After the Merge, the SEC threatens to regulate the Ethereum network

Esteban Suárez

In a civil suit the SEC suggested that it believes the US government has jurisdiction over Ethereum transactions.

When the SEC filed a federal lawsuit Monday against crypto influencer Ian Balina for failing to register a cryptocurrency as a security before launching an initial offering ( ICO) in the year 2018, at first everything seemed ordinary as the SEC for years has filed civil lawsuits against individuals and organizations for implementing unregistered ICO, in an unprecedented move in the paragraph 69 of the same, the SEC affirmed that it had the right to sue Balina not only because her case refers to transactions carried out in the United States, but also because, essentially, the entire Ethereum network is under the supervision 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 are clustered more densely in the United States than in any other country.

The SEC then concludes:

As a result, those transactions took place in the United States.

The SEC seems to be suggesting that, because more Ethereum validation nodes currently operate in the United States than in any other country, all Ethereum transactions globally should be considered US-origin. Currently, 45.85% of all Ethereum nodes operate from the United States, according to Etherscan. The second highest node density is in Germany, at just 19%, by comparison.

Saying that allows [the SEC] to characterize doing business on the Ethereum blockchain as doing business on a US stock exchange," the University of California law professor told Decrypt Kentucky, Brian Fyre.

Which, from his regulatory perspective, is convenient. It makes things much simpler.

If the SEC were to successfully classify activity on Ethereum as similar to that on a US stock exchange, it would be the equivalent of the regulator claiming jurisdiction over all activity on the apparently decentralized Ethereum network. Such a development would constitute a major escalation in the SEC’s role in overseeing both Ethereum specifically, where the vast majority of NFT and DeFi activity takes place, and cryptocurrencies as a whole.

Fyre noted that the language in today’s complaint does not carry legal weight and, due to the nature of the SEC’s lawsuit against Balina, it is unlikely that the court in this case will weigh in on this specific issue. But that doesn’t mean the statement is unimportant.

I think they may be trying to get their take on what Ethereum is and how it works, in the judicial ecosystem, It’s the SEC saying, ‘This whole body of financial activity is within the scope of what we regulate and therefore We are going to regulate everything.

Last week, in the hours after the successful Ethereum merger, SEC Chairman Gary Gensler hinted that the transition could bring the network closer to the definition of security in the eyes of the government.

Following testimony before the Senate Banking Committee, Gensler gave his opinion on how “reframe” (i.e., pledging assets to a crypto network in exchange for passive rewards) could be interpreted as indicating that an asset qualifies as a **security. ** under the so-called Howey Test, although he did not refer to any specific cryptocurrency or network by name.

[Today’s language] seems perfectly consistent with what Gensler was saying in his statement […] that the SEC sees all of this as securities and therefore will make regulatory decisions in relation to the entire ecosystem. Fyre said.

After the Ethereum Merge, it has been pointed out that the decentralization of the network ceased to be such to a great extent and therefore the existing danger that the network could be regulated in some countries as the SEC threatens.