Why does the SEC want to run Bitcoin and Ethereum nodes?

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Why does the SEC want to run Bitcoin and Ethereum nodes?

The SEC is ramping up its surveillance by hiring contractors to run nodes for all of the major blockchains. What are they hoping to find?

The United States Securities and Exchange Commission (SEC) is seeking quotes from contractors to run Bitcoin and Ethereum nodes on its behalf, in addition to “as many as possible of the following blockchains: Bitcoin Cash, Stellar, Zcash, EOS, NEO and XRP Ledger.”

Contractors will need to be able to add new blockchains whenever the SEC likes.

What is the reason behind SEC’s node move?

The stated reason is “to support its efforts to monitor risk, improve compliance’s and inform commission policy with respect to digital assets.”

Essentially, it appears as if they want to ramp up their analytics to assist, or outsource, the SEC’s blockchain monitoring and compliance investigations.

Early reaction to SEC running nodes is mixed

The news sparked a mixed reaction as Twitter users appear to be divided between those who think it’s a bullish sign of SEC acceptance and that the US Government won’t ban crypto – or alternatively that it’s a harbinger of Big Brother-style blockchain surveillance.

eToro senior analyst Mati Greenspan posted a link earlier this morning, commenting: “Never thought I’d see the day.”

The first reaction of many users, including LamboMoonVehicle (@vehiclemoon) was to wonder: “Isn’t this just a way for them to track transactions?”

Other users pointed out most of the information on public blockchains can already easily be accessed via blockchain explorers.

SEC nodes: will they improve data and analysis?

The SEC, however, seems to think it can extract more information for analysis by running its own nodes directly.

The request for a quote (which went out in late June but has been overlooked until now) specifically states “the subscription shall source all blockchain data from hosted nodes, rather than providing this data as a secondary source (e.g., via blockchain explorers).”

They also want direct access to other data – also publicly available – including “hashing algorithms, hashing power, mining difficulty and rewards, transactions quantity and size, coin supply and blockchain size.”

They want all the data from the genesis block onwards provided in a dump, with the info updated daily through a feed or API.

The ability to analyze this data is getting better all the time

As has been noted many times before – although it is frequently overlooked by users – Bitcoin and blockchain can be relatively private, but most coins are not anonymous and every transaction ever made is recorded.

Investigators have already demonstrated they can analyze the blockchain and link transactions to individual users and this ability will only be enhanced with AI and Quantum computers.

₿ (@C01NMAN) predicted the news about regulators running nodes will put the focus on privacy coins:

“It means they’re going after your privacy and analysing transactions. Hopefully countered by more focus on the privacy improvements from bitcoin dev side, and I’m predicting a renewed interest in Monero as well.”

Charles Lee (@guest1x) suggested it could actually be good for the integrity of blockchain networks such as XRP:

“One reason may be to identify and track down malicious nodes that are trying to negatively influence the consensus process.”

SEC nodes conspiracy theories: 51% attack!

Some Twitter users flipped the switch to conspiracy. Achievement League (@AchieveLeague) thought it was horrible news: “Because they will control bitcoin network? and eventually try to create a 51% attack?”

Bora Karabulut (@KryptoVersum_eK) also thought it was the beginning of the end.

“SEC could just try to take over the hashrate in the next years! chances are low but that’s a threat for the Bitcoin network. Imagine you own more than 51% of the hashrate!”

But as Greenspan points out “It’s just a node.”

But it’s bullish news?

Udi (@cryptoTwentyOne) called it the “Most bullish thing I’ve heard in 2019 post Libra … if this is true.”

Kevin Lambert (@kevinLambert) had a similar take: “Another bullish indicator for Crypto. More time and resources being spent by the US gov’t continues to point to the fact that there are no current plans to try to ban/squash crypto in the USA.”

SEC doesn’t regulate Bitcoin

The SEC currently doesn’t have jurisdiction over Bitcoin, although some activities such as raising money with BTC, fall under its remit. It has stated Ethereum is not a security itself but plenty of ERC-20 tokens could be.

Trustnodes suggested the blockchain monitoring might help lower the burden of compliance for new security tokens through automation. However, it’s not entirely clear at this point.

“So the American regulator might perhaps finally be moving a bit, but it’s not clear whether their focus is more on enforcement or on facilitation of capital formation.”

Watch this space.