SEC attorneys have a very rough understanding of crypto

The Merger: Ethereum and its long-awaited migration from the current “Proof-of-Work” consensus mechanism to a “Proof-of-Stake” system finally happened. A process that should look seamless from the user’s side nevertheless has consequences in the legal aspect. The market’s “toponomy” is also going to change. And it is not certain whether everyone will benefit from these changes.

ETH is too important to be untouchable

This is primarily the fact that with ETH now going Proof of Stake (PoS), most people will bet with custodians, due to the simplicity and the fact that they don’t have 32ETH. In this way, large companies will have a majority share over the network. Thus, it will be possible for the regulator to reach them and prohibit them from validating individual transactions (censorship), which will cause such transactions to be confirmed slowly.

But it should primarily be a problem of confirmation speed, as there will always be some validators who will subsequently confirm the transaction.

ETH, as the main network for DeFi, will be the main handle for regulatory policy. Tokens like USDC and many others contain blacklisting and blocking mechanisms at the development level, unlike the DeFi market in general. It makes sense that validators and the MEV market will play the role of leverage tools. But in the short term this is more frightening as there are too many miners and no one can control this process at a reasonable price.

On top of that, regulators may intend to oblige those node validators operating under their jurisdiction to implement the AML procedures for the transactions they validate.

The merger puts it in the SEC crosshairs

US Securities and Exchange Commission Chairman Gary Gensler said in a statement on September 15 that stake-based cryptocurrencies are very likely securities that should be regulated by the agency. This sounds like trouble for Ethereum. The SEC also claims that it has jurisdiction over ETH transactions because the network nodes are tightly clustered in the United States.

The organization has previously been criticized for its regulatory approach to crypto, such as the BlockFi case, when in February the SEC announced actions against this company due to the failure to register high-interest accounts that the SEC considers to be securities. One of the SEC’s requirements is to bring the BlockFi business into compliance with the Investment Company Act of 1940 within 60 days.

As a result – BlockFi ended up on the auction block and two other companies with similar businesses went up, these were the words of Stu Alderoty (Ripple General Counsel).

Thus, a situation has arisen where the SEC used the legislation from 1940 to regulate modern and not yet fully developed technology, which is absurd.

SEC statement

The statement by the SEC that all Ethereum falls under US jurisdiction is false to say the least. Even if it was, it would be very convenient for the SEC. The SEC’s logic is that the Ethereum blockchain node network is more tightly clustered in the United States than anywhere else, so the SEC should count all Ethereum transactions worldwide of American origin.

But according to Etherscan, the US is now home to only 46.19% of all Ethereum nodes. It is not even a simple majority. Like this SEC statement, one could argue that only the EU should regulate Bitcoin.

I think these statements are just a result of the SEC attorneys’ very crude understanding of how cryptocurrencies work. But we cannot rule out the fact of past tendencies of the SEC to regulate through enforcement.

Conclusion

The SEC and other regulators have been concerned about the huge sums circulating in the DeFi sector without any control. Since the ETH blockchain is the basis of most tokens, the new PoS protocol can be used as an argument to control the decentralized market at least partially.

About the author

Slava Demchuk is a certified AML specialist in the cryptocurrency field and an expert in crypto regulation and transaction monitoring. He has a bachelor’s degree in information network security, and has completed the Anti-Money Laundering Fundamentals course at the European Institute of Management and Finance. Slava is the founder of AMLBot, a service to check cryptocurrencies for connections with illegal activities. He is also the CEO of AMLSafe, a non-custodial wallet with a built-in crypto-AML module. Since 2013, he has led the IT team and developed software for the blockchain market. In addition, Slava is a member of the Blockchain Association of Ukraine (BAU).

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