SEC Suit Hints at Case for US Jurisdiction Over Ethereum Network

Suvashree Ghosh, Bloomberg News

Bitcoin and Ethereum logos on a t-shirt on display inside a cryptocurrency exchange in Barcelona, Spain, on Thursday, Sept. 8, 2022. The upcoming 'merge' will be the Ethereum blockchain's most ambitious software upgrade ever, with the upgrade representing a fundamental overhaul of how the Ethereum blockchain works. Photographer: Angel Garcia/Bloomberg , Bloomberg

(Bloomberg) -- The saga over cryptocurrency regulation took another twist courtesy of a comment buried in a Securities and Exchange Commission lawsuit that hints at a case for US jurisdiction over the Ethereum blockchain.

The suit lodged Monday is against the founder of a crypto investment research firm over allegedly undisclosed incentives linked to an initial coin offering. It also detailed the movement of Ether tokens in relation to the case.

Those Ether transactions originated in America and “were validated by a network of nodes on the Ethereum blockchain which are clustered more densely in the US than in any other country,” the SEC said. “As a result, those transactions took place in the US.”

The comment appears in the 69th paragraph of the 23-page filing, a lowly position which perhaps cautions against reading too much into it. Still, it winks at the possibility of a case for US jurisdiction over the most commercially important blockchain based on where the bulk of its computing happens.

An SEC spokesperson said the regulator didn’t have a comment “beyond public filings.”

“The bigger issue here is the problems over jurisdiction of blockchain activities more generally,” said Elizabeth Morton, research fellow at Australia’s RMIT Blockchain Innovation Hub. “Multiple jurisdictions with their own regulatory frameworks can make independent claims.”

Over $40 billion is sitting in decentralized-finance applications on Ethereum, which lets users trade, lend and borrow coins, DeFi Llama data shows.

The digital ledger is used by people in many countries. According to Etherscan, about 46% of all Ether nodes -- computers helping to operate and secure the network -- are in the US, followed by nearly 19% in Germany.

The SEC was already circling Ether, the blockchain’s native token, after the digital ledger’s upgrade last week to a much more energy-efficient system.

SEC Chair Gary Gensler signaled a feature of this revised approach, whereby Ether holders can earn financial rewards by allowing the network to use some of their assets, could fall under securities rules.

Decentralized blockchains sprawling across computer networks around the globe, and tokens that can make or lose billions of dollars in the blink of an eye, are giving regulators headaches. They are also stirring a contest among agencies for the right to manage oversight.

(Updates with SEC comment in the fifth paragraph.)