The regulatory landscape in the United States is complex. While a comprehensive framework is slowly but surely being developed, enforcement remains with various authorities. Gary Gensler, chairman of the SEC, claims jurisdiction over most of the crypto industry.
Since the US President’s executive order in March 2022, the regulation of the crypto industry has steadily crept up the priority list. The upcoming framework builds on existing authorities and aims to prioritize consumer protection. At the forefront is the US Securities and Exchange Commission (SEC), headed by former Goldman Sachs investment banker Gary Gensler, which aims to seize decision-making authority over the majority of regulations governing cryptocurrency issuance and trading.
Jurisdiction over all Ethereum-based tokens
Tucked away in a civil lawsuit against crypto-influencer Ian Balina, the US Securities and Exchange Commission provides deep insight. Gary Gensler feels responsible for regulating the entire decentralized network, as all transactions take place in the United States. Buried under paragraph 69 of the 23-page indictment against the influencer, the validation of the Ethereum blockchain is listed, and it is claimed that the transactions were processed because of the United States due to the high node density in the United States.
“The US-based investors in Balina’s pool irrevocably committed to the transaction when they sent their ETH contribution to Balina’s pool from the US. At this point, their ETH contribution was validated by a network of nodes on the Ethereum blockchain, more densely concentrated in the United States than any other country. As a result, these transactions took place in the United States.” – SEC Civil Complaint
In this bold and unprecedented move, the US Securities and Exchange Commission claims that virtually the entire Ethereum network falls under the agency’s purview. An absurd point of view – not to mention the fact that less than a third of all hubs were in the US at the time. It is well known that Gensler wants to use various means to secure control over the entire crypto sector.
Dispute between US regulators
The question of whether digital assets should be considered securities is at the center of the discussion. Finally, securities fall under the jurisdiction of the SEC, trading in commodities is overseen by the Commodity Futures Trading Commission (CFTC). For his part, Gensler argues using the Howey test, introduced in 1933, that “virtually all” cryptocurrencies should be classified as securities. This is in contrast to the position of the CFTC, which also feels responsible for the area.
This battle was fueled in late 2020 when the SEC indicted Ripple Labs – the issuer of the cryptocurrency XRP – for selling unregistered securities. But the fact that the legal dispute has not yet been resolved shows the complexity of the case. An acquittal of Ripple’s board would mean a backlash for Gensler’s regulator.
Ether also a security?
The only exception from Gensler’s point of view is Bitcoin – due to sufficient decentralization, he also recognizes it as a “commodity”. The second largest cryptocurrency by market capitalization, ether (ETH), on the other hand, may also turn out to be an unregistered security. After the successful switch from blockchain to Proof of Stake (also known as Merge), the SEC chairman raised new concerns. The fact that users can now generate a return through stake potentially makes ether an investment contract.
The situation is the same in decentralized finance applications (DeFi). Over 100 Ethereum-based tokens were removed from trading protocol Uniswap’s interface last July because the cryptocurrencies could embody securities. The same issue sparked a dispute between Coinbase and regulators a few months ago when the largest US crypto exchange was accused of listing securities. Without clear guidance from the SEC, this is unlikely to be the last controversy on the subject.