The SEC’s Misunderstanding of Public Digital Infrastructure: A Threat to Web3

The SEC’s Misunderstanding of Public Digital Infrastructure: A Threat to Web3

In a world where the internet is considered a public digital infrastructure that we all have the right to access and use, the Securities and Exchange Commission (SEC) is causing concern with its recent actions in the blockchain ecosystem.

The SEC, which was mandated by Congress to regulate securities, is now investigating whether Ethereum’s native token ETH is a security, along with sending a Well’s Notice to investigate Uniswap, a decentralized automated protocol in the crypto ecosystem. These actions, along with a complaint against Coinbase and claims that decentralized blockchain projects are securities, are raising questions about the SEC’s understanding of public digital infrastructure.

The SEC’s “ecosystem” argument, which suggests that the underlying blockchain and activities in the ecosystem make tokens more valuable and thus securities, is causing alarm. This argument could give the SEC the power to regulate the entire ecosystem, beyond just the tokens themselves.

US District Court Judge Failla’s recent ruling in SEC v. Coinbase showed indications of agreement with the SEC’s ecosystem argument, further fueling concerns about the SEC’s reach into the digital economy. If the SEC’s theory is applied to traditional financial activities, it could mean regulating activities far beyond just the tokens themselves.

It is crucial for courts and government agencies to understand that genuinely decentralized protocols, including base layer blockchains, are public digital infrastructure that should serve the public good. Research is beginning to support this concept, highlighting the importance of decentralized protocols in our digital economy.

As the SEC v. Coinbase case heads towards a long road of litigation, potentially reaching appellate courts and even the Supreme Court, the implications go beyond just defining what is a “security.” It raises questions about the SEC’s regulatory power over the entire digital economy and the public infrastructure that supports it.

In a world where the internet is considered a public digital infrastructure, the SEC’s actions in the blockchain ecosystem are causing concern and highlighting the need for a better understanding of decentralized protocols as part of the foundation of our digital economy.