SEC lawsuit asserts jurisdiction due to the 'clustering' of ETH nodes in the United States

By: Dickson Arinze

SEC lawsuit asserts jurisdiction due to the 'clustering' of ETH nodes in the United States

September 20, 2022 6:37 AM

The SEC contends that because there are so many ETH validators located in the United States, all ETH transactions must take place there.


Since ETH nodes are "clustered more densely" in the U. S. compared to any other country, the Securities and Exchange Commission (SEC) has crafted the unprecedented assertion that all Ethereum transactions occur in the United States.


A lawsuit filed by the SEC on September 19 alleges that crypto researcher and YouTuber Ian Balina engaged in an unregistered offering of Sparkster (SPRK) tokens when he formed an investing pool on Telegram in 2018.


The SEC asserts that the Ethereum blockchain's network of nodes, "which are clustered more densely in the United States than in any other country," verified the ETH contributions made by U.S.-based investors in Balina's investing pool.


For this reason, the SEC claimed, "those transactions took place in the United States."


The viability of such a claim in court and the potential significance of the issue as a matter of precedent are both unknown at this time. Of the 7807 nodes in the Ethereum network, however, 42.56 percent are located in the United States, as reported by Ethernodes.


Dr. Aaron Lane, an Australian lawyer and Senior Research Fellow at the RMIT Blockchain Innovation Hub, recently told Cointelegraph that the geographical dispersion of Ethereum nodes is largely irrelevant to the current matter at hand, explaining:


"What really matters is that both the plaintiff and the defendant are located in the United States, and that all relevant transactions took place within the United States. It makes no difference whether the transaction was conducted via Ethereum, MasterCard, or any other payment network."


Even though SEC's claim is intriguing, Lane argued that it will not affect future cases even if Balina's attorneys don't challenge the issue of jurisdiction.


"If the defense admits jurisdiction, then it's not a contentious point, and the court won't make any rulings on it. At this point, concerns about setting a legal precedent are unwarranted."


The SEC's approach to crypto regulation has been criticized in the past; some have called it "regulation by enforcement."


Immediately following Ethereum's proof-of-stake switch on September 15, SEC Chairman Gary Gensler hinted that Ether-based staking could also trigger U.S. securities laws.


In a 19-part Twitter thread, Balina responded to the lawsuit, calling the charges against him "baseless" and saying that he "turned down settlement so they [SEC] have to prove themselves."



However, Balina remained silent when asked about the SEC's argument that U.S. courts should have jurisdiction over transactions conducted on the Ethereum network due to the number of nodes located within the country.


To add insult to injury, Balina's accusations come on the heels of a September 19 settlement between Sparkster and the SEC, in which the company and its CEO, Sajjad Daya, agreed to pay $35 million to "harmed investors" as compensation for losses sustained as a result of the ICO it held in 2018.