Key points to remember
- The SEC is suing crypto YouTuber Ian Balina for making undisclosed promotions of an Ethereum-based ICO-era crypto project, Sparkster.
- In its filing, the SEC claimed that Ethereum transactions should be considered to take place in the United States, as there are more nodes in the United States than in any other country.
- The SEC has been widely criticized for its regulatory approach to crypto.
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New court documents from the Securities and Exchange Commission show that the regulator claims that due to the fact that more Ethereum nodes are located in the United States than in any other country, Ethereum transactions should be considered to “take place” in the United States. United States.
Ian Balina charged over undisclosed promotion
The Securities and Exchange Commission (SEC) deposit a lawsuit today against crypto YouTuber Ian Balina for allegedly failing to disclose the compensation he received for promoting Sparkster and its token, SPRK. The SEC also accuses Balina of failing to register with the regulator before selling some of its own SPRK tokens in its Telegram investment pool.
Sparkster held its initial coin offering (ICO) for SPRK between April and July 2018. Built on Ethereum, Sparkster was spear as a decentralized cloud network; the project has yet to deliver a product and has been the subject of a class action lawsuit (which Balina has joined). According to the SEC filing, the company (based in the Cayman Islands) is guilty of raising more than $30 million from investors in the United States and abroad by selling them unregistered securities.
But SEC attorneys argued in their court filing that Ethereum transactions should be considered to originate in the United States, despite the blockchain’s decentralized nature.
“At the moment, [SPRK investors’] ETH contributions have been validated by a network of nodes on the Ethereum blockchain, which are clustered more densely in the United States than in any other country. Accordingly, these transactions took place in the United States.
According ethernodes.org, Ethereum is currently mined by over 7,771 nodes. 42.33% of them are based in the United States, 11.60% in Germany, 4.55% in Singapore and 4.54% in France, with the rest spread across 72 different countries.
The SEC and Crypto
While the US regulator has indicated that Bitcoin should be treated as a commodity and fall under the supervision of the Commodity Futures Trading Commission (CFTC), SEC Chairman Gary Gensler has repeatedly reiterated his belief that most cryptographic tokens should be considered securities.
The SEC announced in July that it was filing nine lawsuits against nine different ICO-era crypto projects for selling unregistered securities; the regulatory agency would also now be investigating major US crypto exchanges, including Coinbase and Binance, for listing these tokens. Gensler has also declared that he could see “no difference” between crypto exchanges and stock exchanges. However, Gensler has been ambiguous about his views on Ethereum. He has refuse to clarify if he thinks this is safe, although some past comments indicate that might be the case.
Gensler’s tone changed slightly last week. On September 15, Ethereum successfully transitioned from proof-of-work to proof-of-stake, which means that the blockchain no longer uses crypto-miners, but validators. Validators participate in the block production process by staking ETH and are rewarded for their work with more ETH tokens. Shortly after the update, Gensler declared that at least one feature of this consensus mechanism could cause the SEC to consider a project’s cryptocurrency as security. He did not, however, name Ethereum specifically. Other Proof-of-Stake blockchains include Solana, Binance Smart Chain, and Avalanche.
The SEC’s ambiguous approach was strongly critical by industry leaders. Coinbase has advocated for the agency to develop a “workable regulatory framework” for crypto companies and CFTC Commissioner Caroline Pham has criticized it for engaging in “regulation by enforcement.” Congressman Tom Emmer (R-MN) went so far as call the “power-hungry” SEC, saying it “uses law enforcement to expand its jurisdiction.”
Due to its level of decentralization, Ethereum is widely considered a decentralized stateless network. While it is true that more Ethereum nodes are operating in the US than any other country in the world, US nodes still only make up 42.33% of the network, not even the majority of the total node count.
Even if they were in the majority, it would still be a stretch to claim that Ethereum transactions take place in the United States itself. Would this mean that Bitcoin should fall under the tutelage of the European Union, since most of its nodes are currently located the? And what would be the threshold percentage of Ethereum nodes needed for the blockchain to be considered outside US jurisdiction? The SEC gives no details in its filing.
It’s still possible that the SEC’s claims in the Balina lawsuit are simply the work of lawyers with little understanding of the mechanics of consensus. But given the agency’s past tendencies to regulate through law enforcement, it’s entirely plausible that the SEC’s wording was intentional. This would mark another step in the agency’s quest for regulatory oversight of the crypto space. After all, saying that Ethereum transactions take place in the United States is only one step away from saying that Ethereum itself operates in the United States. Moreover, by slipping this claim into a relatively small lawsuit against a YouTube influencer, the SEC may be trying to set a precedent. If the lawsuit turns out in its favor, the agency may be able to revisit the case if it attempts to claim jurisdiction over Ethereum at a later date. Not only could ETH be considered unregistered security, but most (if not all) ERC-20 tokens as well.
Disclosure: At the time of writing this article, the author of this article owned BTC, ETH, and several other cryptocurrencies.