ConsenSys urges SEC to exclude blockchain networks from expanded definition of ‘exchange’

ConsenSys urged the SEC to state explicitly that distributed-ledger networks do not fall under the proposed extension of the term ‘exchange’ in the Securities Exchange Act of 1934.

They noted that the proposed wording could inadvertently designate some decentralized systems as exchanges. Moreover, the regulator did not mention blockchain, cryptocurrency or DeFi in the document, nor did it indicate how the Act’s requirements should be applied to the industry.

We (@ConsenSys) have submitted a comment in response to @SECGov ‘s proposal to expand the definition of a securities “exchange” to cover “communication protocol systems”. We encourage you to read it here: https://t.co/NKDXk2hcNz.
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— wchughes.eth 🦊 (@BillHughesDC) April 18, 2022

“It seems highly unlikely that the SEC actually wants this rule to cover blockchain systems, because they are entirely unlike the centralized securities exchanges the Act was enacted to address,” wrote ConsenSys’s senior counsel Bill Hughes.

It strikes us as highly unlikely that @SECGov actually wants this rule to cover blockchain systems, because they are entirely unlike the centralized securities exchanges the Exchange Act was enacted to address. 3/21

— wchughes.eth 🦊 (@BillHughesDC) April 18, 2022

If the formulation is intended to cover decentralized systems, the proposal would violate the Securities Exchange Act, the Administrative Procedure Act, and the Constitution, the company said.

With regard to the Exchange Act, Hughes noted that its text and purpose “sharply diverge” from the Commission’s proposed regulation of potential sellers and buyers.

“Blockchain systems, in particular DeFi, replace intermediaries with software. The risks posed by real intermediaries, including abuses of power, do not actually exist,” he stressed.

The company argued that the SEC’s proposed ‘exchange’ formulation would upend the congressional regulatory framework in this area and leave the industry without clearly delineated rules.

“The scope of blockchain systems would leave too many questions unanswered for the proposal to be refined. The SEC would need to start over and conduct a thorough analysis of its rationale, as well as the costs and benefits,” Hughes said.

As for the APA, covering blockchain systems would leave too many questions unanswered for the proposal to be finalized. The SEC would need to start over and provide extensive analysis of its rationale and the costs and benefits. 10/21

— wchughes.eth 🦊 (@BillHughesDC) April 18, 2022

He said the Commission’s proposal “regulates speech based on its content,” which runs counter to the Constitution’s guarantees of freedom of expression.

“We remain optimistic that a reasonable solution to this particular problem will be provided by the SEC in response to public feedback,” Hughes concluded.

Coin Center, a blockchain-industry advocacy group, also called the Commission’s proposal unconstitutional.