As you likely know, the SEC recently filed suit against Ian Balina for his involvement in an unregistered 2018 ICO. In this case, he failed to disclose that he was compensated with SPRK tokens for promoting the ICO. Further, the SEC is suing Ian Ballina for reselling Sparkster’s SPRK tokens and his failure to file paperwork. This is somewhat common.
That’s a story. But it’s not THE story.
Hidden deep in the filing was a chilling comment on the SEC’s assumed jurisdiction over Ethereum.
In the 69th paragraph of the filing, the SEC snuck in this comment: “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. As a result, those transactions took place in the United States.” The SEC is saying that, because a majority of nodes are U.S. based, the SEC has jurisdiction over the entire Ethereum network.
Etherscan shows that 46% of nodes operate in the U.S., 19% in Germany, and 5% in Russia, with the rest being scattered around the world. So yes, the U.S. holds a substantial amount of nodes. But does that mean that the SEC now has the right to regulate the Ethereum network?
First, it’s important to note that the SEC’s comment in the 69th paragraph holds no legal weight, and the court won’t be interested in this part of this case. But this does offer a glimpse into the way the SEC views the network.
There’s no proof that the beliefs of Gensler or any of the other commissioners fully align with this statement, but its inclusion in the filing was deliberate. Identifying transactions on the Ethereum network as the exchange of U.S. securities would render the Ethereum mission effectively useless in America. I imagine there will be incredible pushback if the SEC ever chooses to take this route.
The SEC can regulate ICOs at will, but to come after a decentralized blockchain that powers thousands of digital applications around the globe is insane. ETH is simply the native utility token used to participate in the ecosystem. I do not believe that it qualifies as a security by means of the Howey Test. Either way, this filing is not a statement on the token’s status as a security, but rather on the operation of the entire network.
Just last week, Gary Gensler revealed to the WSJ that proof-of-stake currencies could be securities. He is obviously angling towards complete control of everything not named Bitcoin.
The Balina filing is scary, but far from definitive. The SEC can retract their statements from the past, so it’s important for investors and advocates to stay on top of the SEC’s views as code and opinions change.
As always, more to come.