The birth of the internet, sparked by the adoption of the TCP/IP common communications protocol in 1983, created an open, public digital infrastructure with ubiquitous access expectations. In this realm, financial regulators at bodies such as the Securities and Exchange Commission (SEC) and the Federal Reserve largely did not view internet protocols as within their jurisdictions even as finance became more digitized, according to Linda Jeng, former financial regulator and current CEO of Digital Self Labs.
However, in the blockchain ecosystem, there are signs that the SEC is beginning to classify public digital infrastructures as falling within their financial regulatory authority. For example, the SEC is rumored to be investigating if Ethereum’s native token ETH should be considered a security, and has announced intentions to investigate Uniswap, a decentralized automated crypto protocol.
The SEC’s assertion, as expressed in their recent complaint against Coinbase, declares that decentralized blockchain projects like Solana, Cardano, Filecoin among others are not truly decentralized, thereby indicating ambiguity over understanding the nature of public digital infrastructures. This belief appears to be influencing legal decisions, as indicated by recent rulings from US District Court Judge Failla in SEC v. Coinbase.
Critics argue that the SEC’s premise, termed the “ecosystem” argument, takes an expansive view that empowers the Commission to govern entire ecosystems rather than restricting its focus to whether tokens are securities. Such a wide scope potentially overlooks the varied and significant roles that decentralized protocols play in our digital economy, impacting areas such as digital identity, social media and gaming, among others.
As the SEC appears set to extend its jurisdiction over the digital economy, the broadening debate encompasses more than defining what qualifies as a security. Increasingly, it’s becoming a discourse on the nature and boundaries of the SEC’s regulatory remit over the public infrastructures powering today’s digital economies.
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