A lawsuit recently filed by the Securities and Exchange Commission (SEC) charges crypto influencer Ian Balina for allegedly failing to disclose payment for endorsing Sparkster and its SPRK ICO. The case has ramifications on Ethereum as a whole, due to the SEC’s stance on the location of Ethereum nodes.
In the Balina filing, the SEC signaled that because Ethereum nodes are densely concentrated inside the U.S., therefore those transactions, in fact, took place in the U.S. and are subject to U.S. law; stating:
“The U.S.-based investors in Balina’s pool irrevocably committed to the transaction when, from within the United States, they sent their ETH contributions to Balina’s pool. At that point, their 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.
Ethereum is used worldwide. According to Etherscan, roughly 46% of all Ethereum nodes are in the United States, with Germany accounting for nearly 19%. As of September 15, 2022, anyone in and out of the U.S. can set up a node Ethereum network by running client software and staking a set amount of ETH.
Impact on crypto economy
The SEC has already faced criticism for its approach to cryptocurrency regulation. Messari Research Founder Ryan Selkis calls it “a failed institution whose relevance ended with the internet, and that’s become a national liability for our competitiveness in tech & finance.”
In the advent of Ethereum’s hard-fork into a Proof-of-Stake consensus algorithm to be more energy efficient, SEC Chair Gary Gensler indicated staking ETH into the Ethereum ecosystem for rewards may be subject to securities regulations.
Decrypt reporter Sander Lutz mentions that should the SEC were to effectively assert control over all activity on the decentralized Ethereum network, it would also hypothetically lay claim over the 30 billion dollar DeFi industry on the network.
University of Kentucky law professor Brian Fyre stated that “It’s the SEC saying, ‘This entire body of financial activity is within the scope of the stuff that we regulate, and therefore we’re going to regulate all of it.'”
Fyre later added that it is unclear whether such a claim will be upheld in court or whether any legal precedent is at stake. However, Twitter users have criticized the SEC’s choice of words as an overstep of jurisdiction, analyzing that the SEC is trying to set a legal precedent to regulate all crypto.
A spokesperson for the SEC has stated that the SEC has no comment at this time.