Ethereum price drops 20% as SEC declares control over network

U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler, testifies before the Senate Banking, Housing and Urban Affairs Committee during an oversight hearing on Capitol Hill in Washington, U.S., September 15, 2022. REUTERS/Evelyn Hockstein
Gary Gensler chairman of the US SEC. The SEC says that since the majority of Ethereum transactions are validated in the US, it should be regulated in the US. Photo: Reuters/Evelyn Hockstein

Ethereum has plummeted by over 20% despite last week's successful transition to proof of stake as the shadow of a major US regulator body falls over its rising ambitions.

The world's second-largest blockchain was declared as coming under the jurisdiction of US government and Security Exchange Commission, SEC, due to the majority of validator nodes that secure the network being set up within the US.

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After the news, ether (ETH-USD) fell 20% to $1,364, as of the time of writing.

However, bitcoin (BTC-USD) faired better, holding above $19K with a fall of 13% in that past week to $19,413.

Comments from Gary Gensler, the head of the SEC, have rattled investor confidence in the world's second-largest cryptocurrency by market cap.

According to a report from the Wall Street Journal last Thursday Gensler referred to the process of Ethereum's staking rewards and said: "From the coin’s perspective, that’s another indicia that under the Howey Test, the investing public is anticipating profits based on the efforts of others."

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After moving to a low energy use proof of stake method for validating transactions, investors can now stake their ether to secure the validation of transactions on the network, and also profit from staking rewards.

This profiting from staked ether has drawn the attention of Gensler and made crypto investors nervous about the future classification of Ethereum.

Also, when the SEC filed a federal lawsuit on Monday against crypto influencer Ian Balina for his failure to register a cryptocurrency as a security in 2018, a sentence in the filing claimed the SEC had the right to sue Balina because they view the entire Ethereum network as falling under the US government’s jurisdiction.

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The SEC stated that the ether sent to Balina in 2018 was “validated by a network of nodes on the Ethereum blockchain, which are clustered more densely in the United States than in any other country and as a result, those transactions took place in the United States.”

This is a challenge to Ethereum's determination to be seen as a fully global, decentralised blockchain that provides a public good and base layer for web3 applications.

According to Etherscan, 45.85% of all Ethereum validator nodes operate from within the US.

The second-greatest density of nodes is in Germany, with 19% of validator nodes.

Ethereum controls the majority of decentralised finance within the cryptocurrency ecosystem and most of the smart contract applications.

The SEC has not made a standalone official statement Ethereum blockchain is a security, but if the blockchain is classified as a security rather than a commodity, then this will create a legal precedent that would send a wave of panic throughout the entire cryptocurrency market.

A move by the SEC to classify Ethereum as a security would mean that most digital assets except bitcoin could be considered a security and every project that is deployed on top of the Ethereum network could be claimed to be a security and coming within the jurisdiction of the SEC.

Being classified as a security will make Ethereum, and any application deployed on it, need to go through the lengthy process of registration with the SEC.

Also, if it is deemed a security, then that would mean Ethereum has been trading as an unregistered security for many years, and this could lead to fines for the Ethereum Foundation, the multitude of exchanges that have been trading ether, and most Ethereum-based cryptocurrency tokens.

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