Following on from last week's news of the Securities and Exchange Commission's (SEC) lawsuit against crypto influencer Ian Ballina for an alleged failure to register a cryptocurrency as a security before a 2018 ICO, crypto commentators have identified a "supermassive black hole" buried in the complaint at paragraph 69, which reads:
The US-based investors in Balina's pool irrevocably committed to the transaction when, from within the United States, they sent their ETH contributions to Balina's pool. 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.
This implies a ground for jurisdiction arising from a certain number of Ethereum's validating nodes operating in the US, which by extension would make all Ethereum transactions globally inherently American by origin and have significant impacts on what law would apply to transactions on Ethereum, including almost all DeFi protocols.
It is estimated that approximately 46% of all Ethereum nodes operate from within the US. Legal commentator Professor Brian Fyre in the University of Kentucky Law Faculty said:
Saying that enables [the SEC] to characterize doing business on the Ethereum blockchain, as doing business on a US securities exchange... [w]hich, from their regulatory perspective, is convenient. It makes things so much simpler.
The effect of the allegation, if made out and supported by a Court, would be that the SEC could claim all activity on Ethereum was the same as if it was made on any US exchange or payment system, and give a massive jurisdictional reach to the USA over decentralised protocols based purely on a node basis, even if all the parties to a transaction were outside the USA.
Fyre considers, however, that the inclusion of the last sentence that "as a result, those transactions took place in the United States" bears no real significant legal value, and that it would be unlikely for the Court to actually determine the issue:
I think they may be trying to get their vision of what Ethereum is, and how it works, out into the judicial ecosystem... [i]t’s the SEC saying, ‘This entire body of financial activity is within the scope of the stuff that we regulate, and therefore we’re going to regulate all of it.'
The increased attention follows the implication from SEC Chair Gary Gensler that the Ethereum merge would bring the network closer to the definition of a security in the eyes of the regulator.