Nonprofit blockchain advocacy group Coin Center has called the Securities and Exchange Commission’s (SEC) proposed redefinition of an “exchange” an “unconstitutional overreach.”
The lobby group made the comments in a written response to the SEC’s March 18 Amendments Regarding the Definition of “Exchange”, which details changing the meaning of “exchange” from a “system that brings together the orders” of a security to one that “brings together buyers and sellers.”
Bringing together orders, which are things, is very different to bringing together people and Coin Center says the latter is tantamount to coercion.
The rule change suggests that Communication Protocol Systems are also exchanges which may bring in programmers who merely share code for a crypto trade. If the proposal becomes an SEC rule, decentralized exchanges (DEX) such as UniSwap (UNI) and PancakeSwap (CAKE) would all be on notice that the commission wants them to register as exchanges.
A new SEC proposal has a serious change hidden within its complex language.
Bottom line: The proposal violates the First Amendment by requiring a license to speak—even of open source developers. It’s unconstitutional and they should change it.
Coin Center is pushing back 1/
— ɥƃɹnquǝʞןɐΛ ⚖ (@valkenburgh) April 14, 2022
Coin Center argues that this shift “to a speech-based definition” would impact “countless developers, publishers, and republishers” who may trade code but not tokens. This is particularly the case for DEX developers.
The nonprofit reacted to the proposed change in lengthy comments on April 14 by calling it unconstitutional and citing Supreme Court (SC) precedent that it believes could compel the SEC to retract its proposal:
“The way it [expands the definition of ‘exchange’] would create an inappropriately broad standard for registration that would impose an unconstitutional prior restraint on the protected speech activities of countless software developers and technologists.”
By the SEC’s account, including considerations of Communication Protocol Systems to the definition of “exchange” acknowledges the benefit individual buyers and sellers extract from communicating within a marketplace. It said that adding those users in the definition can “reduce regulatory disparities among like markets.”
However, Coin Center argues the new definition is an attempt to abridge freedom of speech in contravention of the First Amendment. The SEC was accused of doing this in the landmark 1985 Lowe v SEC case. In that case, the SEC attempted to force Lowe to stop stop acting as an Investment Advisor by publishing a financial newsletter. The SC stated that Lowe’s newsletter was protected free speech and he won the case.
Regarding Lowe v SEC, Coin Center wrote the commission “jeopardized the speech rights of Americans with an overbroad interpretation of its statutory authority.”
The SEC will be accepting comments from U.S. citizens regarding the rule proposal until April 18.
Last November, the Infrastructure Bill passed which required software developers, transaction validators and node operators to file taxes as crypto brokers, an overly-broad definition by the account of many in the crypto industry.