SEC Tightens Control over Cryptocurrencies and Ethereum in Particular
Recently, Gary Gensler, the chair of the U.S. Securities and Exchange Commission (SEC), has made important announcements about the cryptocurrency market. One of them concerns blockchains with the Proof-of-Stake (PoS) consensus. According to him, such projects have signs of an investment contract.
If this regulatory authority deems some coins and tokens on PoS blockchains to be securities, they will fall under its responsibility. This obliges issuing companies to follow relevant regulations and laws, otherwise, the Commission will sanction them.
The root of the problem
The first discussions of cryptocurrencies issued on PoS blockchains had started before the autumn press conference. One of the serious measures taken by the SEC was the obligatory licensing of crypto lending projects. At the same time, Gary Gensler reported on the similarity of staking and lending.
Some analysts didn’t consider the ether coin as a cryptocurrency that might suffer from the regulator’s actions. Same as BTC, it’s considered a commodity rather than a security. Commodities fall under the jurisdiction of the CFTC (Commodity Futures Trading Commission).
A drastic change occurred after the transition of Ethereum to the PoS algorithm. Ether is no longer issued as a reward to miners. Now, stakers get paid for holding a certain number of coins. This forces the SEC to reconsider the way it perceives the cryptocurrency which is the second-largest by capitalization.
Escalation of the situation
It took the SEC less than a week to move from initial discussions to serious statements. In September 2022, they stated that the activities of any tokens issued on the Ethereum blockchain must comply with the jurisdiction of the United States.
SEC representatives have already filed the first lawsuits. This way, in one of the cases, Ian Balina became the accused. According to the Commission, this popular crypto blogger withheld information about the income received for working with the Sparkster project. An aggravating circumstance in the accusation was the fact that he didn’t have a licence necessary for the legal sale of Sparkster’s SPRK tokens. Balina offered them to subscribers of his Telegram channel.
Sparkster executives also received lawsuits. The accusation was the same — the SPRK token sale without a licence, including to US investors. The project sold tokens worth $30 million.
In the statements of the case, the SEC refers to the obligation of any crypto projects that issue and sell tokens on the Ethereum blockchain to comply with the laws of the United States. This is provided that either most of the nodes and validators of the network are located in the USA or tokens are sold to US citizens.
Possible restraining of Ethereum
Since Ethereum now belongs to a group of cryptocurrencies that fall under the jurisdiction of the SEC (according to their rules), investors are worried that the regulator will soon ‘restrain’ this blockchain platform. Serious issues aren’t anticipated, but difficulties with usage and transactions can still affect the price of ETH.
Analysts present disappointing statistics: according to Labrys, ~45% of all Ethereum validators already support OFAC sanctions. The Office of Foreign Assets Control is an agency of the U.S. Treasury Department.
The number of ‘censored blocks’ might increase further, so after some time, there will be over 50% of them. In this situation, it’s difficult to talk about the decentralization of Ethereum. Most of the ‘problematic’ (suspicious) transactions can be cancelled, and the processing time for the remaining ones will increase.
The probability of such a scenario
Analysts Adam Pollet and Andrea Gordon from Eversheds Sutherland think that it’s impossible to exclude the scenario of a total ‘submission’ of Ethereum. Right now, it only looks like intimidation, so the Ethereum-based project representatives become more cooperative and voluntarily register with the SEC.
Some projects are ready to go through any procedures to avoid sanctions. However, many want to stay in the shadows according to the decentralization principles. All this divides the market into two groups and generates conflict.
Such a scenario isn’t the worst for the cryptocurrency market, because it doesn’t allow total control of transactions and the activities of individual projects. The position of developers using the Ethereum blockchain is supported by doubts about the legality of the actions of the SEC.
That’s why the Commission uses intimidation and not brute force. To do this, it imposes sanctions on validators registered in the USA. The only thing left is to wait and see whether ether gets recognised as a security and whether the dispute between the regulatory authority and the community moves to a new stage.