SEC lawsuit claims jurisdiction because ETH nodes are ‘clustered’ in the US

The United States Securities Exchange Commission (SEC) has made an unprecedented claim that Ethereum transactions take place in the United States because Ethereum nodes are “clustered more densely” in the U.S. than in any other country. 

The SEC argument is found within a Sept. 19 lawsuit against crypto researcher and YouTuber Ian Balina, which alleged, among many other complaints, that Balina conducted an unregistered offering of Sparkster (SPRK) tokens when he formed an investing pool on Telegram in 2018.

The SEC claims that at the time that U.S.-based investors participated in Balina’s investing pool, the Ether (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.”

The SEC argued that as a result, “those transactions took place in the United States.”

At this stage, it is unclear whether such a claim will hold up in court or whether there is any legal precedent at stake. However, currently, 42.56% of the 7807 Ethereum nodes are currently situated in the U.S., according to Ethernodes.

Speaking to Cointelegraph, Aaron Lane, an Australian lawyer and senior research fellow at the RMIT Blockchain Innovation Hub, said the distribution of Ethereum nodes is largely irrelevant to the case at hand, explaining:

“The fact that we’ve got a U.S. based plaintiff, a U.S. based defendant and transactions flowing from the U.S. is what is most relevant here. It doesn’t matter whether the payment was done on Ethereum, Mastercard or any payment network for that matter.”

Lane said that while SEC’s claim was an interesting one, he added that even if Balina’s lawyers don’t contest the issue of jurisdiction, it’s not going to have any impact on future cases for now:

“The defense may concede jurisdiction here, and if they do it won’t be an issue, and if it’s not a contested issue then the court won’t say anything about it. Any concern about legal precedent at this stage is premature.”

Related: 3 cloud providers accounting for over two-thirds of Ethereum nodes: Data

The SEC has been previously criticized for its regulatory approach toward crypto, which has been labeled by some as “regulation by enforcement.”

SEC Chair Gary Gensler recently hinted that Ether-based staking could also trigger U.S. securities laws shortly after Ethereum transitioned to proof-of-stake on Sept. 15.

Responding to the lawsuit, Balina said in a 19-part Twitter thread that the charges were “baseless” and that he “turned down settlement so they [SEC] have to prove themselves.”

1/ Official Statement on the baseless SEC charges regarding Ian Balina being compensated for promoting Sparkster:

The SEC Enforcement Division’s proposed charges against Mr. Balina are an unfounded effort based upon multiple misconceptions of fact and law, enumerated below.

— Ian Balina (@DiaryofaMadeMan) September 19, 2022

Balina did not comment on the SEC’s claim that the U.S. should be afforded jurisdiction for Ethereum-based transactions because of the heavy distribution of nodes situated in the U.S.

Balina’s charges come as Sparkster and its CEO, Sajjad Daya, recently settled its case with the SEC on Sept. 19, agreeing to pay back $35 million to “harmed investors” after its initial coin offering (ICO) in 2018.