be interpreted as an indication that an asset qualifies as a cryptocurrency. security, according to the so-called Howey Test, although he didn’t address any cryptocurrency or Network by name specifically.

For Fyre, the relationship between that statement and today’s is not a fluke.

“[A linguagem usada hoje] seems perfectly consistent with what Gensler was saying in his statement […] that the SEC sees all of these as securities and will therefore make regulatory decisions regarding the entire Ethereum ecosystem.”

According to Gensler, the SEC has yet to take an official position on Ethereum, despite previous administration leadership within the Commission having already suggested that Ethereum was “sufficiently decentralized” and therefore could not be interpreted as a security. But if the SEC ever claims that Ethereum was a type of unregistered security, Fyre doubts the courts will prevent that.

“I think the judges would accept that, of course: Ethereum is substantially located in the United States since it runs on a lot of computers, and a lot of those computers are in the United States,” Fyre said. “These transactions are actually happening in the United States. In fact.”

*Translated with permission from Decrypt.co.

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