In April 2023, the Securities and Exchange Commission once again started to accept comments on the proposed set of regulations that redefine blockchain protocols as securities exchanges regulated by U.S. authorities. This is the second time since the beginning of 2022 that the SEC is trying to take DeFi under control.
Playing games with the securities laws
The main issue with the rules proposed by the Commission is that attempts to consider blockchain protocols as regulated securities exchanges do not fit with the Exchange Act of 1934, current exchange regulations, or even an understanding of the technology itself. Laws on securities exchanges were passed that address the risks inherent in intermediary systems between buyers and sellers. Congress strove to regulate exchanges only to the degree that they, as centralized organizations, had an important role in setting market prices and influencing market conditions.
According to the Commission’s proposal, an exchange is any system that helps potential buyers and sellers find each other and negotiate transactions. It seems that the SEC does not understand the definition of an exchange. According to law, an exchange is an organization that performs functions commonly performed by a stock exchange. However, blockchain protocols do not perform any functions similar to those of a stock exchange.
The existing legislation is clear in its definition of an exchange: it refers to a group of persons acting jointly based on an agreement. The SEC seems to ignore this definition, changing the meaning of collective liability to include persons engaged in related activities. A blockchain protocol includes a wide range of participants who do not necessarily act in concert. The protocols are open, inviting people who are clearly independent of each other, both in terms of functions and motivation. Things are even more complicated due to the fact that most groups that participate in blockchain protocols include persons from outside the U.S. This is important because American securities laws do not usually apply extraterritorially. The SEC even seems to have recognized this fact but has not offered any insight into how its lawmaking proposal would treat groups that include foreign participants. This makes things uncertain and might affect blockchain participation around the world.
Everything is vague
If this new legislation is adopted, representatives of the blockchain community will be responsible for understanding the rules correctly even though they are vague. Everyone who misunderstands the unclear rules, including software companies and individual developers using the products of others, may face heavy fines. It might also allow the Commission to identify rule violations after they happen and apply retroactive punishment that is generally forbidden.
According to the new proposal, software developers who publish or republish code independently and for free (meaning that they are not creating an exchange) “may be less likely” to face registration obligations if the code is subsequently repurposed for use by a supposed exchange. This will disincentivize the development of free, open-source software.
This is basically an attempt to ban blockchain in the U.S. under the pretense of helping.
Attempts to fire Gary Gensler
Gary Gensler’s resentment towards the crypto industry is even getting on the nerves of U.S. congressmen. His decisions are driving the new market offshore where it cannot be controlled at all.
“Today I filed the SEC Stabilization Act to restructure the SEC and fire Gary Gensler. U.S. capital markets must be protected from a tyrannical Chairman, including the current one,” announced Warren Davidson, a Republican congressman from Ohio, wrote on Twitter on June 9.
Warren Davidson was joined by Tom Emmer, another Republican, representing Minnesota and serving as the House Majority Whip. He has repeatedly criticized Gensler for his “incompetence” in regulating the crypto market and forcing the industry to move abroad.
These comments are in line with the arguments of the crypto industry. On June 6, Coinbase became the target of the SEC’s lawsuit over alleged securities law violations. The exchange commented that the SEC is pursuing an “enforcement-only approach” without providing transparent rules on digital assets. On June 8, Binance US accused the Commission of using intimidation tactics to pursue “an ideological campaign against the American digital asset industry.”
