Earlier this week, the Securities and Exchange Commission (SEC) buried a very broad and very large jurisdictional claim 69 paragraphs down in a lawsuit over a 2018 initial coin offering (ICO) it claimed was an unregistered securities offering.
The case concerns an ICO for SPRK tokens issued by the Sparkster blockchain project. It claimed a promoter, Ian Balina, organized a pool of about 50 investors in illegal securities. It demands that Balina spit out any funds earned and pay an unspecified fine.
The allegation is not groundbreaking — the SEC has filed and settled a slew of these lawsuits, settled millions of dollars in fines and, not coincidentally, effectively quashed ICOs as a means of funding blockchain development.
The assertion of US jurisdiction by the SEC is groundbreaking.
Continue reading: Lawsuit proposes US jurisdiction over Ethereum
It gives the securities regulator control of transactions on Ethereum — by far the largest blockchain hosting various cryptocurrency projects — and by implication many, if not most, other blockchains.
And that logic could apply to any other agency.
That’s because of the reasoning. In paragraph 69, the SEC argued that by sending Balina’s pooled ether tokens, US-based investors had “irrevocably committed them to the transaction.”
So far, so good. But what followed has ramifications well beyond this case and possibly beyond securities law.
“At that point, their ETH contributions were validated by a network of nodes on the Ethereum blockchain, which are more densely clustered in the United States than in any other country,” the SEC attorneys said in the lawsuit. “As a result, these transactions took place in the United States.”
The SEC appears to not only effectively claim jurisdiction over every transaction on Ethereum (and its new incarnation, Ethereum 2.0), which ranks second in market capitalization after Bitcoin with $158 billion worth of ETH in circulation, but over every one Crypto blockchain in which most of the nodes — the servers that hold a full copy of the blockchain and validate new transactions — are located in the United States
That’s quite a number of them.
But the precedent could give any government agency jurisdiction over every transaction on such a blockchain — including law enforcement. And such a claim would not necessarily be limited to the US government.
That would be an interesting development for a technology whose proponents claim that its distributed nature — anyone can set up an Ethereum node anywhere in the world — effectively puts it outside the control of any single government.
See also: Ethereum 2.0 will not be faster, said Vitalik Buterin. But it will still scale massively
And while this isn’t necessarily enough to actively control a blockchain, the problem in the crypto community is severe enough that a recent Twitter poll of Ethereum token holders asked whether node validators that support censorship requirements like US -To comply with sanctions, their Ether tokens should have been “burned” – destroyed – the primary creator of the Ethereum BlockchainVitalik Buterin voted yes.
fwiw I voted X in your poll above
— vitalik.eth (@VitalikButerin) August 15, 2022
Much of that claim would be strengthened if a court upheld it, which could happen in the Balina case, since all other parties to the ICO, including Sparkster, have already reached settlements with the SEC.
But Balina said on Twitter on September 19: “I’m looking forward to bringing this fight to the public. This frivolous SEC indictment sets a bad precedent for the whole thing crypto industry … turned down the settlement so they have to prove themselves.”
Excited to make this fight public.
This frivolous SEC indictment sets a bad precedent for the entire crypto industry.
If investing in a private sale at a discount is a crime, the entire crypto VC space is in trouble.
Declined to settle, so they have to prove themselves. 💯 pic.twitter.com/lVaqnnsLgT
— Ian Balina (@DiaryofaMadeMan) September 19, 2022
However, other ICO token issuers have made similar promises and eventually backed down due to the cost. The exception is Ripple, which is currently fighting a lawsuit in court over illegal securities sales. However, due to the nature of the blockchain — technically a distributed ledger — itself, this is slightly different.
Continue reading: Ripple lawyer slams SEC push to regulate crypto
Behind all of this is the SEC’s campaign to designate almost every cryptocurrency except Bitcoin as a security under its jurisdiction. Others, notably the Commodity Futures Trading Commission (CFTC), have said that ether is not a security.
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