The Securities and Exchange Commission (SEC) has made the startling assertion that Ethereum transactions take place in the country because Ethereum nodes are “clustered more densely” in the United States than in any other country.
The SEC’s argument can be found in a lawsuit filed on September 19 against cryptocurrency researcher and YouTuber Ian Balina. The lawsuit asserted that, among other things, Balina ran an unauthorised sale of Sparkster (SPRK) tokens in 2018 when he started an investing club on Telegram.
According to the SEC, a network of Ethereum blockchain nodes, “which are clustered more densely in the United States than in any other country,” verified the contributions of ETH at the time when U.S.-based investors were members of Balina’s investment pool. As per the SEC, those transactions took place in the United States.
The validity of such a claim in court and the existence of any guiding legal precedent is currently unknown. However, according to Ethernodes, 42.56% of the 7807 Ethereum nodes are now located in the United States.
The SEC has already come under fire for its regulatory approach to cryptocurrencies, which some have dubbed “regulation by enforcement.” Gary Gensler, the chairman of the SEC, recently made a suggestion that shortly after Ethereum switched to proof-of-stake on September 15, Ether-based staking would also be subject to U.S. securities regulations.
The SEC would effectively assert control over all activity on the allegedly decentralised Ethereum network if it were to correctly designate activities on Ethereum as comparable to that on an American securities market. Such a move would represent a significant expansion of the SEC’s role in regulating both cryptocurrencies generally and Ethereum in particular—where the vast majority of NFT and DeFi activity occurs.
Despite leadership within the Commission during the previous administration indicating that Ethereum was “sufficiently decentralised” and hence not a security, the SEC has yet to adopt a formal position on the cryptocurrency under Gensler. But the courts are unlikely to get involved if the SEC ever asserts that Ethereum is unregistered security.