In a lawsuit against cryptocurrency Youtuber Ian Balina, Securities and Exchange Commission (SEC) lawyers claimed that all Ethereum (ETH) transactions should be considered as taking place in the United States, despite the blockchain's decentralized nature.
“At that point, (SPRK investors’) ETH contributions were validated by a network of nodes on the Ethereum (ETH) blockchain tech, which are clustered more densely in the United States than in any other country,” the lawyers said. “Consequently, those transactions took place in the United States.”
Ethereum is a decentralized and, therefore, stateless network. Although there are more Ethereum nodes in the United States than in other countries, the country only hosts 42.33 percent of the network.
According to ethernodes.org, over 7,771 nodes are currently running Ethereum (ETH). 11.6 percent is in Germany, 4.55 percent in Singapore, and 4.54 percent in France, with the rest of them being spread across 72 countries.
Suing Balina for promoting Sparkster
The claim came on September 19 in a lawsuit alleging that Balina had failed to disclose the compensation he had received for promoting Sparkster and its crypto token, SPRK.
The SEC also sued the Youtuber for failing to register with the authorities before selling some of his SPRK crypto tokens in his Telegram investing pool.
Sparkster held an initial coin offering (ICO) for SPRK tokens between the middle of April and the middle of July 2018. Sparkster, built on Ethereum (ETH), is marketed as a decentralized cloud network.
However, the project has yet to deliver a product. The SEC said that the Cayman Islands-based company had raised more than $30 million from investors in the US and abroad by selling unregistered securities.
2/2— Adam Cochran (adamscochran.eth) (@adamscochran) September 19, 2022
Rather than take on a simple case, the SEC is trying to use this to set precedent claiming that ALL OF CRYPTO is under SEC's jurisdiction.
This is an absolutely unacceptable overstep that will have to be pushed back against aggressively.
SEC and Crypto
SEC chair Gary Gensler has repeatedly said that most crypto tokens should be considered securities. United States authorities, on other hand, said that bitcoin should be treated as a commodity and regulated under the jurisdiction of the Commodity Futures Trading Commission (CFTC).
In July, the SEC announced nine lawsuits against nine different ICO-era cryptocurrency projects for selling unregistered securities. The regulatory authority is also reportedly investigating top US cryptocurrency exchanges, including Coinbase Crypto and Binance Crypto, for listing these crypto tokens.
Gensler also said that he saw “no difference” between securities and cryptocurrency exchanges. Meanwhile, he was ambiguous about his views on Ethereum, refusing to say whether he considered it a security.
Ethereum has successfully transitioned away from using crypto miners to using validators. Validators participate in the block production process by staking Ethereum and are rewarded with more ETH crypto tokens for their work.
Ethereum recently switched from being a proof-of-work currency to a proof-of-stake one in a process called the Merge. Gensler hinted that at least one aspect of the mechanism could cause the SEC to consider the Ethereum's digital currency a security.
On September 16, he said that proof-of-stakes digital assets could pass the Howey test and thus be considered a security.
“That’s another indicia that under the Howey test," Gensler told the Wall Street Journal. "The investing public is anticipating profits based on the efforts of others.”
Industry leaders have often criticized the SEC’s ambiguous approach. Congressman Tom Emmer (R-MN) earlier accused the SEC of abusing its authority by using enforcement to expand its jurisdiction.