US SEC accused of reaching beyond its legal powers, likely violation of First Amendment rights of DeFi coders

• Crypto industry insiders and influencers’ letters fill the SEC’s inbox as the regulator attempts to stretch its legal powers to DeFi. 
• The updated Proposed Exchange Rule would potentially force rules on service providers that DeFi exchanges and platforms need. 
• Crypto advocates and lobbyists argue the SEC’s new rules, if finalized, will double down on the regulator’s treatment of crypto as a new sector.

The US Securities and Exchange Commission (SEC) has been accused of overreach in its proposed regulation of DeFi exchanges and their service providers. 

Over the past two weeks, several crypto industry influencers and lobbyists addressed letters to the SEC, explaining how the potential enforcement of the regulators’ new rules could violate the rights of DeFi ecosystem’s coders. 

Also read: XRP volatility surges as Hinman documents support Ripple's case against the SEC

US financial regulator warned by crypto lobbyists of overreach

Since the beginning of June, several crypto influencers, lobbyists and support groups have dropped emails to the regulator explaining how the new rule is an “overreach.”

June 13 marks the deadline for the public to submit input on the SEC’s Proposed Exchange Rule. 

The agency is closing the comment window within the next few hours. The letters received by the regulator until now include comments on how the SEC is “out-of-bounds” and is dragging DeFi ecosystem’s service providers like coders and electronic companies.

Find the letter from DeFi Education Fund here, investment firm Paradigm’s letter here, and Coin Centre’s appeal to the regulator here.

Crypto lobbyists argue that the Proposed Exchange Rule violates the First Amendment rights of coders. In its input on the SEC’s rule, DeFi Education Fund stated,

The proposal would operate as a blanket de facto banishment of DeFi from the United States.

The First Amendment protects freedom of speech, the press, assembly, and the right to petition the Government for a redress of grievances. Coders’ expression, or lines of code, is part of their freedom of expression and is likely threatened by the SEC’s proposed rules.

Instead of offering clarity on DeFi regulation, the SEC’s proposal creates great confusion among traders, DeFi platforms and market participants. 

Are DeFi platforms as exchanges and service providers part of the exchange?

The US SEC answers the above question in the affirmative, treating any system that brings together potential buyers and sellers as exchanges. The agency failed to identify functions performed by DeFi protocols that make them similar to stock exchanges and lists “important factors” that mean anyone participating in the blockchain ecosystem is a part of the exchange.

The list of factors acts as a blanket to include entities like electronic companies providing services and coders working on development.