The Electronic Frontier Foundation is taking the SEC to task for potentially repressive policies related to enforcement actions levied against crypto industry firms.
Free speech online is the EFF’s wheelhouse, but in a recent blog post, they’ve also addressed other matters in the cryptosphere. The criminalization of “providing an algorithm” is too broad a language for the constitutional watchdogs.
Taking issue with a specific aspect of the case against EtherDelta co-founder Zachary Coburn, the digital rights organization reminds the SEC that Coburn was within his rights to write and publish an algorithm for the decentralized cryptocurrency exchange. The regulator issued a statement on November 16, 2018, saying:
“[A]n entity that provides an algorithm, run on a computer program or on a smart contract using blockchain technology, as a means to bring together or execute orders could be providing a trading facility.”
EFF says that the broadness of this language is an existential threat to the rights of programmers everywhere – not just coders deploying illegal crypto exchanges.
“EFF today sent a public letter reminding the agency that writing and publishing code is a form of protected speech under the First Amendment, and that the courts don’t take kindly to government agencies requiring people to obtain licenses before exercising their free speech rights.”
The SEC charged that EtherDelta founder Zachary Coburn “should have known” his code would contribute to securities violations. They gave him an immediate settlement offer, which he took, that amounted to $375,000 in total. $300,000 was “disgorgement,” a term generally reserved for ill-begotten gains, and $75,000 was in fines.
“Coburn should have known that his actions would contribute to EtherDelta’s violations and thus, under Exchange ActSection 21C(a), caused EtherDelta to violate Section 5 of the Exchange Act.”
The case against Coburn concerns the EFF less than the constitutional implications raised. They’re instead concerned about the SEC’s potential to “stifle innovation.”
Indeed, the broad language used by the SEC makes it unclear exactly at which point Coburn was breaking the law.
Was it when he “provided the algorithm,” or was it when the EtherDelta contract took profits?
The SEC unilaterally treats dealing in unregistered securities as a crime, depending on the nature of your dealings.
However, writing and publishing software is a crucially important activity for the advancement of the human race. As the EFF says:
“Setting aside whatever other issues the SEC might have had with EtherDelta, there are many reasons why software that enables decentralized currency or other exchanges may be useful to consumers. That’s why it’s important that regulatory interventions today don’t stifle that innovation by claiming they can impose liability merely for the act of writing or distributing code.”
Left to its own devices, the agency could use its success against EtherDelta to justify prosecution of other open source contributors.
Most crypto projects are open source. Such contributors otherwise have no involvement in the market side of crypto. Many coders practice their craft with no expectation of financial reward.
For example, you write an API for a web language to easily interact with privacy-centric cryptocurrency Monero.
As part of another case, the government prosecutes you for providing code that helped an individual or group perform illegal activities. They say your work made it difficult for them to know money laundering was going down.
As the EFF says:
“The SEC’s broad language about ‘an entity that provides an algorithm’ could include cryptographic researchers and coders who are publishing ideas or code for debate and discussion, and working to develop systems that could benefit the public.”
Interestingly, the EFF seems to take a position on centralized versus decentralized exchanges. They note that:
“These centralized exchanges are also a target for criminals seeking to steal customer funds, and can themselves be run by unscrupulous individuals who abuse their access to customer funds and data.”
“Decentralized exchanges allow for the exchange of digital currencies using smart contracts.”
In a previous publication, EFF called on centralized Bitcoin exchanges to be more transparent. Exchanges should notify users when governments make requests for their data. But in this more recent post, the EFF clearly states that decentralized exchanges are the future of crypto trading.
Their letter to the SEC, which can be followed up with legal action (as the EFF frequently does), wholly intends to defend the innovations that will lead to the decentralized trading future.
The players involved make this interesting. Rather than a major crypto player coming to the defense of decentralized exchanges, a non-profit organization fills the role.
This aspect speaks to the state of crypto markets.
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