Blockchain software company Consensys has submitted a letter to the US Securities and Exchange Commission (SEC) urging the withdrawal of a proposed definition amendment that could classify DeFi protocols as part of securities exchanges. The US-based blockchain firm is opposing this motion citing concerns over regulatory overreach and violations of US core constitutional amendments.
Consensys Warns SEC: Proposed Exchange Rule Violates US Law
In a recent submission to the SEC’s crypto task force headed by Commissioner Hester Pierce, William C. Hughes, Senior Counsel at Consensys highlighted multiple reasons for the Commission to withdraw its proposed change to the definition of “exchange” under US securities law.
Firstly, Hughes explains that the proposed rule change goes beyond what the US Congress intended in defining an “exchange” under the Securities Exchange Act of 1934 as a marketplace for the buyers and sellers of securities. Rather, these amendments aim to include platforms such as DeFi protocols whose tools are passively used by traders in negotiating and coming to trade agreements.
Furthermore, the Consensys executive argues that the amendments violate the Administrative Procedure Act (APA). This is because the SEC failed to consider key points raised in the public comment in 2022 which stated that decentralized protocols if classified as an exchange will be unlikely to meet the operation requirements of the Commission. This indicates an unpermissible predetermined aim of banning these projects from the US.
Another point raised by Hughes is that the proposed rule changes also present no single real-world benefit other than extending the regulatory authority of the SEC. The lawyer and former DOJ officer explains that there has been no sufficient cost-benefit analysis of these amendments that captured the entirety of the blockchain projects that would be affected by the definition change.
A statement from Consensys petition’s reads:
As an initial matter, the number of entities that would be affected by the amendments is substantially undercounted: we are told that there would be only 35 to 46 New Rule 3b-16(a) Systems, between 15 and 20 of which trade digital assets. 88 Fed. Reg. at 29465, 29474. That number is far too low when, especially given the amendments’ expansive but amorphous scope, when we are dealing with an ecosystem with hundreds if not thousands of projects and protocols.
In addition to these points, the Consesnys Senior Counsel also highlights that the SEC amendments are in direct violation of the First Amendment as they aim to “improperly” cover all “communication protocols” between parties with a trading interest regardless of affirmative verbal action. Hughes states that the proposed rule change also fails to clarify terms such as “communication protocols”, and “the level of causation required for a group to be deemed to be “[bringing] together” individuals with trading interests” among others which is a violation of due process in respect to the Fifth Amendment.
Consensys requests that the SEC’s crypto task force consider these points and effect the immediate removal of this definition change from the regulatory agenda.
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