For the SEC, transactions on Ethereum (ETH) “take place in the United States”

In its complaint against a crypto influencer, the SEC took a bold shortcut, finding that due to the high concentration of its validating nodes, Ethereum transactions were taking place in the United States. We clarify these remarks, which relaunch the debate on the points of centralization of a blockchain.

The SEC makes a shortcut on Ethereum transactions

In a lawsuit filed Monday in an Austin, Texas court, the Securities and Exchange Commission ( SEC ) made some startling remarks regarding Ethereum (ETH). Indeed, according to the US financial policeman, blockchain transactions would take place in the United States.

To put the elements in their context, this declaration was made within the framework of a legal action against Ian Balina. A crypto influencer allegedly promoted an ICO in 2018, disregarding securities laws. The latter would have hidden from his community his commercial link with the project he promoted.

Thus, the SEC provides, in its complaint, elements to support its argument. Its elements are intended in particular to justify the fact that the actions of the defendant violate the laws of the United States. It is in this logic that paragraph 69 is presented as such:

 The American investors in the Balina pool irrevocably committed themselves to the transaction when, from the United States, they sent their contributions in ETH to this pool. Furthermore, their ETH contributions have been validated by a network of nodes on the Ethereum blockchain, which is concentrated more densely in the United States than in any other country. Accordingly, these transactions took place in the United States. 

Do Ethereum transactions take place in the United States?

Of course, this is not to take the situation out of context. This is nothing more or less than a legal argument against a crypto influencer and in no way an attack on Ethereum. Nevertheless, such statements raise questions about how our ecosystem is perceived by regulators.

Indeed, in addition to the legal aspect, this highlights flaws caused by geographical centralization. According to Etherscan, the United States would indeed be the country with the most nodes with 4,365 nodes, or 46.19% of the network:

If in the context of a proof-of-work blockchain, we can, without using a VPN, rely on geographical location, this is less relevant for a proof-of-stake chain, as Ethereum now is.

And for good reason, many nodes can be hosted on virtual servers, for example, thanks to Google or Amazon. The map of the latter also shows the location of the company’s servers, which strangely resembles the classification below:

The only exception will be Russia, because while AWS does not have servers in the Netherlands or Finland, Google does.

Thus, validators may very well be scattered all over the world, but their choice of hosting may, despite everything, lead to centralization.

This is one of the areas of improvement that Ethereum should focus on in the future. The next big updates, especially through sharding, will be supposed to alleviate the hardware needs to run a node.

Thanks to such improvements, it could incentivize validators to do without virtual servers by performing this maintenance themselves, thus increasing decentralization. Such awareness will be necessary in order to diminish the pressure points of the different states in the future.