Coin Center believes the SEC’s new proposed definition of exchange is a gross overreach, as it would encompass all modes of communication, not just trade.
Coin Center, a non-profit blockchain advocacy organization, has labeled the Securities and Exchange Commission’s (SEC) proposed redefining “exchange” as an “unconstitutional overreach.”
The lobbying group made the comments in a written response to the SEC’s March 18 Amendments to the Definition of “Exchange,” which detail changing the definition of “exchange” from a “system that brings together the orders” of security to one that “brings buyers and sellers together.”
Bringing orders, which are things, together is quite different from bringing people together, and Coin Center asserts that the latter is tantamount to coercion.
The rule change implies that Communication Protocol Systems also exchange, attracting programmers who merely share code for crypto transactions. If the proposal is adopted as a rule by the SEC, decentralized exchanges (DEX) such as UniSwap (UNI) and PancakeSwap (CAKE) will be notified that the commission requires them to register as exchanges.
According to Coin Center, this shift to a “speech-based definition” would affect “thousands of developers, publishers, and republishers” who trade code but not tokens. This is especially true for developers of DEX.
The nonprofit responded to the proposed change on April 14 with lengthy comments in which it declared it unconstitutional and cited Supreme Court (SC) precedent that it believes could compel the SEC to withdraw its proposal:
According to the SEC, incorporating considerations of Communication Protocol Systems into the definition of “exchange” recognizes the value that individual buyers and sellers derive from communicating within a marketplace. According to the report, including these users in the definition can help “reduce regulatory disparities between similar markets.”
Coin Center, on the other hand, argues that the new definition is an attempt to curtail free speech in violation of the First Amendment. The SEC was accused of doing so in the landmark 1985 case Lowe v SEC. The SEC attempted to compel Lowe to cease acting as an Investment Advisor in that case by publishing a financial newsletter. Lowe won the case after the SC ruled that his newsletter protected free speech.
Concerning Lowe v. SEC, Coin Center stated that the commission “threaten[ed] Americans’ free speech rights through an overbroad interpretation of its statutory authority.”
The SEC will accept comments on the rule proposal from US citizens until April 18.
Last November, the Infrastructure Bill was passed, requiring software developers, transaction validators, and node operators to file taxes as crypto brokers, a definition that many in the crypto industry believe is overly broad.